<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 1997.
SECURITIES ACT FILE NO. 33-34476
INVESTMENT COMPANY ACT FILE NO. 811-6089
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 8 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 10 [X]
(CHECK APPROPRIATE BOX OR BOXES)
---------------------
MERRILL LYNCH SHORT-TERM GLOBAL
INCOME FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE REGISTRANT: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
FRANK P. BRUNO, ESQ.
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to
paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to
paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to
paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of
rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates
a new effective
date for a previously filed post-effective
amendment
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF COMMON
STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE
REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON FEBRUARY 20, 1997.
---------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<S> <C> <C> <C> <C>
=======================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING AMOUNT OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED BEING REGISTERED PER SHARE OFFERING PRICE FEE
- -------------------------------------------------------------------------------------------------------
Shares of Common Stock (par
value $.10 per share)....... 20,018,135 $8.14 $329,996 $100
=======================================================================================================
</TABLE>
*(1) The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during Registrant's
previous fiscal year was 19,977,595 shares of Common Stock.
(3) None of the shares described in (2) above have been used for reduction
pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act
of 1940 in previous filings during Registrant's current fiscal year.
(4) All of the shares redeemed during Registrant's previous fiscal year are
being used for the reduction of the registration fee in this amendment to
the Registration Statement.
================================================================================
<PAGE> 2
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
- ----------- --------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Not Applicable
Item 3. Condensed Financial Information....... Financial Highlights; Performance Data
Item 4. General Description of Registrant..... Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund................ Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion of Fund
Performance......................... Not Applicable
Item 6. Capital Stock and Other Securities.... Cover Page; Additional Information
Item 7. Purchase of Securities Being
Offered............................. Cover Page; Fee Table; Merrill Lynch
Select Pricing(SM) System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase.............. Fee Table; Merrill Lynch Select
Pricing(SM) System; Purchase of Shares;
Redemption of Shares; Shareholder
Services
Item 9. Pending Legal Proceedings............. Additional Information
PART B
Item 10. Cover Page............................ Cover Page
Item 11. Table of Contents..................... Back Cover Page
Item 12. General Information and History....... Not Applicable
Item 13. Investment Objectives and Policies.... Investment Objective and Policies
Item 14. Management of the Fund................ Management of the Fund
Item 15. Control Persons and Principal Holders
of Securities....................... Management of the Fund
Item 16. Investment Advisory and Other
Services............................ Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other
Practices........................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities.... General Information--Description of
Shares
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............ Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; General
Information
Item 20. Tax Status............................ Distributions and Taxes
Item 21. Underwriters.......................... Purchase of Shares
Item 22. Calculation of Performance Data....... Performance Data
Item 23. Financial Statements.................. Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item,
so numbered, in Part C to this Registration Statement.
</TABLE>
<PAGE> 3
PROSPECTUS
APRIL 25, 1997
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Short-Term Global Income Fund, Inc. (the "Fund") is a
non-diversified, open-end management investment company that seeks to provide
shareholders with as high a level of current income as is consistent with
prudent investment management from a global portfolio of high quality debt
securities denominated in various currencies and multinational currency units
and having remaining maturities not exceeding three years. Under normal
circumstances, the Fund will invest its assets in debt securities denominated in
at least three different currencies, including the United States dollar. At
times, the Fund may seek to hedge its portfolio against currency risks and, to a
lesser extent, interest rate risks through the use of futures, options on
futures and currency transactions. Investment on a global basis involves special
considerations. See "Special and Risk Considerations." There can be no assurance
that the investment objective of the Fund will be realized. For more information
on the Fund's investment objective and policies, please see "Investment
Objective and Policies" on page 11.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. As a
result of the implementation of the Select Pricing(SM) System, Class A shares of
the Fund outstanding prior to October 21, 1994, were redesignated Class D
shares. The Class A shares offered by this Prospectus differ from the Class A
shares offered prior to October 21, 1994, in many respects, including sales
charges, exchange privilege and the classes of persons to whom such shares are
offered. See "Merrill Lynch Select Pricing(SM) System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], and other securities dealers that have entered into dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100, and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85, but as of May
1, 1997, $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through the Fund's transfer agent are not subject to
the processing fee. See "Purchase of Shares" and "Redemption of Shares."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------------------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated April 25, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ------------------------- ----------- --------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).......... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments................................ None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds,
whichever is lower).......................... None(d) 4.0% during the first 1.0% for None(d)
year, decreasing 1.0% one year(f)
annually thereafter to
0.0% after
the fourth year(e)
Exchange Fee................................... None None None None
Annual Fund Operating Expenses
(as a percentage of average net assets):
Investment Advisory Fees(g).................... 0.55% 0.55% 0.55% 0.55%
Rule 12b-1 Fees(h):
Account Maintenance Fees..................... None 0.25% 0.25% 0.25%
Distribution Fees............................ None 0.50% 0.55% None
(Class B shares convert
to Class D shares
automatically after
approximately ten years
and cease being subject
to distribution fees)
Other Expenses:
Custodial Fees............................... 0.05% 0.05% 0.05% 0.05%
Shareholder Servicing Costs(i)............... 0.19% 0.23% 0.20% 0.19%
Other........................................ 0.16% 0.16% 0.13% 0.16%
----- ----- ----- -----
Total Other Expenses....................... 0.40% 0.44% 0.38% 0.40%
----- ----- ----- -----
Total Fund Operating Expenses.................... 0.95% 1.74% 1.73% 1.20%
===== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 27 and "Shareholder
Services -- Fee-Based Programs" -- page 39.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 29.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A or Class D
purchases of $1,000,000 or more may not be subject to an initial sales
charge. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 27.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 39.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 39.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 39.
(g) See "Management of the Fund -- Management and Advisory Arrangements" -- page
23.
(h) See "Purchase of Shares -- Distribution Plans" -- page 32.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 24.
2
<PAGE> 5
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $40 initial sales
charge (Class A and Class D shares only) and assuming
(1) the Total Fund Operating Expenses for each class set
forth on page 2, (2) a 5% annual return throughout the
periods and (3) redemption at the end of the period
(including any applicable CDSC for Class B and Class C
shares):
Class A.............................................. $ 49 $69 $ 90 $152
Class B.............................................. $ 58 $75 $ 94 $205
Class C.............................................. $ 28 $54 $ 94 $204
Class D.............................................. $ 52 $77 $ 103 $180
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A.............................................. $ 49 $69 $ 90 $152
Class B.............................................. $ 18 $55 $ 94 $205
Class C.............................................. $ 18 $54 $ 94 $204
Class D.............................................. $ 52 $77 $ 103 $180
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charges permitted under the Conduct
Rules of the National Association of Securities Dealers, Inc. (the "NASD").
Merrill Lynch may charge its customers a processing fee (presently $4.85, but as
of May 1, 1997, $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through the Fund's transfer agent are not subject to
the processing fee. See "Purchase of Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 registered investment companies advised by Merrill Lynch Asset Management,
L.P. ("MLAM" or the "Investment Adviser") or its affiliate, Fund Asset
Management, L.P. ("FAM"). Funds advised by MLAM or FAM that utilize the Merrill
Lynch Select Pricing(SM) System are referred to herein as "MLAM-advised mutual
funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses
3
<PAGE> 6
of the ongoing distribution fees and the additional incremental transfer agency
costs resulting from the deferred sales charge arrangements. The CDSCs,
distribution and account maintenance fees that are imposed on Class B and Class
C shares, as well as the account maintenance fees that are imposed on the Class
D shares, are imposed directly against those classes and not against all assets
of the Fund, and, accordingly, such charges will not affect the net asset value
of any other class or have any impact on investors choosing another sales charge
option. Dividends paid by the Fund for each class of shares will be calculated
in the same manner at the same time and will differ only to the extent that
account maintenance and distribution fees and any incremental transfer agency
costs relating to a particular class are borne exclusively by that class. Each
class has different exchange privileges. See "Shareholder Services -- Exchange
Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is the most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares."
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 4.00% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.50% B shares convert to
years, at a rate of 4.0% D shares automatically
during after approximately
the first year, decreasing ten years(5)
1.0% annually to 0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.55% No
- -------------------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A and Class D
share purchases of $1,000,000 or more will not be subject to an initial
sales charge but instead may be subject to a 1.0% CDSC if redeemed within
one year. Such CDSC may be waived in connection with certain fee-based
programs. A 0.75% sales charge for 401(k) purchases over $1,000,000 will
apply. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(footnotes continued on next page)
4
<PAGE> 7
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs may be modified. Also, Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made have an eight-year conversion
period. If Class B shares of the Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares of the Fund. Eligible investors include participants in
certain fee-based programs. In addition, Class A shares of the Fund
will be offered at net asset value to Merrill Lynch & Co., Inc. ("ML &
Co.") and its subsidiaries (the term "subsidiaries," when used herein
with respect to ML & Co., includes MLAM, FAM and certain other
entities directly or indirectly wholly-owned and controlled by ML &
Co.) and to their directors and employees and to members of the Boards
of MLAM-advised mutual funds. The maximum initial sales charge of
4.00% is reduced for purchases of $25,000 and over, and waived for
purchases of Class A shares in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge, but if the initial sales charge is waived such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with certain fee-based programs. Sales charges also are reduced under
a right of accumulation that takes into account the investor's
holdings of all classes of all MLAM-advised mutual funds. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A
and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.50% of the Fund's average net
assets attributable to Class B shares and a CDSC if they are redeemed
within four years of purchase. Such CDSC may be modified in connection
with certain fee-based programs. Approximately ten years after
issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately eight years. If Class B
shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period
for the shares acquired. Automatic conversion of Class B shares into
Class D shares will occur at least once a month on the basis of the
relative net asset values of the shares of the two classes on the
conversion date, without the imposition of any sales load, fee or
other charge. Conversion of Class B shares to Class D shares will not
be deemed a purchase or sale of the shares for Federal income tax
purposes. Shares purchased through reinvestment of dividends on Class
B shares also will convert automatically to Class D shares. The
conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans is modified as
described under "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B
Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.55% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a CDSC of 1.0% if they are redeemed within one year of purchase.
Such CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on
5
<PAGE> 8
Class C shares for an indefinite period subject to annual approval by
the Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge is 4.00%, which is
reduced for purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is waived, such purchases may be subject to 1.0% CDSC if
the shares are redeemed within one year after purchase. Such CDSC may
be waived in connection with certain fee-based programs. The schedule
of initial sales charges and reductions for Class D shares is the same
as the schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D
shares also will be issued upon conversion of Class B shares as
described above under "Class B." See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his or her
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the CDSC imposed in connection with purchases of Class B or Class C
shares. Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Class A, Class B, Class C and Class D share holdings will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will cause
Class B and Class C shares to have higher expense ratios, pay lower dividends
and have lower total returns than the initial sales charge shares. The ongoing
Class D account maintenance fees will cause Class D shares to have a higher
expense ratio, pay lower dividends and have a lower total return than Class A
shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately ten years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby
6
<PAGE> 9
take advantage of the reduction in ongoing fees resulting from the conversion
into Class D shares. Other investors, however, may elect to purchase Class C
shares if they determine that it is advantageous to have all their assets
invested initially and they are uncertain as to the length of time they intend
to hold their assets in MLAM-advised mutual funds. Although Class C shareholders
are subject to a shorter CDSC period at a lower rate, they forego the Class B
conversion feature, making their investment subject to account maintenance and
higher distribution fees for an indefinite period of time. In addition, while
both Class B and Class C distribution fees are subject to the limitations on
asset-based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares -- Limitations on the Payment of Deferred Charges."
7
<PAGE> 10
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial statements for the fiscal
year ended December 31, 1996, and the independent auditors' report thereon are
included in the Statement of Additional Information. Further information about
the performance of the Fund is contained in the Fund's most recent annual report
to shareholders which may be obtained, without charge, by calling or by writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------------- ----------------------
FOR THE FOR THE FOR THE
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
YEAR NOV. 1, YEAR OCT. 21, YEAR NOV. 1,
ENDED 1995 TO ENDED 1994+ TO ENDED 1995 TO
DEC. 31, DEC. 31, OCT. 31, OCT. 31, DEC. 31, DEC. 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1996++ 1995++ 1995++ 1994++ 1996++ 1995++
-------- --------- ----------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............... $ 7.91 $ 7.93 $ 8.11 $ 8.11 $ 7.90 $ 7.93
-------- --------- ----- -------- -------- ----------
Investment income--net............................. .54 .09 .49 .01 .44 .08
Realized and unrealized loss on investments and
foreign currency transactions--net............... (.06) (.02) (.12) -- (.09) (.03)
-------- --------- ----- -------- -------- ----------
Total from investment operations................... .48 .07 .37 .01 .35 .05
-------- --------- ----- -------- -------- ----------
Less dividends and distributions:
Investment income--net........................... (.44) (.09) (.27) -- (.38) (.08)
Return of capital--net........................... (.06) -- (.28) (.01) (.06) --
-------- --------- ----- -------- -------- ----------
Total dividends and distributions.................. (.50) (.09) (.55) (.01) (.44) (.08)
-------- --------- ----- -------- -------- ----------
Net asset value, end of period..................... $ 7.89 $ 7.91 $ 7.93 $ 8.11 $ 7.81 $ 7.90
======== ======== ========= ======= ======== =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................. 6.29% .92%# 4.62% .12%# 4.52% .66%#
======== ======== ========= ======= ======== =========
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................... .95% 1.02%* .96% .97%* 1.74% 1.80%*
======== ======== ========= ======= ======== =========
Investment income--net............................. 6.45% 6.91%* 6.75% 6.28%* 5.62% 6.13%*
======== ======== ========= ======= ======== =========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........... $ 3 $ 75 $ 66 $ 59 $239,419 $376,049
======== ======== ========= ======= ======== =========
Portfolio turnover................................. 349.34% 25.09% 312.13% 259.50% 349.34% 25.09%
======== ======== ========= ======= ======== =========
<CAPTION>
CLASS B
---------------------------------------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
DEC. 28, AUG. 3,
FOR THE YEAR ENDED OCTOBER 31, 1990 TO 1990+ TO
----------------------------------------------- OCT. 31, DEC. 27,
INCREASE (DECREASE) IN NET ASSET VALUE: 1995++ 1994++ 1993(1) 1992 1991 1990
-------- -------- ---------- ---------- ---------- ----------
<S> <C<C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............... $ 8.10 $ 8.65 $ 8.85 $ 9.84 $ 9.92 $ 10.00
-------- -------- ---------- ---------- ---------- ----------
Investment income--net............................. .47 .50 .57 .72 .77 .39
Realized and unrealized loss on investments and
foreign currency transactions--net............... (.15) (.58) (.20) (.99) (.08) (.08)
-------- -------- ---------- ---------- ---------- ----------
Total from investment operations................... .32 (.08) .37 (.27) .69 .31
-------- -------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net........................... (.24) -- -- -- (.77) (.39)
Return of capital--net........................... (.25) (.47) (.57) (.72) -- --
-------- -------- ---------- ---------- ---------- ----------
Total dividends and distributions.................. (.49) (.47) (.57) (.72) (.77) (.39)
-------- -------- ---------- ---------- ---------- ----------
Net asset value, end of period..................... $ 7.93 $ 8.10 $ 8.65 $ 8.85 $ 9.84 $ 9.92
======== ======== ========= ========= ========= =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................. 3.96% (1.02)% 4.63% (3.00)% 6.93%# 3.40%#
======== ======== ========= ========= ========= =========
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................... 1.73% 1.52% 1.60% 1.50% 1.52%* 1.51%*
======== ======== ========= ========= ========= =========
Investment income--net............................. 5.95% 5.68% 7.26% 7.60% 9.11%* 9.75%*
======== ======== ========= ========= ========= =========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........... $398,136 $750,750 $1,664,602 $3,182,520 $5,918,769 $2,796,301
======== ======== ========= ========= ========= =========
Portfolio turnover................................. 312.13% 259.50% 284.62% 120.77% 153.72% 19.40%
======== ======== ========= ========= ========= =========
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
(1) On February 25, 1993, Merrill Lynch Asset Management U.K. Limited became a
sub-adviser to the Fund.
8
<PAGE> 11
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
CLASS C CLASS D
------------------------------------------------- ---------------------
FOR THE FOR THE FOR THE
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
YEAR NOV. 1, YEAR OCT. 21, YEAR NOV. 1,
ENDED 1995 TO ENDED 1994+ TO ENDED 1995 TO
DEC. 31, DEC. 31, OCT. 31, OCT. 31, DEC. 31, DEC. 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1996++ 1995++ 1995++ 1994++ 1996++ 1995++
------- ---------- ----------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............... $ 7.72 $ 7.74 $ 8.10 $ 8.11 $ 7.90 $ 7.93
------- ----- ----- -------- ------- -----
Investment income--net............................. .38 .08 .35 .01 .48 .09
Realized and unrealized loss on investments and
foreign currency transactions--net............... (.01) (.02) (.28) (.01) (.09) (.03)
------- ----- ----- -------- ------- -----
Total from investment operations................... .37 .06 .07 -- .39 .06
------- ----- ----- -------- ------- -----
Less dividends and distributions:
Investment income--net........................... (.37) (.08) (.21) -- (.42) (.09)
Return of capital--net........................... (.05) -- (.22) (.01) (.06) --
------- ----- ----- -------- ------- -----
Total dividends and distributions.................. (.42) (.08) (.43) (.01) (.48) (.09)
------- ----- ----- -------- ------- -----
Net asset value, end of period..................... $ 7.67 $ 7.72 $ 7.74 $ 8.10 $ 7.81 $ 7.90
======= ========= ========= ======= ======= =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................. 4.93% .78%# .89% .00%# 5.09% .75%#
======= ========= ========= ======= ======= =========
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................... 1.73% 1.83%* 1.83% 2.14%* 1.20% 1.27%*
======= ========= ========= ======= ======= =========
Investment income--net............................. 5.23% 6.09%* 5.99% 5.63%* 6.13% 6.67%*
======= ========= ========= ======= ======= =========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........... $ 155 $ 103 $ 109 $ 1 $17,948 $ 24,240
======= ========= ========= ======= ======= =========
Portfolio turnover................................. 349.34% 25.09% 312.13% 259.50% 349.34% 25.09%
======= ========= ========= ======= ======= =========
<CAPTION>
CLASS D
----------------------------------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
DEC. 28, AUG. 3,
FOR THE YEAR ENDED OCTOBER 31, 1990 TO 1990+ TO
------------------------------------------- OCT. 31, DEC. 27,
INCREASE (DECREASE) IN NET ASSET VALUE: 1995++ 1994++ 1993(1) 1992 1991 1990
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............... $ 8.11 $ 8.66 $ 8.85 $ 9.85 $ 9.92 $ 10.00
------- ------- ------- -------- -------- --------
Investment income--net............................. .52 .54 .61 .77 .82 .42
Realized and unrealized loss on investments and
foreign currency transactions--net............... (.17) (.58) (.19) (1.00) (.07) (.08)
------- ------- ------- -------- -------- --------
Total from investment operations................... .35 (.04) .42 (.23) .75 .34
------- ------- ------- -------- -------- --------
Less dividends and distributions:
Investment income--net........................... (.26) -- -- -- (.82) (.42)
Return of capital--net........................... (.27) (.51) (.61) (.77) -- --
------- ------- ------- -------- -------- --------
Total dividends and distributions.................. (.53) (.51) (.61) (.77) (.82) (.42)
------- ------- ------- -------- -------- --------
Net asset value, end of period..................... $ 7.93 $ 8.11 $ 8.66 $ 8.85 $ 9.85 $ 9.92
======= ======= ======= ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................. 4.40% (.51)% 5.28% (2.60)% 7.53%# 3.73%#
======= ======= ======= ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................... 1.20% 1.01% .98% 1.00% .96%* .75%*
======= ======= ======= ======== ======== ========
Investment income--net............................. 6.49% 6.19% 7.24% 8.11% 9.70%* 10.51%*
======= ======= ======= ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........... $26,619 $48,879 $99,037 $188,623 $399,416 $211,006
======= ======= ======= ======== ======== ========
Portfolio turnover................................. 312.13% 259.50% 284.62% 120.77% 153.72% 19.40%
======= ======= ======= ======== ======== ========
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
(1) On February 25, 1993, Merrill Lynch Asset Management U.K. Limited became a
sub-adviser to the Fund.
9
<PAGE> 12
SPECIAL AND RISK CONSIDERATIONS
As a global fund, the Fund may invest in U.S. and foreign securities.
Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign or U.S. governmental laws or restrictions applicable to such
investments. Because the Fund may invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may affect the value of investments in the portfolio and the unrealized
appreciation or depreciation of investments insofar as U.S. investors are
concerned. Changes in foreign currency exchange rates relative to the U.S.
dollar will affect the U.S. dollar value of the Fund's assets denominated in
those currencies and the Fund's yield on such assets. Foreign currency exchange
rates are determined by forces of supply and demand on the foreign exchange
markets. These forces are, in turn, affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation, and other factors. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resources,
self-sufficiency and balance of payments position.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign financial
instrument than about a U.S. instrument, and foreign entities may not be subject
to accounting, auditing and financial reporting standards and requirements
comparable to those to which U.S. entities are subject. In addition, certain
foreign investments may be subject to foreign withholding taxes. If more than
50% of the Fund's total assets at the close of any taxable year consists of
stock or securities in foreign corporations, investors may be able to include
their respective share of such taxes in income and to deduct their respective
share of such taxes in computing their taxable income or use such amounts as
credits against their U.S. income taxes. See "Distributions and Taxes -- Taxes."
Foreign financial markets, while generally growing in volume, have, for the most
part, substantially less volume than U.S. markets, and securities of many
foreign companies are less liquid and their prices more volatile than securities
of comparable domestic companies. The foreign markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of the Fund are uninvested and no return is earned thereon. The inability
of the Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result either in losses
to the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities are generally higher than costs associated with transactions
in U.S. securities. There is generally less government supervision and
regulation of exchanges, financial institutions and issuers in foreign countries
than there is in the U.S.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in U.S. securities because
the expenses of the Fund, such as custodial costs, are higher.
The Fund may engage in various portfolio strategies to seek to hedge its
portfolio against movements in the securities markets and exchange rates between
currencies by the use of options and futures thereon.
10
<PAGE> 13
Utilization of options and futures transactions involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities or currencies which are the subject of the hedge.
There can be no assurance that a liquid secondary market for options and futures
contracts will exist at any specific time. See "Investment Objective and
Policies -- Hedging Techniques."
The net asset value of the Fund's shares will be affected by changes in the
general level of interest rates. When interest rates decline, the value of a
portfolio of fixed income securities can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio of fixed income securities can be
expected to decline.
As a non-diversified investment company, the Fund may invest a larger
percentage of its assets in individual issuers than a diversified investment
company. In this regard, the Fund is not subject to the general limitation that
it not invest more than 5% of its total assets in the securities of any one
issuer. To the extent the Fund makes investments in excess of 5% of its assets
in a particular issuer, its exposure to credit and market risks associated with
that issuer is increased.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek to provide shareholders
with as high a level of current income as is consistent with prudent investment
management from a global portfolio of high quality debt securities denominated
in various currencies and multinational currency units and having remaining
maturities not exceeding three years. The investment objective described in this
paragraph is a fundamental policy of the Fund and may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities. Under normal circumstances, the Fund will invest its assets in debt
securities denominated in at least three different currencies, including the
U.S. dollar. The Fund's investments will be rated AA or better by Standard &
Poor's Ratings Services ("S&P") or Aa or better by Moody's Investors Service,
Inc. ("Moody's") or A-1 or better by S&P or Prime-1 or better by Moody's in the
case of commercial paper, similarly rated by another internationally recognized
rating service, such as IBCA Ltd. ("IBCA"), or determined by the Fund's Board of
Directors and the Investment Adviser to be of similar creditworthiness, or will
be issued or guaranteed by governmental or supragovernmental entities (each as
defined below). The Fund may seek to hedge its portfolio securities against
currency risks and, to a lesser extent, interest rate risks through the use of
options, futures, options on futures and currency transactions. There can be no
assurance that the investment objective of the Fund will be realized.
The Fund is designed for the investor who seeks a higher yield than a money
market fund and less fluctuation in net asset value than a longer-term global
bond fund. Under normal conditions, debt securities with longer maturities tend
to produce higher yields, while debt securities with shorter maturities are
subject to less market risk resulting from changes in interest rates. With a
maturity limit of three years, the Fund seeks more attractive yields than those
offered by the shorter-term money market securities in which money market funds
invest (money market funds maintain average maturities of less than 90 days). At
the same time, the three-year limitation enables the Fund to avoid the greater
market risk inherent in longer-term securities.
The Investment Adviser will seek to manage the Fund's portfolio in
accordance with a multi-market strategy. Consistent with such a strategy, the
Fund may invest in debt securities denominated in any currency
11
<PAGE> 14
or multinational currency unit. In addition, the Investment Adviser intends to
allocate the Fund's investments among securities denominated in the currencies
of a number of foreign countries and, within each such country, among different
types of debt securities. The Investment Adviser will adjust the Fund's exposure
to different currencies based on its perception of the most favorable markets
and issuers. In allocating the Fund's assets among multiple markets, the
Investment Adviser will assess the relative yield and anticipated direction of
interest rates in particular markets, general market and economic conditions and
the relationship of currencies of various countries to each other. In its
evaluations, the Investment Adviser will utilize its internal financial,
economic and credit analysis resources as well as information obtained from
other sources. The Fund will not invest more than 25% of its total assets in
debt securities denominated in a single currency or currency unit, except that
it may invest more than 25% of its total assets in U.S. dollar-denominated
securities. In addition, the Fund will not invest in countries that are not
considered by the Investment Adviser to have stable governments or whose
currencies are not convertible into U.S. dollars. As a result of hedging
techniques, the Fund's net exposure to any one currency may be different from
that of its total assets denominated in such currency. See "Special and Risk
Considerations."
The securities in which the Fund may invest include debt obligations issued
or guaranteed by U.S. or foreign governments, political subdivisions thereof
(including states, provinces and municipalities) or their agencies and
instrumentalities ("governmental entities"), or issued or guaranteed by
international organizations designated or supported by governmental entities to
promote economic reconstruction or development ("supranational entities"), or
issued by corporations or financial institutions. Securities issued by
supranational entities may be denominated in U.S. dollars, a foreign currency or
a multinational currency unit. Securities of corporations and financial
institutions in which the Fund may invest include corporate and commercial
obligations, such as medium-term notes and commercial paper, which may be
indexed to foreign currency exchange rates.
The Fund may invest in securities whose potential investment return is
based on the change in particular measurements of value or rate (an "index"). As
an illustration, the Fund may invest in a security that pays interest and
returns principal based on the change in an index of interest rates or of the
value of a currency or basket of currencies. Interest and principal payable on a
security may also be based on relative changes among particular indices. In
addition, the Fund may invest in securities whose potential investment return is
inversely based on the change in particular indices. For example, the Fund may
invest in securities that pay a higher rate of interest and principal when a
particular index decreases and pay a lower rate of interest and principal when
the value of the index increases. To the extent that the Fund invests in such
types of securities, it will be subject to the risks associated with changes in
the particular indices, which may include reduced or eliminated interest
payments and losses of invested principal. The Fund will purchase such indexed
obligations to generate current income or for currency hedging purposes, and
will not speculate through such obligations.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Fund believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow the Fund to seek
potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.
12
<PAGE> 15
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing powers. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund will
invest in foreign government securities of issuers considered stable by the
Investment Adviser, based on its analysis of factors such as general political
or economic conditions relating to the government and the likelihood of
expropriation, nationalization, freezes or confiscation of private property. The
Investment Adviser does not believe that the credit risk inherent in the
obligations of stable foreign governments is significantly greater than that of
U.S. Government securities. Examples of supranational entities include the
International Bank for Reconstruction and Development (the "World Bank"), the
European Steel and Coal Community, the Asian Development Bank and the
Inter-American Development Bank. The governmental members, or "stockholders",
usually make initial capital contributions to the supranational entity and in
many cases are committed to make additional capital contributions if the
supranational entity is unable to repay its borrowings.
As indicated above, the Fund may invest in securities denominated in a
multinational currency unit. An illustration of a multinational currency unit is
the European Currency Unit (the "ECU"), which is a "basket" consisting of
specified amounts of the currencies of certain member states of the European
Union, a Western European economic cooperative organization that includes
France, Germany, The Netherlands, the United Kingdom and other countries. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Union to reflect changes in relative values of the
underlying currencies. The Investment Adviser does not believe that such
adjustments will adversely affect holders of ECU-denominated obligations or the
marketability of such securities. European supranational entities, in
particular, issue ECU-denominated obligations. The Fund may invest in securities
denominated in the currency of one nation although issued by a governmental
entity, corporation or financial institution of another nation. For example, the
Fund may invest in a British pound sterling-denominated obligation issued by a
U.S. corporation. Such investments involve credit risks associated with the
issuer and currency risks associated with the currency in which the obligation
is denominated.
The Fund also may invest in participations in, or bonds and notes backed
by, pools of mortgage, credit card, automobile or other types of receivables
with remaining maturities of three years or less. These structured financings
will be supported by sufficient collateral and other credit enhancement,
including letters of credit, insurance, reserve funds and guarantees by third
parties, to enable such instruments to obtain a high quality rating by a
nationally recognized statistical rating agency (such as S&P or Moody's) or be
of comparable quality as determined by the Investment Adviser. Generally, the
issuers of mortgage-backed and receivable-backed bonds, notes or pass-through
certificates are special purpose entities and do not have any significant assets
other than the assets securing such obligations. Instruments backed by pools of
mortgages and receivables may be subject to unscheduled prepayments of principal
prior to maturity. When the obligations are prepaid, the Fund must reinvest the
prepaid amounts in securities the yields of which reflect interest rates
prevailing at the time. Therefore, the Fund's ability to maintain a portfolio
which includes high-yielding asset-backed securities will be adversely affected
to the extent that prepayments of principal must be reinvested in securities
which have lower yields than the prepaid obligations. Moreover, prepayments of
securities purchased at a premium could result in a realized loss. Certain
asset-backed and receivable-backed securities may be illiquid. The Fund's
investments in asset-backed and receivable-backed securities that are illiquid
will be limited, together with all other illiquid investments, to 15% of the
Fund's total assets.
13
<PAGE> 16
To minimize the credit risk of its investments, the Fund will invest only
in high quality debt securities. A security may be deemed to be high quality if
it is issued or guaranteed by governmental entities or supranational entities
which the Investment Adviser, acting under the general supervision of the Board
of Directors, has determined to be of high creditworthiness. Securities issued
by corporations or financial institutions will be deemed to be high quality if
they are rated AA or better by S&P or Aa or better by Moody's, or A-1 or better
by S&P or Prime-1 or better by Moody's in the case of commercial paper, or
similarly rated by another internationally recognized rating service, such as
IBCA, or obligations of issuers that the Investment Adviser, acting under the
general supervision of the Board of Directors, has determined to be of similar
creditworthiness.
Under normal conditions, a significant percentage of the shorter-term
investments in the Fund's portfolio may be money market securities. Money market
securities include short-term obligations issued or guaranteed by the U.S.
Government or foreign governments or issued by such governments' respective
agencies and instrumentalities, bank money market instruments including
certificates of deposit, bankers' acceptances and deposit notes and certain
other short-term obligations such as short-term commercial paper. With respect
to bank money market instruments, the obligations may be issued by U.S. or
foreign depository institutions, foreign branches or subsidiaries of U.S.
depository institutions ("Eurodollar" obligations), U.S. branches or
subsidiaries of foreign depository institutions ("Yankeedollar" obligations) or
foreign branches or subsidiaries of foreign depository institutions. Eurodollar
and Yankeedollar obligations and obligations of branches or subsidiaries of
foreign depository institutions may be general obligations of the parent bank or
may be limited to the issuing branch or subsidiary by the terms of the specific
obligations or by government regulation.
It is anticipated that the Fund will invest primarily in securities
denominated in the currencies of the United States, Japan, Canada, Western
European nations, New Zealand or Australia, as well as securities denominated in
the ECU described above. Further, it is anticipated that such securities will be
issued primarily by entities located in such countries and by supranational
entities. Under certain adverse conditions and for the duration of such
conditions, the Fund may restrict the financial markets or currencies in which
its assets are invested, and it may invest its assets solely in one financial
market or in obligations denominated in one currency.
Under normal circumstances, the Fund will invest at least 25% of its total
assets in debt instruments issued by U.S. and foreign companies engaged in the
banking industry, including bank holding companies. Such investments may include
certificates of deposit, time deposits, bankers' acceptances, and obligations
issued by bank holding companies, as well as repurchase agreements entered into
with banks. For temporary defensive purposes, however, the Fund may reduce its
investments in the banking industry to less than 25% of its total assets. The
Fund's policy as to concentrating its investments in the banking industry is
fundamental and may not be changed without the approval of a majority of the
Fund's voting securities.
The Fund's policy of concentrating its investments in the banking industry
will cause the Fund to have greater exposure to certain risks associated with
the banking industry. In particular, economic or regulatory developments in or
related to the banking industry will affect the value of and investment return
on the Fund's shares. Sustained increases in interest rates may adversely affect
the availability and cost of funds for a bank's lending activities;
deterioration in general economic conditions may increase a bank's exposure to
credit losses. The banking industry also is subject to the effects of the
concentration of loan portfolios in particular businesses that may be adversely
affected by economic conditions, such as real estate, energy, agriculture or
high technology-related companies. In addition, the banking industry is subject
to national and local regulation
14
<PAGE> 17
and competition among banks as well as with other types of financial
institutions. Also, the Fund's investments in commercial banks located in
several foreign countries are subject to additional risks due to the combination
in such banks of commercial banking and diversified securities activities. As
discussed above, however, the Fund will seek to minimize its exposure to such
risks by investing only in debt securities which are determined by the
Investment Adviser, acting under the general supervision of the Board of
Directors, to be high quality.
The Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"), but can be offered and sold to "qualified institutional buyers" under
Rule 144A under the Securities Act. However, the Fund will not invest more than
15% of its total assets in illiquid investments, which includes securities for
which there is no readily available market, securities subject to contractual
restrictions on resale, certain investments in asset-backed and
receivable-backed securities and restricted securities, unless the Fund's Board
of Directors continuously determines, based on the trading markets for the
specific restricted security, that it is liquid. The Board of Directors has
determined to treat as liquid Rule 144A securities which are freely tradeable in
their primary markets offshore. The Board of Directors may adopt guidelines and
delegate to the Investment Adviser the daily function of determining and
monitoring liquidity of restricted securities. The Board of Directors, however,
will retain sufficient oversight and be ultimately responsible for the
determinations.
Since it is not possible to predict with assurance exactly how this market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
The return that the Fund provides to investors will be influenced by
changes in both exchange rates and prevailing interest rates. The Investment
Adviser believes that the use of foreign currency hedging techniques may help
protect against declines in the U.S. dollar value of investment income available
for distribution to shareholders and declines in the net asset value of the
Fund's shares resulting from adverse changes in currency values. In addition,
changes in market yields will affect the Fund's net asset value since the prices
of portfolio securities generally increase when interest rates decline and
decrease when interest rates rise. Prices of shorter-term securities generally
fluctuate less in response to interest rate changes than do longer-term
securities. As described under "Hedging Techniques," the Fund may enter into
hedging transactions to hedge against both interest rate and currency risks.
Non-Diversified Status. The Fund has registered as a "non-diversified"
investment company so that it will be able to invest more than 5% of the value
of its assets in the obligations of a single issuer subject to the
diversification requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), applicable to the Fund. To the extent the Fund
invests a relatively high percentage of its assets in obligations of a limited
number of issuers, the Fund may be more susceptible than a more widely
diversified fund to any single economic, political or regulatory occurrence or
to changes in an issuer's financial condition or in the market's assessment of
the issuers.
HEDGING TECHNIQUES
The Fund may engage in various portfolio strategies to hedge its portfolio
against interest rate and currency risks. These strategies include use of
options on portfolio positions or currencies, financial and
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currency futures, options on such futures and forward foreign currency
transactions. The Fund may enter into such transactions only in connection with
its hedging strategies. While the Fund's use of hedging strategies is intended
to reduce the volatility of the net asset value of its shares, the net asset
value of the Fund's shares will fluctuate. There can be no assurance that the
Fund's hedging transactions will be effective. Furthermore, the Fund may only
engage in hedging activities from time to time and may not necessarily be
engaging in hedging activities when movements in interest rates or currency
exchange rates occur. Reference is made to the Statement of Additional
Information for further information concerning these strategies.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency
Transactions"), the Investment Adviser believes that, because the Fund will only
engage in these transactions for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. Tax requirements may limit the Fund's ability to engage in the
hedging transactions and strategies described below. See "Distributions and
Taxes -- Taxes."
The following is a description of the hedging instruments the Fund may
utilize with respect to interest rate and currency risks.
Hedging Interest Rate Risks. The Fund may purchase and write (i.e., sell)
call options and put options on securities and engage in transactions in
financial futures and related options, as described below.
The Fund may write covered call options with respect to securities it owns
and enter into closing purchase transactions with respect to such options. A
covered call option provides the holder of the option with the right to buy the
underlying security covered by the option at the stated exercise price until the
option expires. A covered call option is an option where the Fund, in return for
a premium, gives another party a right to buy particular securities held by the
Fund at a specified price for a certain period of time. In return for the
premium income realized from the sale of the option, the Fund gives up the
opportunity to profit from a price increase in the underlying security above the
option exercise price while the option is in effect. In addition, the Fund's
ability to sell the underlying security will be limited until the option is
closed or expires. A closing purchase transaction cancels out the Fund's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. The Fund
also may purchase call options on securities held in its portfolio on which it
has written call options or on securities which it intends to purchase. There is
no percentage limitation with respect to portfolio securities on which the Fund
may write call options.
The Fund may purchase put options on portfolio securities. In return for
payment of a premium, the purchase of a put option gives the holder thereof the
right to sell the security underlying the option to another party at a specified
price until the put option is closed out, expires or is exercised. The Fund will
purchase put options to seek to reduce the risk of a decline in value of the
underlying security owned by the Fund. The total return on the security may be
reduced by the amount of the premium paid for the option. The Fund may write put
options which give the holder of the option the right to sell the underlying
security to the Fund at the stated exercise price. The Fund will receive a
premium for writing a put option, which increases the Fund's return. The Fund
writes only covered put options which means that so long as the Fund is
obligated as the writer of the option it will have deposited and maintained with
its custodian cash or liquid securities with a value equal to or greater than
the exercise price of the underlying securities. By writing a put, the Fund will
be obligated to purchase the underlying security at a price that may be higher
than the market value of that
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<PAGE> 19
security at the time of exercise for as long as the option is outstanding. The
Fund may engage in closing transactions in order to terminate put options that
it has written or purchased.
The Fund also may purchase and sell financial futures contracts as a hedge
against adverse changes in interest rates, as described below. A futures
contract is an agreement between two parties which obligates the purchaser of
the futures contract to buy and the seller of a futures contract to sell a
specified amount of a commodity, such as a currency or a security, for a set
price on a future date. The Fund may effect transactions in futures contracts in
U.S. and foreign agency and government securities and corporate debt securities.
Transactions by the Fund in financial futures are subject to limitation as
described below under "Restrictions on Use of Futures Transactions."
The Fund may sell futures contracts in anticipation of an increase in the
general level of interest rates. Generally, as interest rates rise, the market
value of securities held by the Fund will fall, thus reducing the net asset
value of the shares of the Fund. As interest rates rise, however, the value of
the Fund's short position in the futures contract also will tend to increase,
thus offsetting all or a portion of the depreciation in the market value of the
Fund's investments which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions, these commissions are
generally less than the transaction expenses which would have been incurred had
the Fund sold portfolio securities in order to reduce its exposure to increases
in interest rates.
The Fund may purchase futures contracts in anticipation of a decline in
interest rates when it is not fully invested in a particular market in which it
intends to make investments to gain market exposure that may in part or entirely
offset an increase in the cost of securities it intends to purchase. The Fund
does not consider purchases of futures contracts to be a speculative practice
under these circumstances. In a substantial majority of these transactions, the
Fund will purchase securities upon termination of the futures contract.
The Fund also may purchase and write call and put options on futures
contracts in connection with its hedging activities. Generally, these strategies
are utilized under the same market and market sector conditions (i.e.,
conditions relating to specific types of investments) in which the Fund enters
into futures transactions. The Fund may purchase put options or write call
options on futures contracts rather than selling the underlying futures contract
in anticipation of an increase in interest rates. Similarly, the Fund may
purchase call options, or write put options on futures contracts, as a
substitute for the purchase of such futures to hedge against the increased cost
resulting from a decline in interest rates of securities which the Fund intends
to purchase. Limitations on transactions in options on futures contracts are
described below.
The Fund may engage in options and futures transactions on exchanges and in
options transactions in the over-the-counter ("OTC") markets. In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC transactions are private
two-party contracts with prices and terms negotiated by the buyer and seller.
The Fund will acquire only those OTC options for which management believes the
Fund can receive on each business day at least two independent bids or offers
(one of which will be from an entity other than a party to the option) unless a
quotation from only one dealer is available, in which case only that dealer's
price will be used, or the OTC option can be sold at a formula price provided
for in the OTC option agreement. The Fund will engage in OTC options only with
financial institutions which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
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The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options (including OTC options on futures
contracts) if, as a result of such transactions, the sum of the market value of
OTC options currently outstanding which are held by the Fund, the market value
of the underlying securities covered by OTC call options currently outstanding
which were sold by the Fund and margin deposits on the Fund's existing OTC
options on futures contracts exceeds 15% of the total assets of the Fund, taken
at market value, together with all other assets of the Fund which are illiquid
or are not otherwise readily marketable. However, if an OTC option is sold by
the Fund to a primary U.S. Government securities dealer recognized by the
Federal Reserve Bank of New York and if the Fund has the unconditional
contractual right to repurchase such OTC option from the dealer at a
predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the underlying
security minus the option's strike price). The repurchase price with the primary
dealers is typically a formula price which is generally based on a multiple of
the premium received for the option, plus the amount by which the option is
"in-the-money." This policy as to OTC options is not a fundamental policy of the
Fund and may be amended by the Directors of the Fund without the approval of the
Fund's shareholders. However, the Fund will not change or modify this policy
prior to the change or modification by the Commission staff of its position.
Hedging Foreign Currency Risks. The Fund is authorized to deal in forward
foreign exchange between currencies of the different countries in which it will
invest and multinational currency units as a hedge against possible variations
in the foreign exchange rates between these currencies. This is accomplished
through contractual agreements to purchase or sell one specified currency for
another currency at a specified future date and price at the time of the
contract. The Fund's dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of one forward foreign currency for
another currency with respect to specific receivables or payables of the Fund
accruing in connection with the purchase and sale of its portfolio securities,
the sale and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the purchase or sale of one
forward foreign currency for another currency with respect to portfolio security
positions denominated or quoted in such foreign currency to offset the effect of
an anticipated substantial appreciation or depreciation, respectively, in the
value of such currency relative to the U.S. dollar. In this situation, the Fund
also may, for example, enter into a forward contract to sell or purchase a
different foreign currency for a fixed U.S. dollar amount where it is believed
that the U.S. dollar value of the currency to be sold or bought pursuant to the
forward contract will fall or rise, as the case may be, whenever there is a
decline or increase, respectively, in the U.S. dollar value of the currency in
which portfolio securities of the Fund are denominated (this practice being
referred to as a "cross-hedge").
The Fund will not speculate in forward foreign exchange. Hedging against a
decline in the value of a currency does not eliminate fluctuations in the prices
of portfolio securities or prevent losses if the prices of such securities
decline. Such transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be possible for the
Fund to hedge against a devaluation that is so generally anticipated that the
Fund is not able to contract to sell the currency at a price above the
devaluation level it anticipates.
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<PAGE> 21
The Fund also is authorized to purchase or sell listed or OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be affected with respect to hedges on
non-U.S. dollar denominated securities (including securities denominated in the
ECU) owned by the Fund, sold by the Fund but not yet delivered, or committed or
anticipated to be purchased by the Fund. As an illustration, the Fund may use
such techniques to hedge the stated value in U.S. dollars of an investment in a
Japanese yen-denominated security. In such circumstances, for example, the Fund
may purchase a foreign currency put option enabling it to sell a specified
amount of yen for dollars at a specified price by a future date. To the extent
the hedge is successful, a loss in the value of the dollar relative to the yen
will tend to be offset by an increase in the value of the put option. To offset,
in whole or in part, the cost of acquiring such a put option, the Fund also may
sell a call option which, if exercised, requires it to sell a specified amount
of yen for dollars at a specified price by a future date (a technique called a
"spread"). By selling such a call option in this illustration, the Fund gives up
the opportunity to profit without limit from increases in the relative value of
the yen to the dollar.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or to sell a currency at a fixed price on a future date. Listed options are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) that are issued by a clearing
corporation, traded on an exchange and have standardized strike prices and
expiration dates. OTC options are private two-party contracts and have
negotiated strike prices and expiration dates. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of the currency for a set price on a future date. Futures contracts and options
on futures contracts are traded on boards of trade or futures exchanges. The
Fund will not speculate in foreign currency options, futures or related options.
Accordingly, the Fund will not hedge a currency substantially in excess of the
market value of the securities denominated in such currency which it owns, the
expected acquisition price of securities which it has committed or anticipates
to purchase which are denominated in such currency, and, in the case of
securities which have been sold by the Fund but not yet delivered, the proceeds
thereof in its denominated currency. Further, the Fund will segregate at its
custodian U.S. Government or other liquid securities having a market value
substantially representing any subsequent net decrease in the market value of
such hedged positions, including net positions with respect to cross-currency
hedges. The Fund may not incur potential net liabilities with respect to
currency and securities positions, including net liabilities with respect to
cross-currency hedges, of more than 33% of its total assets from foreign
currency options, futures, related options and forward currency transactions.
Restrictions on Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission applicable to the Fund provide that the futures
trading activities described herein will not result in the Fund being deemed a
"commodity pool" under such regulations if the Fund adheres to certain
restrictions. In particular, the Fund may purchase and sell futures contracts
and options thereon (i) for bona fide hedging purposes, and (ii) for non-hedging
purposes, if the aggregate initial margin and premiums required to establish
positions in such contracts and options does not exceed 5% of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits and
unrealized losses on any such contracts and options. These restrictions are in
addition to other restrictions on the Fund's hedging activities mentioned
herein.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its
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<PAGE> 22
broker, equals the market value of the futures contract, thereby ensuring that
the use of such futures contract is unleveraged.
An order has been obtained from the Commission which exempts the Fund from
certain provisions of the Investment Company Act of 1940, as amended (the
"Investment Company Act") in connection with transactions involving futures
contracts and options thereon.
Risk Factors in Options, Futures and Currency Transactions. Utilization of
futures transactions involves the risk of imperfect correlation in movements in
the prices of futures contracts and movements in the prices of the securities
and currencies which are subject to the hedges. If the price of a futures
contract moves more or less than the price of the security or currency, the Fund
will experience a gain or loss which will not be completely offset by movements
in the price of the debt securities which are the subject of the hedge. There is
also a risk of imperfect correlation where the securities underlying futures
contracts have different maturities than the portfolio securities being hedged.
Transactions in options on futures contracts involve similar risks.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions,
management believes the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is
available, in which case only that dealer's price will be used, or which can be
sold at a formula price provided for in the OTC option agreement. There can be
no assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures transaction.
The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to hedge effectively its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Fund has an open position in an option, a
futures contract or related option.
The exchanges on which options on portfolio securities and currencies are
traded have generally established limitations governing the maximum number of
call or put options on the same underlying security and currency (whether or not
covered) which may be written by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. The Investment
Adviser does not believe that these trading and position limits will have any
adverse impact on the portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Transactions. The securities in which the Fund invests are
traded primarily in the OTC market. Since portfolio transactions generally will
not be effected on foreign securities exchanges, the Fund generally does not
expect to incur potential settlement delays which may occur on certain of such
exchanges. Where possible, the Fund will deal directly with the dealers who make
a market in the securities involved except in those circumstances where better
prices and execution are available elsewhere. Such dealers usually are acting as
principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities generally are traded on a
net basis and normally do not involve either brokerage commissions or transfer
taxes. Securities firms may receive brokerage commissions on certain portfolio
transactions, including options, futures and options on futures transactions and
the purchase and sale
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<PAGE> 23
of underlying securities upon exercise of options. The Fund has no obligation to
deal with any broker in the execution of transactions in portfolio securities.
Under the Investment Company Act, persons affiliated with the Fund, including
Merrill Lynch, are prohibited from dealing with the Fund as a principal in the
purchase and sale of securities unless a permissive order allowing such
transactions is obtained from the Commission. Affiliated persons of the Fund,
and affiliated persons of such affiliated persons, may serve as its broker in
transactions conducted on an exchange and in OTC transactions conducted on an
agency basis. In addition, consistent with the Conduct Rules of the NASD, the
Fund may consider sales of shares of the Fund as a factor in the selection of
brokers or dealers to execute portfolio transactions for the Fund. It is
expected that the majority of the shares of the Fund will be sold by Merrill
Lynch. Costs associated with transactions in foreign securities are generally
higher than those associated with transactions in U.S. securities, although the
Fund will endeavor to achieve the best net results in effecting such
transactions.
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the contract
with the Fund, to repurchase a security (typically a security issued or
guaranteed by the U.S. Government) at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed yield for the Fund insulated from fluctuations in the market value of
the underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements may be entered into
only with financial institutions which (i) have, in the opinion of the
Investment Adviser, substantial capital relative to the Fund's exposure, or (ii)
have provided the Fund with a third-party guaranty or other credit enhancement.
A purchase and sale contract is similar to a repurchase agreement, but purchase
and sale contracts, unlike repurchase agreements, allocate interest on the
underlying security to the purchaser during the term of the agreement. In all
instances, the Fund takes possession of the underlying securities when investing
in repurchase agreements or purchase and sale contracts. Nevertheless, if the
seller were to default on its obligation to repurchase a security under a
repurchase agreement or purchase and sale contract and the market value of the
underlying security at such time was less than the Fund had paid to the seller,
the Fund would realize a loss. The Fund may not invest more than 15% of its
total assets in repurchase agreements or purchase and sale contracts maturing in
more than seven days, together with all other illiquid securities.
Lending of Portfolio Securities. The Fund is authorized to lend securities
from its portfolio, with a value not exceeding 33% of its total assets, to
banks, brokers and other financial institutions if it receives collateral in
cash or securities issued or guaranteed by the U.S. Government or other high
quality securities which will be maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities. During the
period of this loan, the Fund receives the income on the loaned securities and a
loan fee and may thereby increase its yield.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies that are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (i) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). Among its fundamental policies, the Fund may not invest
more than 25% of its total assets (taken at market value at the time of each
investment) in the securities of issuers in any particular
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industry, except that, under normal circumstances, the Fund will invest more
than 25% of its total assets in issuers in the banking industry. This
restriction will not apply to securities issued or guaranteed by the U.S.
Government or by its agencies or instrumentalities, but will apply to
obligations of a foreign government unless the Commission permits their
exclusion. Investment restrictions and policies that are non-fundamental
policies may be changed by the Board of Directors without shareholder approval.
As a non-fundamental policy, the Fund may not borrow amounts in excess of 10% of
its total assets taken at market value (including the amount borrowed), and then
only from banks as a temporary measure for extraordinary or emergency purposes,
including to meet redemptions or to settle securities transactions. Usually only
"leveraged" investment companies may borrow in excess of 5% of their assets;
however, the Fund will not borrow to increase income but only to meet redemption
requests or to settle securities transactions which might otherwise require
untimely disposition of portfolio securities. The Fund will not purchase
securities while borrowings exceed 5% of total assets except to honor prior
commitments. (For the purpose of this restriction, collateral arrangements with
respect to the writing of options, and, if applicable, futures contracts,
options on futures contracts, and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge of assets and neither
such arrangements nor the purchase or sale of futures or related options are
deemed to be the issuance of a senior security.)
Although the Fund has registered as a "non-diversified" investment company
under the Investment Company Act, to qualify as a regulated investment company
under the Code, the Fund will be subject to certain diversification requirements
of the Code. See "Distributions and Taxes -- Taxes."
Portfolio Turnover. The Investment Adviser will effect portfolio
transactions without regard to holding period, if, in its judgment, such
transactions are advisable in light of a change in circumstance in general
market, economic or financial conditions. As a result of its investment
policies, the Fund may engage in a substantial number of portfolio transactions.
Accordingly, while the Fund anticipates that its annual portfolio turnover rate
should not exceed 400% under normal conditions, it is impossible to predict
portfolio turnover rates. The portfolio turnover rate is calculated by dividing
the lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities in the portfolio during the year. High portfolio turnover involves
correspondingly greater transaction costs in the form of dealer spreads and
brokerage commissions, which are borne directly by the Fund, and may increase
the percentage of the Fund's distributions which are taxable to shareholders as
ordinary income. See "Distributions and Taxes -- Taxes."
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The Board of Directors is responsible for the overall supervision
of the operations of the Fund and performs the various duties imposed on the
directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL* -- President of the Investment Adviser and its affiliate,
FAM; President and Director of Princeton Services, Inc.; Executive Vice
President of ML & Co.; and Director of the Distributor.
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DONALD CECIL -- Special Limited Partner of Cumberland Partners (an
investment partnership).
EDWARD H. MEYER -- Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
CHARLES C. REILLY -- Self-employed financial consultant; former President
and Chief Investment Officer of Verus Capital, Inc.; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc.
RICHARD R. WEST -- Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
EDWARD D. ZINBARG -- Former Executive Vice President of The Prudential
Insurance Company of America.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Investment Adviser is owned and controlled by ML & Co., a financial
services holding company and the parent of Merrill Lynch. The Investment Adviser
provides the Fund with investment advisory and management services. The
Investment Adviser or its affiliate, FAM, acts as the investment adviser for
more than 130 registered investment companies. The Investment Adviser also
offers portfolio management and portfolio analysis services to individuals and
institutions. As of March 31, 1997, the Investment Adviser and FAM had a total
of approximately $247.2 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Investment
Adviser.
Subject to the direction of the Board of Directors, the Investment Adviser
is responsible for the actual management of the Fund's portfolio and constantly
reviews the Fund's holdings in light of its own research analysis and that from
other relevant sources. The responsibility for making decisions to buy, sell or
hold a particular security rests with the Investment Adviser. The Investment
Adviser performs certain of the other administrative services and provides all
the office space, facilities, equipment and necessary personnel for management
of the Fund.
Pursuant to the Fund's investment advisory agreement with the Investment
Adviser (the "Investment Advisory Agreement"), the Investment Adviser is
entitled to receive compensation at the annual rate of 0.55% of the average
daily net assets of the Fund not exceeding $2 billion, 0.525% of the average
daily net assets of the Fund in excess of $2 billion but not exceeding $4
billion, 0.50% of the average daily net assets of the Fund in excess of $4
billion but not exceeding $6 billion, 0.475% of the average daily net assets of
the Fund in excess of $6 billion but not exceeding $10 billion, 0.45% of the
average daily net assets of the Fund in excess of $10 billion but not exceeding
$15 billion, and 0.425% of the average daily net assets of the Fund in excess of
$15 billion. For the fiscal year ended December 31, 1996, the fee paid by the
Fund to the Investment Adviser was $1,778,380 (based on average net assets of
approximately $323.3 million).
The Investment Adviser has also entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), an indirect, wholly-owned subsidiary of ML & Co. and an affiliate
of the Investment Adviser, pursuant to which the Investment Adviser pays MLAM
U.K. a fee for providing investment advisory services to the Investment Adviser
with respect to the Fund in an amount to be determined from time to time by the
Investment Adviser and MLAM U.K. but
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<PAGE> 26
in no event in excess of the amount that the Investment Adviser actually
receives for providing services to the Fund pursuant to the Investment Advisory
Agreement. For the fiscal year ended December 31, 1996, the Investment Adviser
paid MLAM U.K. a fee of $161,870 pursuant to the Sub-Advisory Agreement. MLAM
U.K. has offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
The following persons associated with the Investment Adviser and MLAM U.K.
are primarily responsible for the day-to-day management of the Fund's investment
portfolio (the length of time that such persons have been so responsible is
indicated following each person's name): Alex V. Bouzakis (since 1992), Edward
F. Gobora (since 1993) and Stephen Yardley (since 1992). Each of these persons
is a Vice President of the Fund. Mr. Bouzakis is a Vice President and Senior
Portfolio Manager of the Investment Adviser and has been associated with the
Investment Adviser since 1982. Mr. Gobora has been a Vice President and
Portfolio Manager of the Investment Adviser since 1993, and associated therewith
since 1988. Mr. Yardley is a Vice President and Portfolio Manager of MLAM U.K.
and has been associated with MLAM U.K. since 1992; prior thereto, he was a
Portfolio Manager at Julius Baer Investment Management, Inc. and Bankers Trust
Company.
The Investment Advisory Agreement obligates the Fund to pay certain
expenses incurred in its operations, including, among other things, the
investment advisory fee; legal and audit fees; unaffiliated Directors' fees and
expenses; registration fees; custodian and transfer agency fees; accounting and
pricing costs; and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information. Accounting
services are provided to the Fund by the Investment Adviser, and the Fund
reimburses the Investment Adviser for its costs in connection with such
services. For the fiscal year ended December 31, 1996, the Fund reimbursed the
Investment Adviser $125,960 for accounting services. For the fiscal year ended
December 31, 1996, the ratio of total expenses to average net assets for Class
A, Class B, Class C and Class D shares was .95%, 1.74%, 1.73% and 1.20%,
respectively.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a subsidiary of ML & Co., acts as the Fund's transfer agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder
24
<PAGE> 27
Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Fund pays the Transfer
Agent an annual fee of up to $11.00 per Class A or Class D account and up to
$14.00 per Class B or Class C account and is entitled to reimbursement for
out-of-pocket expenses incurred by it under the Transfer Agency Agreement. The
term "account" includes a shareholder account maintained directly by the
Transfer Agent and any other account representing the beneficial interest of a
person in the relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co. For the fiscal
year ended December 31, 1996, the total fee paid by the Fund to the Transfer
Agent was $736,542.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Investment Adviser and of Merrill
Lynch, acts as the distributor of the shares of the Fund. Shares of the Fund are
offered continuously for sale by the Distributor and other eligible securities
dealers (including Merrill Lynch). Shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase is $1,000, and the minimum subsequent
purchase is $50, except that for retirement plans, the minimum initial purchase
is $100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
Pricing(SM) System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (the "NYSE") (generally, 4:00 p.m. New York time), which includes
orders received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the NYSE, on that day, provided the Distributor
in turn receives the order from the securities dealer prior to 30 minutes after
the close of business on the NYSE on that day. If the purchase orders are not
received prior to 30 minutes after the close of business on the NYSE on that
day, such orders shall be deemed received on the next business day. The Fund or
the Distributor may suspend the continuous offering of the Fund's shares of any
class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee (presently
$4.85, but as of May 1, 1997, $5.35) to confirm a sale of shares to such
customers. Purchases made directly through the Transfer Agent are not subject to
the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees. A discussion
of the factors that
25
<PAGE> 28
investors should consider in determining the method of purchasing shares under
the Merrill Lynch Select Pricing(SM) System is set forth under "Merrill Lynch
Select Pricing(SM) System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). See "Distribution Plans"
below. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 4.00% initial No No No
sales charge(2),(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.50% B shares convert to
years, at a rate of 4.0% D shares automatically
during after approximately
the first year, decreasing ten years(5)
1.0%
annually to 0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.55% No
- -------------------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
26
<PAGE> 29
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A and Class D
share purchases of $1,000,000 or more will not be subject to an initial
sales charge but instead may be subject to a 1.0% CDSC if redeemed within
one year. Such CDSC may be waived in connection with certain fee-based
programs. A 0.75% sales charge for 401(k) purchases over $1,000,000 will
apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee-based
programs may be modified. Also, Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made have an eight-year conversion
period. If Class B shares of the Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS DISCOUNT TO
SALES LOAD PERCENTAGE* OF SELECTED DEALERS
AS PERCENTAGE THE NET AS PERCENTAGE OF
AMOUNT OF PURCHASE OF OFFERING PRICE AMOUNT INVESTED THE OFFERING PRICE
- ------------------------------------------------ ------------------ --------------- -------------------
<S> <C> <C> <C>
Less than $25,000............................... 4.00% 4.17% 3.75%
$25,000 but less than $50,000................... 3.75 3.90 3.50
$50,000 but less than $100,000.................. 3.25 3.36 3.00
$100,000 but less than $250,000................. 2.50 2.56 2.25
$250,000 but less than $1,000,000............... 1.50 1.52 1.25
$1,000,000 and over**........................... 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases in connection with certain
fee-based programs. If the sales charge is waived in connection with a
purchase of $1,000,000 or more, such purchases may be subject to a 1.0% CDSC
if the shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with certain fee-based programs. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed. A sales charge of 0.75% will be
charged on purchases of $1,000,000 or more of Class A or Class D shares by
certain employer-sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. The
proceeds from the account maintenance fees are used to compensate Merrill Lynch
for providing continuing account maintenance activities.
As noted above, as a result of the implementation of the Merrill Lynch
Select Pricing(SM) System, Class A shares of the Fund outstanding prior to
October 21, 1994, were redesignated Class D shares. The Class A shares offered
by this Prospectus differ from the Class A shares offered prior to October 21,
1994, in many
27
<PAGE> 30
respects, including sales charges, exchange privilege and the classes of persons
to whom such shares are offered.
During the fiscal year ended December 31, 1996, the Fund sold 13,395 Class
A shares for aggregate net proceeds to the Fund of $105,688. The Distributor and
Merrill Lynch did not receive sales charges for the sale of such Class A shares
during the fiscal year ended December 31, 1996 and the Distributor received no
CDSCs with respect to redemption within one year after purchase of Class A
shares purchased subject to a front-end sales charge waiver.
During the fiscal year ended December 31, 1996, the Fund sold 550,920 Class
D shares for aggregate net proceeds to the Fund of $4,350,585. The gross sales
charges for the sale of its Class D shares for that year were $3,557, of which
$312 and $3,245 were received by the Distributor and Merrill Lynch,
respectively. During such year, the Distributor received no CDSCs with respect
to redemptions within one year after purchase of Class D shares purchased
subject to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Certain employer-sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class A shares at net asset
value provided such plans meet the required minimum number of eligible employees
or required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment programs including
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and purchases made in connection with
certain fee-based programs. In addition, Class A shares are offered at net asset
value to ML & Co. and its subsidiaries and their directors and employees and to
members of the Boards of MLAM-advised investment companies, including the Fund.
Certain persons who acquired shares of certain MLAM-advised closed-end funds in
their initial offerings who wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. In addition, Class A shares of the
Fund and certain other MLAM-advised mutual funds are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer
conducted by such funds in shares of the Fund and certain other MLAM-advised
mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges may
also be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Subject to certain conditions, Class A
and Class D shares are offered at net asset value to shareholders of Merrill
Lynch
28
<PAGE> 31
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc., and Class A shares are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc., who wish to reinvest in shares of
the Fund the net proceeds from a sale of certain of their shares of common
stock, pursuant to tender offers conducted by those funds.
Class D shares are also offered at net asset value without sales charge to
an investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
which declines each year, while Class C shares are subject only to a one year
1.0% CDSC. On the other hand, approximately ten years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B
and Class C shares are subject to an account maintenance fee of 0.25% of net
assets and Class B and Class C shares are subject to distribution fees of 0.50%
and 0.55% of net assets, respectively, as discussed under "Distribution Plans."
The proceeds from the account maintenance fees are used to compensate Merrill
Lynch for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans."
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares, from its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. Approximately ten years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately eight years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
29
<PAGE> 32
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Charges" below. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services --
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares that
are redeemed within four years after purchase may be subject to a CDSC at the
rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. Accordingly, no
CDSC will be imposed on increases in net asset value above the initial purchase
price. In addition, no CDSC will be assessed on shares derived from reinvestment
of dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC for Class B
shares purchased after October 21, 1994:
<TABLE>
<CAPTION>
CLASS B CDSC
YEAR SINCE AS A PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
--------------------------------------------------------------------- -------------------
<S> <C>
0-1.................................................................. 4.00%
1-2.................................................................. 3.00%
2-3.................................................................. 2.00%
3-4.................................................................. 1.00%
4 and thereafter..................................................... 0.00%
</TABLE>
Class B shares purchased prior to October 21, 1994, and redeemed within
three years of purchase are subject to a CDSC at the rates set forth below:
<TABLE>
<CAPTION>
CLASS B CDSC
YEAR SINCE AS A PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
--------------------------------------------------------------------- -------------------
<S> <C>
0-1.................................................................. 3.00%
1-2.................................................................. 2.00%
2-3.................................................................. 1.00%
3 and thereafter..................................................... 0.00%
</TABLE>
During the fiscal year ended December 31, 1996, the Distributor received
CDSCs of $113,472 with respect to the redemption of Class B shares.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from the shareholder's account to another account will be assumed to be
made in the same order as a redemption.
30
<PAGE> 33
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase for shares purchased after
October 21, 1994).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder. The CDSC also is waived on redemptions of
shares by certain eligible 401(a) and eligible 401(k) plans. The CDSC also is
waived for any Class B shares which are purchased by eligible 401(a) or eligible
401(k) plans which are rolled over into a Merrill Lynch or Merrill Lynch Trust
Company custodied IRA and held in such account at the time of redemption and for
any Class B shares that were acquired and held at the time of the redemption in
an Employee Access Account(SM) available through employers providing eligible
401(k) plans. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Effective on or about May 12, 1997, the
Class B CDSC also will be waived for any Class B shares purchased within
eligible Employee Access(SM) Accounts. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information. The terms of the CDSC may be modified in connection with certain
fee-based programs. See "Shareholder Services -- Fee-Based Programs."
Contingent Deferred Sales Charges -- Class C Shares. Class C shares that
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs." For the fiscal year ended December 31, 1996 the
Distributor received no CDSCs with respect to the redemption of Class C shares.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the
31
<PAGE> 34
two classes on the Conversion Date, without the imposition of any sales load,
fee or other charge. Conversion of Class B shares to Class D shares will not be
deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event that such certificates are not received
by the Transfer Agent at least one week prior to the Conversion Date, the
related Class B shares will convert to Class D shares on the next scheduled
Conversion Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value.
The Conversion Period also may be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid
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<PAGE> 35
monthly, at the annual rate of 0.25% of the average daily net assets of the Fund
attributable to shares of the relevant class in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) in connection with
account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rates of 0.50%,
with respect to Class B shares, and 0.55% with respect to Class C shares, of the
average daily net assets of the Fund attributable to the shares of the relevant
class in order to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing shareholder and distribution services, and bearing
certain distribution-related expenses of the Fund, including payments to
financial consultants for selling Class B and Class C shares of the Fund. The
Distribution Plans relating to Class B and Class C shares are designed to permit
an investor to purchase Class B and Class C shares through dealers without the
assessment of an initial sales charge and at the same time permit the dealer to
compensate its financial consultants in connection with the sale of the Class B
and Class C shares. In this regard, the purpose and function of the ongoing
distribution fees and the CDSC are the same as those of the initial sales charge
with respect to the Class A and Class D shares of the Fund in that the deferred
sales charges provide for the financing of the distribution of the Fund's Class
B and Class C shares.
For the fiscal year ended December 31, 1996, the Fund paid the Distributor
$2,265,534 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $302.1
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended December 31, 1996, the Fund paid the
Distributor $605 pursuant to the Class C Distribution Plan (based on average net
assets subject to such Class C Distribution Plan of $75,635), all of which was
paid to Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class C shares. For the fiscal year
ended December 31, 1996, the Fund paid the Distributor $52,898 pursuant to the
Class D Distribution Plan (based on average net assets subject to such Class D
Distribution Plan of approximately $21.2 million), all of which was paid to
Merrill Lynch for providing account maintenance activities in connection with
Class D shares.
The payments under the Distribution Plans are based upon a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, the distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs
and the expenses consist of financial consultant compensation.
As of December 31, 1996, for Class B shares, the fully allocated accrual
expenses for the period since August 3, 1990 (commencement of operations)
incurred by the Distributor and Merrill Lynch exceeded fully allocated accrual
revenues by approximately $11,311,000 (4.72% of Class B net assets at that
date). As of
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<PAGE> 36
December 31, 1996, for Class B shares, direct cash revenues for the period since
August 3, 1990 (commencement of operations) exceeded direct cash expenses by
$84,731,036 (35.39% of Class B net assets at that date). As of December 31,
1996, for Class C shares, the fully allocated accrual expenses for the period
since October 21, 1994 (commencement of operations) incurred by the Distributor
and Merrill Lynch exceeded fully allocated accrual revenues by approximately
4,000 (2.57% of Class C net assets at that date.) As of December 31, 1996, for
Class C shares, direct cash revenues for the period since October 21, 1994
(commencement of operations) exceeded direct cash expenses by $262 (.17% of
Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares but not the account maintenance
fee. The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible
gross sales of Class B shares and Class C shares, computed separately (defined
to exclude shares issued pursuant to dividend reinvestments and exchanges) plus
(2) interest on the unpaid balance for the respective class, computed
separately, at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fee
and the CDSC). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in excess of
0.50% of eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in connection with the
Class B shares is 6.75% of eligible gross sales. The Distributor retains the
right to stop waiving the interest charges at any time. To the extent payments
would exceed the voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares, and any CDSCs will be paid
to the Fund rather than to the Distributor; however, the Fund will continue to
make payments of the account maintenance fees. In certain circumstances the
amount payable pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper
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<PAGE> 37
notice of redemption. Except for any CDSC which may be applicable, there will be
no charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value of
shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice
of redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. Redemption requests should not be sent to the Fund.
The redemption request requires the signatures of all persons in whose names the
shares are registered, signed exactly as their names appear on the Transfer
Agent's register or on the certificate, as the case may be. The signature(s) on
the notice must be guaranteed by an "eligible guarantor institution" (including,
for example, Merrill Lynch branch offices and certain other financial
institutions) as such term is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents, such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payment will be mailed within seven days of receipt of a
proper notice of redemption.
At various times, the Fund may be requested to redeem shares for which it
has not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a U.S. bank). The Fund may delay or cause to be delayed the mailing of
a redemption check until such time as good payment has been collected for the
purchase of such shares. Normally this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the NYSE
on the day received and that such request is received by the Fund from such
dealer not later than 30 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time) on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later than
30 minutes after the close of business on the NYSE in order to obtain that day's
closing price.
The repurchase arrangements are for the convenience of shareholders and do
not involve a charge by the Fund (other than any applicable CDSC); securities
firms which do not have selected dealer agreements with the Distributor,
however, may impose a charge on the shareholder for transmitting the notice of
repurchase to the Fund. Merrill Lynch may charge its customers a processing fee
(presently $4.85, but as of May 1, 1997,
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<PAGE> 38
$5.35) to confirm a repurchase of shares of such customers. Repurchases directly
through the Transfer Agent are not subject to the processing fee. The Fund
reserves the right to reject any order for repurchase, which right of rejection
might adversely affect shareholders seeking redemption through the repurchase
procedure. However, a shareholder whose order for repurchase is rejected by the
Fund may redeem Fund shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Certain of such services are not available to investors who place purchase
orders for the Fund's shares through the Merrill Lynch Blueprint(SM) Program.
Full details as to each of such services and instructions as to how to
participate in the various services or plans, or to change options with respect
thereto, can be obtained from the Fund by calling the telephone number on the
cover page hereof or from the Distributor or Merrill Lynch. Certain of these
services are available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. These statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gain distributions. A shareholder may
make additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent. Shareholders also may maintain their accounts
through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch
brokerage account, an Investment Account in the transferring shareholder's name
will be opened automatically, without charge, at the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that if the firm to which the Class A or Class D shares
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<PAGE> 39
are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder. Shareholders considering transferring a tax deferred retirement
account such as an IRA from Merrill Lynch to another brokerage firm or financial
institution should be aware that if the firm to which the retirement account is
to be transferred will not take delivery of shares of the Fund, a shareholder
must either redeem the shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm, or such shareholder
must continue to maintain a retirement account at Merrill Lynch for those
shares.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
the account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his or her account at the time of the exchange and is not otherwise eligible
to acquire Class A shares of the second fund, the shareholder will receive Class
D shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period for the newly acquired shares of the
other Fund.
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Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without a sales charge, at the net
asset value per share next determined after the close of business on the NYSE on
the monthly payment date for such dividends and distributions. A shareholder may
at any time, by written notification to Merrill Lynch if the shareholder's
account is maintained with Merrill Lynch or by written notification or telephone
call (1-800-MER-FUND or 1-800-637-3863) to the Transfer Agent if the
shareholder's account is maintained with the Transfer Agent, elect to have
subsequent dividends, or both dividends and capital gains distributions paid in
cash, rather than reinvested, in which event payment will be mailed on or about
the payment date. Cash payments can also be directly deposited to the
shareholder's bank account. No CDSC will be imposed on redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to his or her bank account on either
a monthly or quarterly basis. A Class A or Class D shareholder whose shares are
held within a CMA(R), CBA(R) or Retirement Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the CMA(R) or CBA(R) Systematic Redemption Program, subject to certain
conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by pre-arranged charges of $50 or more
to his regular bank account. Investors who maintain CMA(R) or CBA(R) accounts
may arrange to have periodic investments made in the Fund in their CMA(R) or
CBA(R) accounts or in certain related accounts in amounts of $100 or more
through the CMA(R) or CBA(R) Automated Investment Program.
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<PAGE> 41
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions, (each referred to in this paragraph as a "Program")
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at 1-800-MER-FUND or 1-800-637-3863.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily prior
to the determination of the net asset value, which is calculated 15 minutes
after the close of business on the NYSE (generally, 4:00 p.m., New York time) on
that day. The net investment income of the Fund for dividend purposes consists
of interest earned on portfolio securities, less expenses, in each case computed
since the most recent determination of the net asset value. Expenses of the
Fund, including the investment advisory fees, distribution and/or account
maintenance fees, are accrued daily. Dividends of net investment income are
declared daily and reinvested monthly in the form of additional full and
fractional shares of the Fund at net asset value unless the shareholder elects
to receive such dividends in cash. Shares will accrue dividends as long as they
are issued and outstanding. Shares are issued and outstanding from the
settlement date of a purchase order to the day prior to settlement date of a
redemption order.
All net realized long-term or short-term capital gains, if any, are
declared and distributed to the Fund's shareholders annually. Capital gains
distributions will be reinvested automatically in shares unless the shareholder
elects to receive such distributions in cash.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class. See "Additional Information -- Determination of
Net Asset Value."
See "Shareholder Services" for information as to how to elect either
dividend reinvestment or cash payments. Portions of dividends and distributions
which are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of the Fund or received in cash.
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<PAGE> 42
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute substantially all
of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, will not be eligible for the dividends received deduction allowed to
corporations under the Code. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisors concerning the applicability of the U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign
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<PAGE> 43
corporation may be subject to U.S. withholding tax on the income resulting from
the Fund's election described in this paragraph but may not be able to claim a
credit or deduction against such U.S. tax for the foreign taxes treated as
having been paid by such shareholder. The Fund will report annually to its
shareholders the amount per share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts", and from unlisted options generally will be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividend distributions, and all or a portion of distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than such shareholder's tax basis in Fund
shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
41
<PAGE> 44
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time, the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed separately for Class A, Class B, Class C and Class D
shares in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period such as in the
case of Class B and Class C shares. Dividends paid by the Fund with respect to
all shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance fees and distribution fees and any incremental transfer
agency costs relating to each class of shares will be borne exclusively by that
class. The Fund will include performance data for all classes of shares of the
Fund in any advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return, and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over longer periods of time.
In advertisements distributed to investors whose purchases are subject to waiver
of the CDSC in the case of Class B or Class C shares (such as investors in
certain retirement plans) or to reduced sales charges in the case of Class A and
Class D shares, performance data may take into account the reduced, and not the
maximum, sales charges or may not take into account the CDSC and therefore may
reflect greater total return since, due to the reduced sales charges or waiver
of the CDSC, a lower amount of expenses may be deducted. See "Purchase of
Shares." The Fund's total return may be expressed either as a percentage or as a
dollar amount in order to illustrate the effect of such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
42
<PAGE> 45
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by (c) the maximum offering price per
share on the last day of the period. The yields for the 30-day period ended
December 31, 1996, were as follows: Class A shares, 4.27%; Class B shares,
3.72%; Class C shares, 3.69%; and Class D shares, 4.08%.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The value
of an investment in the Fund will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Index, the Dow Jones Industrial Average, or to performance data published by
Lipper Analytical Services, Inc., Morningstar Publications, Inc., Money
Magazine, U.S. News & World Report, Business Week, CDA Investment Technology,
Inc., Forbes Magazine, Fortune Magazine or other industry publications. In
addition, from time to time the Fund may include the Fund's risk-adjusted
performance ratings assigned by Morningstar Publications, Inc. in advertising or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily as of 15 minutes after the close of business on the NYSE (generally
4:00 p.m., New York time) on each day during which the NYSE is open for trading.
The net asset value is computed by dividing the sum of the value of the
securities held by the Fund plus any cash or other assets minus all liabilities
by the total number of shares outstanding at such time, rounded to the nearest
cent. Expenses, including the fees payable to the Investment Adviser and any
account maintenance and/or distribution fees payable to the Distributor, are
accrued daily.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; in addition, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. Since the distribution fees borne by Class C shares are higher than the
distribution fees borne by Class B shares, the per share net asset value of
Class B shares generally will be higher than the per share net asset value of
Class C shares. It is expected, however, that the per share net asset value of
the classes will tend to converge (although not necessarily meet) immediately
after the payment of dividends or distributions which will differ by
approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being
43
<PAGE> 46
valued or, lacking any sales, at the last available bid price. In cases where
the securities are traded on more than one exchange, the securities are valued
on the exchange designated by or under the authority of the Board of Directors
as the primary market. Securities traded in the OTC market are valued at the
last available bid price in the OTC market prior to the time of valuation.
Portfolio securities that are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market.
When the Fund writes an option, the amount of the premium received is recorded
on the books of the Fund as an asset and an equivalent liability. The amount of
the liability is subsequently valued to reflect the current market value of the
option written, based on the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including futures contracts and
related options, are stated at market value. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or dealers
on the day of valuation.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on April 18, 1990. As of the
date of this Prospectus, the Fund has authorized capital of 2,600,000,000 shares
of Common Stock, par value $0.10 per share, divided into four classes,
designated Class A, Class B, Class C and Class D Common Stock as follows: Class
A Common Stock -- 1,000,000,000 shares; Class B Common Stock -- 1,000,000,000
shares; Class C Common Stock -- 300,000,000 shares; and Class D Common
Stock -- 300,000,000 shares. Shares of Class A, Class B, Class C and Class D
Common Stock represent an interest in the same assets of the Fund and are
identical in all respects except that Class B, Class C and Class D shares bear
certain expenses related to the account maintenance fee relating to such shares,
and Class B and Class C shares bear certain expenses related to the distribution
of such shares. Each class has exclusive voting rights with respect to matters
relating to account maintenance and distribution expenditures (except that Class
B shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). See "Purchase of Shares." The Directors of the Fund
may classify and reclassify the shares of the Fund into additional classes of
Common Stock at a future date.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Directors (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. All shares of the Fund have equal voting rights, except, as noted
above, a class of shares will have exclusive voting rights with respect to
matters relating to the account maintenance and/or distribution expenses being
borne solely by such class. There normally will be no meeting of shareholders
for the purpose of electing Directors unless and until such time as less than a
majority of the Directors holding office have been elected by the shareholders,
at which time the Directors then in office will call a shareholders' meeting for
the election of Directors. Shareholders may, in accordance with the terms of the
Articles of Incorporation, cause a meeting of shareholders to be held for the
purpose of voting on the removal of Directors. Also, the Fund will be required
to call a special meeting of shareholders in accordance with the requirements of
the Investment Company Act to seek approval of new management and advisory
arrangements, of a material increase in distribution and/or account maintenance
fees or of a change in fundamental policies, objectives or restrictions. Except
as set forth above, the Directors shall continue to hold office and appoint
successor Directors. Each issued and outstanding share is entitled to
participate equally in dividends and distributions declared and in net assets
upon liquidation or dissolution remaining after satisfaction of outstanding
liabilities
44
<PAGE> 47
except that, as noted above, the Class B, Class C and Class D shares bear
certain additional expenses. Shares issued are fully paid and nonassessable and
have no preemptive rights. Shares have the conversion rights described in this
Prospectus.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this, please call your Merrill Lynch
Financial Consultant or Merrill Lynch Financial Data Services, Inc. at
1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
PENDING LITIGATION
In June 1993, a putative class action complaint was filed in the United
States District Court for the Southern District of California by several
shareholders of the Merrill Lynch Short-Term World Income Portfolio (the "World
Fund", and together with the Fund referred to in this section as the "Funds"), a
fund organized under the laws of the Cayman Islands for investment solely by
non-United States persons, that has similar investment objectives to the Fund.
The complaint named the World Fund, the Investment Adviser and certain of their
affiliates as defendants. The complaint alleged, among other things, that the
World Fund prospectus did not contain risk disclosures included in the Fund's
prospectus.
Thereafter, in September 1993, a First Amended Complaint was filed, among
other things, adding two plaintiffs who purchased shares in the Fund, and adding
the Fund and the Distributor as defendants. The Amended Complaint was filed
purportedly on behalf of Fund investors who purchased shares between September
15, 1990, and October 31, 1992, and on behalf of World Fund investors who
purchased shares between June 9, 1990, and October 31, 1992 and alleged
violations of Section 10(b) and Section 20 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), Section 12(2) and Section 15 of the
Securities Act, and various common law claims, including portfolio
mismanagement. In essence, plaintiffs alleged that these Funds' sales materials
did not contain adequate risk disclosures and further alleged oral point of sale
misrepresentations regarding the safety of investing in these Funds.
After plaintiffs voluntarily dismissed the action as to two Merrill Lynch
affiliates, the remaining defendants, with the exception of the World Fund,
moved to dismiss the Amended Complaint. In addition, all
45
<PAGE> 48
defendants, with the exception of the World Fund, moved to transfer venue to the
District of New Jersey. At the same time, the World Fund moved to dismiss the
Amended Complaint for insufficiency of process and lack of personal
jurisdiction.
In April 1994, the Court granted defendants' motion to transfer the action
to the District of New Jersey. Plaintiffs then moved for reconsideration. On
reconsideration, the Court ruled that the World Fund was subject to jurisdiction
in the United States, and then reaffirmed its decision transferring the action
to the District of New Jersey. In October 1994, the United States Court of
Appeals for the Ninth Circuit denied plaintiffs' petition for a writ of
mandamus.
On March 10, 1995, plaintiffs filed a Second Amended Complaint in the
United States District Court for the District of New Jersey which alleged, among
other things, that the Fund and the World Fund improperly "speculated" in "high
risk 'derivatives"' and that this was not disclosed to the shareholders of
either fund in its offering materials. Plaintiffs reasserted causes of action
under Section 12(2) of the Securities Act and Section 10(b) of the Exchange Act,
as well as various common law claims. The Second Amended Complaint also alleged
that defendants violated Section 12(1) of the Securities Act and Section 7(d) of
the Investment Company Act by selling shares of the World Fund within the United
States without registering with the Commission. It also asserted a new cause of
action under Section 13(a)(3) of the Investment Company Act, alleging that the
Fund and the World Fund improperly deviated from their stated investment
policies. The pleading also added David Walter, the Funds' portfolio manager, as
a defendant.
The Second Amended Complaint purports to be brought on behalf of all
persons and entities who purchased World Fund shares between June 9, 1990 and
October 31, 1992 and who purchased Fund shares between September 15, 1990 and
October 31, 1992. Plaintiffs further seek certification of a new "sub-class,"
consisting of all persons who purchased shares of the World Fund between June 9,
1990 through June 10, 1994, the period of time during which plaintiffs allege
that World Fund shares were unlawfully sold as unregistered investments.
Plaintiffs now claim losses of approximately $700 million and seek punitive
damages in connection with their common law fraud claim.
On September 11, 1995, defendants filed a motion to dismiss the Second
Amended Complaint. On February 23, 1996, the Court granted in part and denied in
part defendants' motion. The Court dismissed plaintiffs' claims that the
defendants failed properly to register the World Fund and its shares with the
Commission. The other counts of the complaint remain. In its opinion, the Court
states that plaintiffs have alleged that the Funds speculated in purchasing $1
billion of derivative securities and further alleged that despite the Funds
being marketed as prudent investments, such speculation was always intended and
was necessary to achieve the Funds' objectives. The opinion states that the
prospectuses contained warnings concerning risks associated with investing in
the Funds, including in particular that "the Funds would invest in debt
securities denominated in different currencies and that investments on a global
basis involved special risks including fluctuations in foreign exchange rates,
future foreign and political and economic developments, and the possible
imposition of exchange controls or other foreign or United States governmental
laws or restrictions applicable to such investments." The Court further noted
that the prospectuses warned of the risks of net asset fluctuation, investments
in indexed notes, the use of derivative securities to execute a hedge and higher
fees. The Court found, however, that taking plaintiffs' allegations as true for
purposes of the motion, as it must, the prospectuses "failed to disclose that it
would be necessary for the Funds to take speculative positions in derivative
securities," as plaintiffs allege. The Funds maintain that such disclosure was
omitted because such speculation was not the Funds' intention, nor did it in
fact occur.
46
<PAGE> 49
On May 14, 1996, defendants filed an Answer to the Second Amended
Complaint. On July 11, 1996, plaintiffs again moved for leave to amend their
complaint to add a claim under Section 11 of the Securities Act for false and
misleading disclosures in the Fund's Registration Statement. Plaintiffs were
permitted to add the Section 11 claim to the Second Amended Complaint.
On January 6, 1997, defendants moved to dismiss plaintiffs' claims under
Sections 11 and 12(2) of the Securities Act and Section 13(a)(3) of the
Investment Company Act for failure to state a claim and on the ground that the
applicable statutes of limitation had expired. Plaintiffs filed a brief in
opposition on February 7, 1997 and the defendants filed a reply brief on
February 18, 1997. This motion is sub judice and discovery is ongoing.
The defendants believe that the allegations are totally without merit, and
will continue to vigorously contest the action. The Investment Adviser has
agreed to indemnify these Funds for any liabilities or expenses they may incur
in connection with this litigation.
47
<PAGE> 50
[This page intentionally left blank]
48
<PAGE> 51
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[ ] Class A shares
[ ] Class B shares
[ ] Class C shares
[ ] Class D shares
of Merrill Lynch Short-Term Global Income Fund, Inc. and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. ................................ 4. ...................................
2. ................................ 5. ...................................
3. ................................ 6. ...................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address................................................... Date................
(Zip Code)
<TABLE>
<S> <C>
Occupation .........................................
...................................................
Signature of Owner
<CAPTION>
Occupation ......................................... Name and Address of Employer.................................................
<S> <C>
.............................................................................
.............................................................................
................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
Ordinary Income Dividends Long-term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] Check
or [ ] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Short-Term Global Income Fund, Inc. Authorization
Form.
SPECIFY TYPE OF ACCOUNT (check one): [ ] checking [ ] savings
Name on your account............................................................
Bank Name.......................................................................
Bank Number........................... Account Number..........................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor..........................................................
Signature of Depositor ................................. Date.................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
49
<PAGE> 52
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC. -- AUTHORIZATION FORM
(PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Distributions and Taxes -- Taxes") either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am no
longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
<TABLE>
<S> <C>
......................,
19 . . . .
Dear Sir/Madam: Date of initial purchase
</TABLE>
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Short-Term Global Income Fund, Inc. or any other investment company with
an initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Short-Term Global
Income Fund, Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Short-Term Global Income Fund, Inc. held as
security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
This form, when completed, should be mailed to:
Merrill Lynch Short-Term Global Income Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer A/C No.
</TABLE>
50
<PAGE> 53
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OF AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
(PLEASE PRINT) ------------------------------------
Name of Owner.......................................................................
First Name Initial Last Name ------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A or [ ] Class D shares in Merrill Lynch Short-Term
Global Income Fund, Inc. at cost or current offering price. Withdrawals to be
made either (check one) [ ] Monthly on the 24th day of each month, or [ ]
Quarterly on the 24th day of March, June, September and December. If the 24th
falls on a weekend or holiday, the next succeeding business day will be
utilized. Begin systematic withdrawals on ________________, or as soon as
possible thereafter. (month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE):
[ ] $________ or [ ] ____% of the current value of [ ] Class A or [ ] Class D
shares in the account.
SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of..........................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print)......................................................
Address.........................................................................
...........................................................................
Signature of Owner.................................... Date ....................
Signature of Co-Owner (if any)..................................................
(b) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number .............................................................
Account Number..................................................................
Bank Address....................................................................
Signature of Depositor................................ Date.....................
Signature of Depositor..........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
51
<PAGE> 54
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC. -- AUTHORIZATION FORM
(PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C shares [ ] Class D shares
of Merrill Lynch Short-Term Global Income Fund, Inc. subject to the terms set
forth below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Short-Term Global Income Fund, Inc., as indicated
below:
Amount of each check or ACH debit $..........................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month
beginning ________________ or as soon thereafter as possible.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip............................................
As a convenience to me, I hereby request and authorize you to pay and charge
to my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
52
<PAGE> 55
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<PAGE> 56
[This page intentionally left blank]
<PAGE> 57
INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
The Chase Manhattan Bank,
Global Securities Services
4 Chase MetroTech Center,
18th Floor
Brooklyn, New York 11245
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE> 58
- ------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................. 2
Merrill Lynch Select Pricing(SM) System... 3
Financial Highlights...................... 8
Special and Risk Considerations........... 10
Investment Objective and Policies......... 11
Hedging Techniques...................... 15
Other Investment Policies and
Practices............................. 20
Investment Restrictions................. 21
Management of the Fund.................... 22
Board of Directors...................... 22
Management and Advisory Arrangements.... 23
Code of Ethics.......................... 24
Transfer Agency Services................ 24
Purchase of Shares........................ 25
Initial Sales Charge Alternatives --
Class A and Class D Shares............ 27
Deferred Sales Charge Alternatives --
Class B and Class C Shares............ 29
Distribution Plans...................... 32
Limitations on the Payment of Deferred
Charges............................... 34
Redemption of Shares...................... 34
Redemption.............................. 35
Repurchase.............................. 35
Reinstatement Privilege -- Class A and
Class D Shares........................ 36
Shareholder Services...................... 36
Investment Account...................... 36
Exchange Privilege...................... 37
Automatic Reinvestment of Dividends and
Distributions......................... 38
Systematic Withdrawal Plans............. 38
Automatic Investment Plans.............. 38
Fee-Based Programs...................... 39
Distributions and Taxes................... 39
Distributions........................... 39
Taxes................................... 40
Performance Data.......................... 42
Additional Information.................... 43
Determination of Net Asset Value........ 43
Organization of the Fund................ 44
Shareholder Reports..................... 45
Shareholder Inquiries................... 45
Pending Litigation...................... 45
Authorization Form........................ 49
</TABLE>
Code # 11099-0497
[MERRILL LYNCH LOGO]
MERRILL LYNCH
SHORT-TERM GLOBAL
INCOME FUND, INC.
[MLYNCH COMPASS]
PROSPECTUS
April 25, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 59
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
-------------------------
Merrill Lynch Short-Term Global Income Fund, Inc. (the "Fund") is a
non-diversified mutual fund seeking to provide shareholders with as high a level
of current income as is consistent with prudent investment management from a
global portfolio of high quality debt securities denominated in various
currencies and multinational currency units and having remaining maturities not
exceeding three years. Under normal circumstances, the Fund will invest its
assets in debt securities denominated in at least three different currencies,
including the U.S. dollar. At times, the Fund may seek to hedge its portfolio
against interest rate and currency risks through the use of futures, options on
futures and currency transactions. There can be no assurance that the investment
objective of the Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated April
25, 1997 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
-------------------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
-------------------------
The date of this Statement of Additional Information is April 25, 1997.
<PAGE> 60
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek to provide shareholders
with as high a level of current income as is consistent with prudent investment
management from a global portfolio of high quality debt securities denominated
in various currencies and multinational currency units and having remaining
maturities not exceeding three years. Under normal circumstances, the Fund will
invest its assets in debt securities denominated in at least three different
currencies, including the U.S. dollar. There can be no assurance that the
investment objective of the Fund will be realized. Reference is made to
"Investment Objective and Policies" in the Prospectus for a discussion of the
investment objective and policies of the Fund.
The Fund will effect portfolio transactions without regard to holding
period if, in the judgment of the Fund's investment adviser, Merrill Lynch Asset
Management, L.P. (the "Investment Adviser"), such transactions are advisable in
light of a change in circumstances of a particular issuer or within a particular
industry or in general market, economic or financial conditions. For the fiscal
year ended October 31, 1995, the fiscal period November 1, 1995 to December 31,
1995 and the fiscal year ended December 31, 1996, the Fund's portfolio turnover
rates were 312.13%, 25.09% and 349.34%, respectively. The portfolio turnover
rate for the fiscal period November 1, 1995 to December 31, 1995 is
significantly lower than for either the fiscal year ended October 31, 1995 or
the fiscal year ended December 31, 1996 because it is for a two month period and
not for a full year. The portfolio turnover rate is calculated by dividing the
lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of all securities whose maturities at the time
of acquisition were one year or less) by the monthly average value of the
securities in the portfolio during the year.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such as
the Fund. If such restrictions should be reinstituted, it might become necessary
for the Fund to invest all or substantially all of its assets in U.S.
securities. In such an event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate. Any changes in
the investment objective or fundamental policies set forth under "Investment
Restrictions" below would require the approval of the holders of a majority of
the Fund's outstanding voting securities.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis on each day the Fund determines its net asset value in U.S. dollars, the
Fund intends to manage its portfolio so as to give reasonable assurance that it
will be able to obtain U.S. dollars to the extent necessary to meet anticipated
redemptions. See "Redemption of Shares." Under present conditions, the Fund does
not believe that these considerations will have any significant effect on its
portfolio strategy, although there can be no assurance in this regard.
HEDGING TECHNIQUES
Reference is made to the discussion concerning hedging techniques under the
caption "Hedging Techniques" in the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against interest rate and currency risks. These strategies include use of
options on its portfolio securities, financial and currency futures and options
on such futures and forward foreign currency transactions. While the Fund's use
of hedging
2
<PAGE> 61
strategies is intended to reduce the volatility of the net asset value of its
shares, the net asset value of the Fund's shares will fluctuate.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options and Futures Transactions"), the
Investment Adviser believes that, because the Fund will engage in these
transactions only for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions.
The following information relates to the hedging instruments that the Fund
may utilize with respect to interest rate and currency risks.
The Fund may purchase and write (i.e., sell) call options and put options
on securities, enter into closing purchase transactions with respect to such
options and engage in transactions in financial futures as described below.
Writing Options. The Fund will receive a premium from writing a call
option, which increases the Fund's return on the underlying security in the
event the option expires unexercised or is closed out at a profit. The amount of
the premium will reflect, among other factors, the current market price of the
underlying security, the relationship of the exercise price to the market price,
interest rates and the time period until the expiration of the option. By
writing a call, the Fund limits its opportunity to profit from an increase in
the market value of the underlying security above the exercise price of the
option for as long as the Fund's obligation as a writer continues. Thus, in some
periods the Fund will receive less total return and in other periods greater
total return from its hedged positions than it would have received from its
underlying securities unhedged. To facilitate closing transactions, as described
below, the Fund will ordinarily write only options for which a secondary market
exists.
The Fund may engage in closing transactions in order to terminate
outstanding exchange-traded options that it has written. To effect a closing
transaction, the Fund purchases, prior to the exercise of an outstanding option
that it has written, an option of the same series as that on which it desires to
terminate its obligation. Profit or loss from a closing purchase transaction
will depend on whether the cost of such transaction is more or less than the
premium received on the sale of the option plus the related transaction costs.
The Fund may also enter into over-the-counter ("OTC") put and call option
transactions, which are two party contracts with prices and terms negotiated
between the buyer and seller. The Fund will enter into OTC option transactions
only with respect to portfolio securities for which management believes the Fund
can receive on each business day at least two independent bids or offers (one of
which will be from an entity other than a party to the option).
Purchase of Put Options. The Fund may purchase put options in connection
with its hedging activities. By buying a put, the Fund has the right to sell the
underlying securities at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put
expires.
Futures Contracts. The Fund may purchase and sell financial futures
contracts as a hedge against adverse changes in interest rates. A futures
contract is an agreement between two parties to buy and sell a security,
respectively, for a set price on a future date. The Fund may effect transactions
in futures contracts in U.S. and foreign agency and government securities and
corporate debt securities traded on U.S. and foreign exchanges, as well as on
OTC markets.
3
<PAGE> 62
The Fund may sell futures contracts in anticipation of an increase in the
general level of interest rates. Generally, as interest rates rise, the market
value of the securities held by the Fund will fall, thus reducing the net asset
value of the Fund. This interest rate risk can be reduced without employing
futures as a hedge by selling long-term securities and either reinvesting the
proceeds in securities with shorter maturities or by holding assets in cash.
This strategy, however, entails increased transaction costs in the form of
dealer spreads and brokerage commissions and typically would reduce the Fund's
average yield as a result of the shortening of maturities.
The sale of futures contracts provides an alternative means of hedging
against rising interest rates. As rates increase the value of the Fund's short
position in the futures contracts will also tend to increase, thus offsetting
all or a portion of the depreciation in the market value of the Fund's
investments which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions (which is done by taking
an opposite position which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
The Fund may purchase futures contracts in anticipation of a decline in
interest rates when it is not fully invested in order to gain rapid market
exposure that may in part or entirely offset an increase in the cost of
long-term securities it intends to purchase. As such purchases are made, an
equivalent amount of futures contracts will be closed out. In a substantial
majority of these transactions, the Fund will purchase securities upon
termination of the futures contracts. Due to changing market conditions and
interest rate forecasts, however, a futures position may be terminated without a
corresponding purchase of securities.
Options on Financial Futures. The Fund may purchase and write call and put
options on futures contracts in connection with its hedging activities.
Generally, these strategies would be employed under the same market and market
sector conditions in which the Fund entered into futures contracts. The Fund may
purchase put options or write call options on futures contracts rather than
selling the underlying futures contracts in anticipation of an increase in
interest rates. Similarly, the Fund may purchase call options or write put
options on futures contracts as a substitute for the purchase of such futures to
hedge against the increased cost resulting from a decline in interest rates of
securities which the Fund intends to purchase.
RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS
Utilization of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and movements in the
price of the securities which are the subject of the hedge. If the price of the
futures contract moves more or less than the price of the security, the Fund
will experience a gain or loss which will not be completely offset by movements
in the price of the debt securities which are the subject of the hedge. There is
also a risk of imperfect correlation when the securities underlying futures
contracts have different maturities than the portfolio securities being hedged.
Transactions in currency futures and options on interest rate and currency
futures contracts involve similar risks.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. Similarly, positions in interest rate and currency futures may be closed
out only on an exchange which provides a secondary market for such futures. The
Fund will enter into an option or futures transaction on an exchange only if
there appears to be a liquid secondary market for such options or futures.
4
<PAGE> 63
However, there can be no assurance that a liquid secondary market will exist for
any particular call or put option or futures contract at any specific time.
Thus, it may not be possible to close an option or futures position. The Fund
will acquire only OTC options for which management believes the Fund can receive
on each business day at least two independent bids or offers (one of which will
be from an entity other than a party to the option), unless there is only one
dealer, in which case such dealer's price will be used or which can be sold at a
formula price provided for in the OTC option agreement. In the case of a futures
position or an option on a futures position written by the Fund, in the event of
adverse price movements, the Fund will continue to be required to make daily
cash payments of variation margin. In such situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
In addition, the Fund may be required to take or make delivery of the
instruments or currencies underlying futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability to hedge its portfolio effectively. There is also the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option. The
risk of loss from investing in futures transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security (whether or not covered) which may
be written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). "Trading Limits" are imposed on the maximum number of contracts which
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Investment Adviser does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
FORWARD FOREIGN EXCHANGE TRANSACTIONS
Generally, the foreign exchange transactions of the Fund will be conducted
on a spot, i.e., cash, basis at the spot rate for purchasing or selling currency
prevailing in the foreign exchange market. This rate under normal market
conditions differs from the prevailing exchange rate in an amount generally less
than one-tenth of one percent due to the costs of converting from one currency
to another. However, the Fund has authority to deal in forward foreign exchange
between currencies of the different countries in whose securities it will invest
as a hedge against possible variations in the foreign exchange rates between
these currencies. This is accomplished through contractual agreements to
purchase or sell a specified currency at a specified future date and price set
at the time of the contract. The Fund's dealings in forward foreign exchange
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities, the sale
and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Fund will not speculate in forward foreign exchange.
The Fund may not position hedge with respect to the currency of a particular
country to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or quoted
in that particular foreign currency. If the Fund enters into a position hedging
transaction, its custodian bank will place cash or liquid securities in a
separate account
5
<PAGE> 64
of the Fund in an amount equal to the value of the Fund's total assets committed
to the consummation of such forward contract. If the value of the securities
placed in the separate account declines, additional cash or securities will be
placed in the account so that the value of the account will equal the amount of
the Fund's commitment with respect to such contracts. The Fund will not enter
into a forward contract with a term of more than one year.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currency involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange are usually
conducted on a principal basis, no fees or commissions are involved.
OTHER INVESTMENT POLICIES AND PRACTICES
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements and purchase and sale contracts.
Repurchase agreements may be entered into only with financial institutions which
(i) have, in the opinion of the Investment Adviser, substantial capital relative
to the Fund's exposure, or (ii) have provided the Fund with a third-party
guaranty or other credit enhancement. Under a repurchase agreement or a purchase
and sale contract, the counterparty agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price in a specified
currency, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during such
period although it may be affected by currency fluctuations. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement; the
Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but constitute only collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement or under a purchase and sale contract, instead of the contractual
fixed rate of return, the rate of return to the Fund shall be dependent upon
intervening fluctuations of the market value of such securities and the accrued
interest on the securities. In such event, the Fund would have rights against
the seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform.
Lending of Portfolio Securities. Subject to the investment restrictions
stated below, the Fund may lend securities from its portfolio to approved
borrowers and receive therefor collateral in cash or securities issued or
guaranteed by the U.S. Government which are maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities. The
purpose of such loans is to permit the borrower to use such securities for
delivery to purchasers when such borrower has sold short. If cash collateral is
received by the Fund, it is invested in short-term money market securities, and
a portion of the yield received in respect of
6
<PAGE> 65
such investment is retained by the Fund. Alternatively, if securities are
delivered to the Fund as collateral, the Fund and the borrower negotiate a rate
for the loan premium to be received by the Fund for lending its portfolio
securities. In either event, the total yield on the Fund's portfolio is
increased by loans of its portfolio securities. The Fund will have the right to
regain record ownership of loaned securities to exercise beneficial rights such
as voting rights, subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans. With respect to the lending of portfolio securities, there is the risk of
failure by the borrower to return the securities involved in such transactions.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), means the lesser of (i) 67% of the
Fund's shares present at a meeting at which more than 50% of the outstanding
shares of the Fund are represented or (ii) more than 50% of the Fund's
outstanding shares).
Under the fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any particular
industry; except that, under normal circumstances, the Fund will invest
more than 25% of its total assets in issuers in the banking industry. This
restriction will not apply to securities issued or guaranteed by the U.S.
Government or by its agencies or instrumentalities, but will apply to
obligations of a foreign government unless the Commission permits their
exclusion.
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they
7
<PAGE> 66
may be amended from time to time, in connection with hedging transactions,
short sales, when-issued and forward commitment transactions and similar
investment strategies.
7. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental restrictions which
may be changed by the Board of Directors. Under the non-fundamental
investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the Securities Act
and determined to be liquid by the Fund's Board of Directors are not
subject to the limitations set forth in this investment restriction.
d. Notwithstanding fundamental investment restriction (6) above,
borrow amounts in excess of 10% of its total assets taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes, including to meet
redemptions or to settle securities transactions. Usually only "leveraged"
investment companies may borrow in excess of 5% of their assets; however,
the Fund will not borrow to increase income but only to meet redemption
requests or to settle securities transactions which might otherwise require
untimely disposition of portfolio securities. The Fund will not purchase
securities while borrowings exceed 5% of total assets except to honor prior
commitments. (For the purpose of this restriction, collateral arrangements
with respect to the writing of options, and, if applicable, futures
contracts, options on futures contracts, and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge of
assets and neither such arrangements nor the purchase or sale of futures or
related options are deemed to be the issuance of a senior security.)
The Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by such Act in
the proportion of its assets that it may invest in securities of a single
issuer. To comply with tax requirements for qualification as a "regulated
investment company," however, the Fund's investments will be limited in a manner
such that, at the close of each quarter of each fiscal year, (a) no more than
25% of the Fund's total assets are invested in the securities of a single
issuer, and
8
<PAGE> 67
(b) with regard to at least 50% of the Fund's total assets, no more than 5% of
its total assets are invested in the securities of a single issuer. For purposes
of this restriction, the Fund will regard each country and each political
subdivision, agency or instrumentality of such country and each multinational
agency of which such country is a member and each public authority which issues
securities on behalf of a private entity as a separate issuer, except that if
the security is backed only by the assets and revenues of a nongovernment
entity, then the entity with the ultimate responsibility for the payment of
interest and principal may be regarded as the sole issuer. In addition, the Fund
will regard the issuer of participations in, or bonds and notes backed by, pools
of mortgage, credit card, automobile or other types of receivables as being the
limited purpose corporation or trust issuing the participation certificates,
bonds or notes as well as any other entity that is or may be responsible for
providing full payment on the underlying obligations in the pool. These
tax-related limitations may be changed by the Board of Directors of the Fund to
the extent necessary to comply with changes to the Federal tax requirements. A
fund which elects to be classified as "diversified" under the Investment Company
Act must satisfy the foregoing 5% and 10% requirements with respect to 75% of
its total assets. To the extent that the Fund assumes large positions in the
securities of a small number of issuers, the Fund's net asset value may
fluctuate to a greater extent than that of a diversified investment company as a
result of changes in the financial condition or in the market's assessment of
the issuers.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of such
transaction, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on futures contracts
exceeds 15% of the total assets of the Fund, taken at market value, together
with all other assets of the Fund which are illiquid or are not otherwise
readily marketable. However, if the OTC option is sold by the Fund to a primary
U.S. Government securities dealer recognized by the Federal Reserve Bank of New
York and if the Fund has the unconditional contractual right to repurchase such
OTC option from the dealer at a predetermined price, then the Fund will treat as
illiquid such amount of the underlying securities as is equal to the repurchase
price less the amount by which the option is "in-the-money" (i.e., current
market value of the underlying securities minus the option's strike price). The
repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money." This policy as to OTC options is
not a fundamental policy of the Fund and may be amended by the Directors of the
Fund without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
Commission staff of its position.
Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Investment Adviser or its affiliates or any of their directors,
general partners, officers, or employees, acting as principal, unless pursuant
to a rule or exemptive order under the Investment Company Act. Because of the
affiliation of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") with the Fund, the Fund is prohibited from engaging in certain
transactions involving such firm or its affiliates except for brokerage
transactions permitted under the Investment Company Act involving only usual and
customary commissions or transactions pursuant to an exemptive order under the
Investment Company Act. Included among such restricted transactions will be
purchases from or sales to Merrill Lynch of securities in transactions in which
it acts as principal. See "Portfolio Transactions and Brokerage." Without such
an exemptive order, the Fund would be prohibited from engaging in portfolio
transactions with Merrill Lynch or its affiliates acting as
9
<PAGE> 68
principal and from purchasing securities in public offerings which are not
registered under the Securities Act, in which such firm or any of its affiliates
participates as an underwriter or dealer.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Fund,
including their ages and their principal occupations for at least the last five
years, is set forth below. Unless otherwise noted, the address of each Director
and executive officer is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (64) -- President and Director(1)(2) -- President of the
Investment Adviser (which term as used herein includes its corporate
predecessors) since 1977; President of Fund Asset Management, L.P. ("FAM")
(which term as used herein includes its corporate predecessors) since 1977;
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since
1990; and Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor")
since 1977.
DONALD CECIL (70) -- Director(2) -- 1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
EDWARD H. MEYER (70) -- Director(2) -- 777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
CHARLES C. REILLY (65) -- Director(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; former
Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990;
Adjunct Professor, Columbia University Graduate School of Business from 1990 to
1991; Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
RICHARD R. WEST (59) -- Director(2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, Dean from 1984 to 1993 and currently Dean
Emeritus of New York University Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado,
Inc. (real estate holding company), Smith-Corona Corporation (manufacturer of
typewriters and word processors) and Alexander's Inc. (real estate company).
EDWARD D. ZINBARG (62) -- Director(2) -- 5 Hardwell Road, Short Hills, New
Jersey 07078-2117. Former Executive Vice President of The Prudential Insurance
Company of America from 1988 to 1994; former Director of Prudential Reinsurance
Company and former Trustee of the Prudential Foundation.
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<PAGE> 69
TERRY K. GLENN (56) -- Executive Vice President(1)(2) -- Executive Vice
President of the Investment Adviser and FAM since 1983; Executive Vice President
and Director of Princeton Services since 1993; President of the Distributor
since 1986 and Director thereof since 1991; and President of Princeton
Administrators, L.P. since 1988.
JOSEPH T. MONAGLE, JR. (48) -- Senior Vice President(1)(2) -- Senior Vice
President and Department Head of the Global Fixed Income Division of the
Investment Adviser and associated therewith since 1977; Senior Vice President of
Princeton Services since 1993.
ALEX V. BOUZAKIS (40) -- Vice President(1)(2) -- Vice President and Senior
Portfolio Manager of the Investment Adviser and associated therewith since 1982.
EDWARD F. GOBORA (31) -- Vice President(2) -- Vice President and Portfolio
Manager of the Investment Adviser since 1993, and associated therewith since
1988.
KEVIN J. MCKENNA (40) -- Vice President(1)(2) -- Vice President of the
Investment Adviser since 1985.
DAVID B. WALTER (51) -- Vice President(1)(2) -- Vice President and
Portfolio Manager of the Investment Adviser since 1984.
STEPHEN YARDLEY (39) -- Vice President(1)(2) -- Vice President and
Portfolio Manager of Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.")
and associated therewith since 1992; Portfolio Manager at Julius Baer Investment
Management, Inc. and Bankers Trust Company prior thereto.
DONALD C. BURKE (36) -- Vice President(1)(2) -- Vice President and Director
of Taxation of the Investment Adviser since 1990.
GERALD M. RICHARD (47) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Investment Adviser and FAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer thereof since 1984.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of certain other
investment companies for which the Investment Adviser or its affiliate, FAM,
acts as investment adviser or manager.
At March 31, 1997, the Directors and officers of the Fund as a group (15
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund owned less than 1% of the outstanding shares of
common stock of ML & Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Investment Adviser
(each, a "non-affiliated Director") a fee of $3,500 per year plus $500 per Board
meeting attended, together with such Director's actual out-of-pocket expenses
relating to attendance at meetings. The Fund also compensates members of its
Audit and Nominating Committee (the "Committee"), which consists of all the
non-affiliated Directors at a rate of $500 per Committee meeting attended. The
Chairman of the Committee receives an additional fee of $250
11
<PAGE> 70
per Committee meeting attended. For the fiscal year ended December 31, 1996,
fees and expenses paid to such non-affiliated Directors aggregated $22,129.
The following table sets forth for the fiscal year ended December 31, 1996,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
investment companies advised by the Investment Adviser and its affiliate, FAM
("MLAM/FAM Advised Funds") to the non-affiliated Directors.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
PENSION OR FROM FUND AND
RETIREMENT BENEFITS MLAM/FAM ADVISED
COMPENSATION ACCRUED AS PART FUNDS PAID TO
NAME OF DIRECTOR FROM THE FUND OF FUND EXPENSES DIRECTORS(1)
- -------------------------------------------- ------------- ------------------- ----------------------
<S> <C> <C> <C>
Donald Cecil................................ $ 5,583 None $268,933
Edward H. Meyer............................. $ 3,583 None $227,933
Charles C. Reilly........................... $ 4,583 None $293,833
Richard R. West............................. $ 4,583 None $269,833
Edward D. Zinbarg........................... $ 4,583 None $127,333
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (32 registered investment companies consisting of 32 portfolios); Mr.
Meyer (32 registered investment companies consisting of 32 portfolios); Mr.
Reilly (41 registered investment companies consisting of 54 portfolios); Mr.
West (41 registered investment companies consisting of 54 portfolios); and
Mr. Zinbarg (18 registered investment companies consisting of 18
portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or other investment advisory clients of the Investment
Adviser or its affiliates. Because of different objectives or other factors, a
particular security may be bought for one or more clients when one or more
clients are selling the same security. If the Investment Adviser purchases or
sells securities for the Fund or other funds for which it acts as investment
adviser or for its other advisory clients, and such purchases or sales arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Investment Adviser or its affiliates during the same period
may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
Pursuant to an investment advisory agreement between the Fund and the
Investment Adviser (the "Investment Advisory Agreement"), the Investment Adviser
receives for its services to the Fund monthly compensation at the annual rate of
0.55% of the average daily net assets of the Fund not exceeding $2 billion,
0.525% of the average daily net assets of the Fund in excess of $2 billion but
not exceeding $4 billion, 0.50% of the average daily net assets of the Fund in
excess of $4 billion but not exceeding $6 billion, 0.475% of the average daily
net assets of the Fund in excess of $6 billion but not exceeding $10 billion,
0.45% of the average daily net assets of the Fund in excess of $10 billion but
not exceeding $15 billion, and 0.425% of the average daily net assets of the
Fund in excess of $15 billion. For the fiscal years ended October 31, 1994 and
1995, the total investment advisory fees paid by the Fund to the Investment
Adviser aggregated $6,995,186 and
12
<PAGE> 71
$3,146,062, respectively. For the fiscal period November 1, 1995 to December 31,
1995 and for the fiscal year ended December 31, 1996, the total investment
advisory fees paid by the Fund to the Investment Adviser aggregated $384,228 and
$1,778,380, respectively.
As described in the Prospectus, the Investment Adviser has also entered
into a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K.") pursuant to which MLAM U.K. provides investment advisory services
to the Investment Adviser with respect to the Fund. For the fiscal years ended
October 31, 1994 and 1995, the Investment Adviser paid MLAM U.K. fees of
$633,170 and $264,717, respectively, pursuant to the sub-advisory agreement. For
the fiscal period November 1, 1995 to December 31, 1995 and for the fiscal year
ended December 31, 1996, the Investment Adviser paid MLAM U.K. fees of $31,481
and $161,870, respectively, pursuant to the sub-advisory agreement.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well as
the fees of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates. The Fund pays all other expenses
incurred in its operation including, among other things, redemption expenses;
expenses of portfolio transactions; expenses of registering the shares under
Federal and state securities laws; pricing costs (including the daily
calculation of net asset value); expenses of printing shareholder reports,
prospectuses and statements of additional information (except to the extent paid
by the Distributor as described below); fees for legal and auditing services,
Commission fees, interest, certain taxes, fees and expenses of unaffiliated
Directors; costs of printing proxies and other expenses related to shareholder
meetings; and other expenses properly payable by the Fund. The organizational
expenses of the Fund were paid by the Fund. Accounting services are provided to
the Fund by the Investment Adviser and the Fund reimburses the Investment
Adviser for its costs in connection with such services. For the fiscal years
ended October 31, 1994 and 1995, the Fund reimbursed the Investment Adviser
$65,501 and $176,648, respectively, for accounting services. For the fiscal
period November 1, 1995 to December 31, 1995 and for the fiscal year ended
December 31, 1996, the Fund reimbursed the Investment Adviser $7,967 and
$125,960, respectively for accounting services. As required by the Fund's
distribution agreements, the Distributor will pay certain promotional expenses
of the Fund incurred in connection with the offering of its shares. Certain
expenses in connection with the account maintenance and/or distribution of
shares will be financed by the Fund pursuant to separate distribution plans in
compliance with Rule 12b-1 under the Investment Company Act. See "Purchase of
Shares -- Distribution Plans."
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the Investment
Company Act because of their ownership of its voting securities or their power
to exercise a controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein,
the Investment Advisory Agreement and the sub-advisory agreement will remain in
effect from year to year if approved annually (a) by the Directors of the Fund
or by a majority of the outstanding shares of the Fund and (b) by a majority of
the Directors who are not parties to such contracts or interested persons (as
defined in the Investment Company Act) of any such party. Such contracts are not
assignable and may be terminated without penalty on 60 days' written notice at
the option of either party thereto or by vote of the shareholders of the Fund.
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<PAGE> 72
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares. The Fund issues four classes of
shares under the Merrill Lynch Select Pricing(SM) System: shares of Class A and
Class D are sold to investors choosing the initial sales charge alternatives,
and shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. Each Class A, Class B, Class C and Class D share of
the Fund represents identical interests in the investment portfolio of the Fund
and has the same rights, except that Class B, Class C and Class D shares bear
the expenses of the ongoing account maintenance fees, and Class B and Class C
shares bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. Each class has different exchange privileges. See "Shareholder
Service -- Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by the Investment Adviser or its
affiliate, FAM. Funds advised by the Investment Adviser or FAM which utilize the
Merrill Lynch Select Pricing(SM) System are referred to herein as "MLAM-advised
mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offerings of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Investment Advisory Agreement and
sub-advisory agreement described above.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
As a result of the implementation of the Merrill Lynch Select Pricing(SM)
System, Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares. The Class A shares currently being offered differ
from the Class A shares offered prior to October 21, 1994, in many respects,
including sales charges, exchange privilege and the classes of persons to whom
such shares are offered. The Distributor and Merrill Lynch received no sales
charges for the sale of new Class A shares for the fiscal period October 21,
1994 (commencement of operations) to October 31, 1994, for the fiscal year ended
October 31, 1995, for the fiscal period November 1, 1995 to December 31, 1995 or
for the fiscal year ended December 31, 1996. The gross sales charges for the
sale of Class D shares (including redesignated Class A shares) for the fiscal
year ended October 31, 1994 were $11,788, of which the Distributor received
$1,110 and Merrill Lynch received $10,678. The gross sales charges for the sale
of Class D shares for the fiscal year ended October 31, 1995 were $4,326, of
which the Distributor received $330 and Merrill Lynch received $3,996. For the
fiscal period November 1, 1995 to December 31, 1995, the Distributor and Merrill
Lynch did not receive sales charges for the sale of Class D shares. The gross
sales charges for the sale of Class D shares for the fiscal year ended December
31, 1996 were $3,557, of which the Distributor received $312 and Merrill Lynch
received $3,245. During such periods, the Distributor received no contingent
deferred sales charges ("CDSCs") with respect to
14
<PAGE> 73
redemptions within one year after purchase of Class A or Class D shares
purchased subject to a front-end sales charge waiver. For information as to
brokerage commissions received by Merrill Lynch, see "Portfolio Transactions and
Brokerage."
The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children under
the age of 21 years purchasing shares for his, her or their own account and to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under Section
401 of the Internal Revenue Code of 1986, as amended (the "Code")) although more
than one beneficiary is involved. The term "purchase" also includes purchases by
any "company," as that term is defined in the Investment Company Act, but does
not include purchases by any such company which has not been in existence for at
least six months or which has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount. The
term "purchase" shall not include purchases by any group of individuals whose
sole organizational nexus is that the participants therein are credit
cardholders of a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment adviser. The term
"purchase" also includes purchases by employee benefit plans not qualified under
Section 401 of the Code, including purchases of shares of the Fund by employees
or by employers on behalf of employees, by means of a payroll deduction plan or
otherwise. Purchases by such a company or non-qualified employee benefit plan
will qualify for the quantity discounts discussed above only if the Fund and the
Distributor are able to realize economies of scale in sales effort and sales
related expense by means of the company, employer or plan making the Fund's
Prospectus available to individual investors or employees and forwarding
investments by such persons to the Fund and by any such employer or plan bearing
the expense of any payroll deduction plan.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Investment
Adviser or its affiliate, FAM, who purchased such closed-end fund shares prior
to October 21, 1994 (the date the Merrill Lynch Select Pricing(SM) System
commenced operations) and wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in Eligible Class A Shares, if the
conditions set forth below are satisfied. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994, and wish to
reinvest the net proceeds from a sale of their closed-end fund shares are
offered Class A shares (if eligible to buy Class A shares) or Class D shares of
the Fund and other MLAM-advised mutual funds ("Eligible Class D Shares"), if the
following conditions are met. First, the sale of the closed-end fund shares must
be made through Merrill Lynch, and the net proceeds therefrom must be
immediately reinvested in Eligible Class A or Class D Shares. Second, the
closed-end fund shares must either have been acquired in the initial public
offering or be shares representing dividends from shares of common stock
acquired in such offering. Third, the closed-end fund shares must have been
continuously maintained in a Merrill Lynch securities account. Fourth, there
must be a minimum purchase of $250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and
15
<PAGE> 74
Merrill Lynch High Income Municipal Bond Fund, Inc. will receive Class D shares
of the Fund, except that shareholders already owning Class A shares of the Fund
will be eligible to purchase additional Class A shares pursuant to this option,
if such additional Class A shares will be held in the same account as the
existing Class A shares and the other requirements pertaining to the
reinvestment privilege are met. In order to exercise this investment option, a
shareholder of one of the above-referenced continuously offered closed-end funds
(an "eligible fund") must sell his or her shares of common stock of the eligible
fund (the "eligible shares") back to the eligible fund in connection with a
tender offer conducted by the eligible fund and reinvest the proceeds
immediately in the designated class of shares of the Fund. This investment
option is available only with respect to eligible shares as to which no Early
Withdrawal Charge or Contingent Deferred Sales Charge (each as defined in the
eligible fund's prospectus) is applicable. Purchase orders from eligible fund
shareholders wishing to exercise this investment option will be accepted only on
the day that the related tender offer terminates and will be effected at the net
asset value of the designated class of the Fund on such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides
plan-participant record-keeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares, but, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds, presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares purchased does not equal the amount stated in the Letter of
Intention (minimum of $25,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to five percent of the intended amount will be
held in
16
<PAGE> 75
escrow during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If a purchase
during the term of such Letter would otherwise be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to the reduced percentage sales charge
which would be applicable to a single purchase equal to the total dollar value
of the Class A or Class D shares then being purchased under such Letter, but
there will be no retroactive reduction of the sales charges on any previous
purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-advised
money market fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are
offered to participants in the Merrill Lynch Blueprint(SM) Program
("Blueprint"). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
Blueprint is directed to small investors, group IRAs and participants in certain
affinity groups such as credit unions, trade associations and benefit plans.
Investors placing orders to purchase Class A or Class D shares of the Fund
through Blueprint will acquire the Class A or Class D shares at net asset value
plus a sales charge calculated in accordance with the Blueprint sales charge
schedule (i.e., up to $300 at 4.25%, from $300.01 to $5,000 at 3.25% plus $3.00
and $5,000.01 or more at the standard sales charge rates disclosed in the
Prospectus). In addition, Class A or Class D shares of the Fund are being
offered at net asset value plus a sales charge of .50% for corporate or group
IRA programs placing orders to purchase their Class A or Class D shares through
Blueprint. Services, including the exchange privilege, available to Class A and
Class D investors through Blueprint, however, may differ from those available to
other investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from employer-sponsored retirement and savings plans
whose trustee and/or plan sponsor has entered into a Merrill Lynch Directed IRA
Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.
17
<PAGE> 76
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and their directors and employees, and
any trust, pension, profit-sharing or other benefit plan for such persons may
purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that such redemption had
been made within 60 days prior to the investment in the Fund, and the proceeds
from the redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
first, the investor must purchase Class D shares of the Fund with proceeds from
a redemption of shares of such other mutual fund and the shares of such other
fund were subject to a sales charge either at the time of purchase or on a
deferred basis; and second, such purchase of Class D shares must be made within
90 days after such notice of termination.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
other mutual funds and that such shares have been outstanding for a period of no
less than six months; and second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must be
maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may, in appropriate cases, be adjusted to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or
18
<PAGE> 77
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any
MLAM-advised mutual fund. Minimum purchase requirements may be waived or varied
for such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors or
by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholder, and all material amendments are required to be
approved by the vote of the Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.
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<PAGE> 78
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
The following table sets forth comparative information as of December 31,
1996, with respect to Class B and Class C shares of the Fund, indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to Class B shares, the Distributor's voluntary maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF DECEMBER 31, 1996
---------------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ----------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD
AUGUST 3, 1990 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1996:
Under NASD Rule as Adopted....... $6,440,624 $ 402,539 $ 202,136 $604,675 $117,966 $ 486,709 $1,197
Under Distributor's Voluntary
Waiver......................... $6,440,624 $ 402,539 $ 32,203 $434,742 $117,966 $ 316,776 $1,197
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1996:
Under NASD Rule as Adopted....... $ 668 $ 42 $ 6 $ 48 $ 2 $ 46 $ 1
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during periods
indicated other than shares acquired through dividend reinvestment and the
exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to July
7, 1993, under the distribution plan in effect at that time, at the 0.75%
rate, 0.50% of average daily net assets has been treated as a distribution
fee and 0.25% of average daily net assets has been deemed to have been a
service fee and not subject to the NASD maximum sales charge rule.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the NASD maximum or, with respect to Class B shares, the
voluntary maximum.
20
<PAGE> 79
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the New
York Stock Exchange (the "NYSE") is restricted as determined by the Commission
or the NYSE is closed (other than customary weekend and holiday closings), for
any period during which an emergency exists as defined by the Commission as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of shareholders
of the Fund.
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in certain
instances, including in connection with certain postretirement withdrawals from
an Individual Retirement Account ("IRA") or other retirement plan or on
redemptions of Class B shares following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies in the case of such
withdrawals are: (a) any partial or complete redemption in connection with a
tax-free distribution following retirement under a tax-deferred retirement plan
or attaining age 59 1/2 in the case of an IRA or other retirement plan, or part
of a series of equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) or any redemption resulting from the tax-free
return of an excess contribution to an IRA; or (b) any partial or complete
redemption following the death or disability (as defined in the Code) of a Class
B shareholder (including one who owns the Class B shares as joint tenant with
his or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability. For the fiscal years ended October
31, 1994 and 1995, for the fiscal period November 1, 1995 to December 31, 1995
and for the fiscal year ended December 31, 1996, the Distributor received CDSCs
of $2,449,809, $469,456, $22,991 and $113,472, respectively, with respect to
redemptions of Class B shares, all of which were paid to Merrill Lynch. For the
fiscal period October 21, 1994 (commencement of operations) to October 31, 1994,
and for the fiscal year ended December 31, 1996, the Distributor received no
CDSCs with respect to redemptions of Class C shares. For the fiscal year ended
October 31, 1995 and the fiscal period November 1, 1995 to December 31, 1995,
the Distributor received CDSCs of $15 and $1,000, respectively, with respect to
redemptions of Class C shares, all of which were paid to Merrill Lynch.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group IRAs
and participants in certain affinity groups such as trade associations and
credit unions. Class B shares of the Fund are offered through Blueprint only to
members of certain affinity groups. The CDSC is waived in connection with
purchase orders placed through Blueprint. Services, including the exchange
privilege, available to Class B investors through Blueprint, however, may differ
from those available to other investors in Class B shares. Orders for purchases
and redemptions of Class B shares of the Fund will be grouped for execution
purposes which, in some circumstances, may involve the execution of such orders
two business days following the day such orders are placed. The minimum initial
purchase price is $100, with a $50 minimum for subsequent purchases through
Blueprint. There is no minimum initial or subsequent purchase requirement for
investors who are part of the Blueprint automatic investment plan. Additional
information concerning these Blueprint programs, including any annual fees or
21
<PAGE> 80
transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith
Incorporated, The Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies -- Other Investment
Policies and Practices -- Portfolio Transactions" in the Prospectus.
Subject to policies established by the Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best net results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission or spread
available. The Fund has no obligation to deal with any broker or group of
brokers in the execution of transactions in portfolio securities. Subject to
obtaining the best price and execution, brokers who provide supplemental
investment research to the Investment Adviser may receive orders for
transactions by the Fund. Information so received will be in addition to and not
in lieu of the services required to be performed by the Investment Adviser under
the Investment Advisory Agreement, and the expenses of the Investment Adviser
will not necessarily be reduced as a result of the receipt of such supplemental
information. Consistent with the Conduct Rules of the NASD, the Investment
Adviser may consider sales of shares of the Fund as a factor in the selection of
brokers or dealers to execute portfolio transactions for the Fund. It is
possible that certain of the supplementary investment research so received will
primarily benefit one or more other investment companies or other accounts for
which investment discretion is exercised. Conversely, the Fund may be the
primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other accounts or investment companies.
The Board of Directors has considered the possibility of seeking to
recapture for the benefit of the Fund brokerage commissions and other expenses
of possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the investment advisory fee paid by the Fund.
After considering all factors deemed relevant, the Directors made a
determination not to seek such recapture. The Directors will reconsider this
matter from time to time.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined once daily, Monday through
Friday, as of 15 minutes after the close of business on the NYSE (generally,
4:00 p.m., New York time), on each day during which the NYSE is open for
trading. The NYSE is not open on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net asset value is computed by dividing the value of the securities held by the
Fund plus any cash or other assets minus all liabilities by the total number of
shares outstanding at such time, rounded to the nearest cent. Expenses,
including the investment advisory fees and any account maintenance and/or
distribution fees, are accrued daily. The per share net asset value of Class B,
Class C and Class D shares generally will be lower than the per share net asset
value of Class A shares reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares and the daily
22
<PAGE> 81
expense accruals of the account maintenance fees applicable with respect to
Class D shares; moreover the per share net asset value of Class B and Class C
shares generally will be lower than the per share net asset value of Class D
shares, reflecting the daily expense accruals of the distribution fees and
higher transfer agency fees applicable with respect to Class B and Class C
shares of the Fund. It is expected, however, that the per share net asset value
of the four classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Portfolio
securities that are traded in both the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes an option, the amount of the premium received is recorded on the books of
the Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based on the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Other investments, including futures contracts and related
options, are stated at market value. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or dealers
on the day of valuation. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Directors of the Fund. Such valuations and procedures
will be reviewed periodically by the Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Fund. Full details as to each
of such services, copies of the various plans described below and instructions
as to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund, the Distributor or
Merrill Lynch. Certain of these services are available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gain distributions. A shareholder may
make additions to his Investment Account at any time by mailing a check directly
to the transfer agent.
23
<PAGE> 82
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Fund's transfer
agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the transfer agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the transfer agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the transfer agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he or she be issued certificates for the
shares and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an IRA from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Fund's transfer agent, acting as agent for
such securities dealers. Voluntary accumulation also can be made through a
service known as the Fund's Automatic Investment Plan whereby the Fund is
authorized through pre-authorized checks or automated clearing house debits of
$50 or more to charge the regular bank account of the shareholder on a regular
basis to provide systematic additions to the Investment Account of such
shareholder. An investor whose shares of the Fund are held within a CMA(R) or
CBA(R) account may arrange to have periodic investments made in the Fund in
amounts of $100 or more ($1 for retirement accounts) through the CMA(R) or
CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the Fund.
Such reinvestment will be at the net asset value of the shares of the Fund as of
the close of business on the NYSE on the monthly payment date for such dividends
and distributions. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Fund or vice
24
<PAGE> 83
versa, and commencing ten days after receipt by the transfer agent of such
notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS -- CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make withdrawals from an
Investment Account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired Class A
or Class D shares of the Fund having a value, based on cost or the current
offering price, of $5,000 or more, and monthly withdrawals are available for
shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value as determined as of
15 minutes after the close of business on the NYSE (generally, 4:00 p.m. New
York time) on the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the NYSE is not open for business on
such date, the Class A or Class D shares will be redeemed at the net asset value
next determined after the close of business on the NYSE on the following
business day. The check for the withdrawal payment will be mailed, or the direct
deposit of the withdrawal payment will be made, on the next business day
following redemption. When a shareholder is making systematic withdrawals,
dividends and distributions on all Class A or Class D shares in the Investment
Account are reinvested automatically in Class A or Class D shares of the Fund,
respectively. A shareholder's Systematic Withdrawal Plan may be terminated at
any time, without charge or penalty, by the shareholder, the Fund, the Fund's
transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends and capital gains distributions, the shareholder's original
investment may be reduced correspondingly. Purchases of additional Class A or
Class D shares concurrent with withdrawals are ordinarily disadvantageous to the
shareholder because of sales charges and tax liabilities. The Fund will not
knowingly accept purchase orders for Class A or Class D shares of the Fund from
investors who maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Periodic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed
on a monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(R) or CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are redeemed.
Monthly systematic redemptions will be made at net asset value on the first
Monday of each month, bimonthly systematic redemptions will be made at net asset
value on the first Monday of every other month, and quarterly, semiannual or
annual redemptions are made at net asset value on the first Monday of months
selected at the shareholder's option. If the first Monday of the month is a
holiday, the redemption will be processed at net asset value on the next
business day. The Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
25
<PAGE> 84
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch
Select Pricing(SM) System, Class A shareholders may exchange Class A shares of
the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his or her account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his or her account at the
time of the exchange and is not otherwise eligible to acquire Class A shares of
the second fund, the shareholder will receive Class D shares of the second fund
as a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase Class
A shares of the second fund. Class B, Class C and Class D shares are
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other fund as more fully described below. Class A, Class B, Class
C and Class D shares are also exchangeable for shares of certain MLAM-advised
money market funds as follows: Class A shares may be exchanged for shares of
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund
(available only for exchanges within certain retirement plans), Merrill Lynch
U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B,
Class C and Class D shares may be exchanged for shares of Merrill Lynch
Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional
Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and any
shares utilized in an exchange must have been held by the shareholder for at
least 15 days. It is contemplated that the exchange privilege may be applicable
to other new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was paid.
Based on this formula, Class A and Class D shares of the Fund generally may be
exchanged into the Class A or Class D shares of the other funds or into shares
of certain money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset
26
<PAGE> 85
value per Class B or Class C share, without the payment of any CDSC that might
otherwise be due on redemption of the outstanding shares. Class B shareholders
of the Fund exercising the exchange privilege will continue to be subject to the
Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating
to the new Class B shares acquired through use of the exchange privilege. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the Class B shares of the fund from which the
exchange has been made. For purposes of computing the sales charge that may be
payable on a disposition of the new Class B or Class C shares, the holding
period for the outstanding Class B or Class C shares is "tacked" to the holding
period of the new Class B or Class C shares. For example, an investor may
exchange Class B shares of the Fund for those of Merrill Lynch Special Value
Fund, Inc. ("Special Value Fund") after having held the Fund Class B shares for
two and a half years. The 2% CDSC that generally would apply to a redemption
would not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Special Value Fund and receive cash. There will be
no CDSC due on this redemption, since by "tacking" the two and a half year
holding period of Fund Class B shares to the three year holding period for the
Special Value Fund Class B shares, the investor will be deemed to have held the
Special Value Fund Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Investment Adviser or its affiliates, but the
period of time that Class B or Class C shares are held in a money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or, with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
which were acquired as a result of an exchange for Class B or Class C shares of
the Fund may, in turn, be exchanged back into Class B or Class C shares,
respectively, of any fund offering such shares, in which event the holding
period for Class B or Class C shares of that fund will be aggregated with
previous holding periods for purposes of reducing the CDSC. Thus, for example,
an investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Fund Class B
shares for two and a half years and three years later decide to redeem the
shares of Institutional Fund for cash. At the time of this redemption, the 2%
CDSC that would have been due had the Class B shares of the Fund been redeemed
for cash rather than exchanged for shares of Institutional Fund will be payable.
If, instead of such redemption, the shareholder exchanged such shares for Class
B shares of a fund which the shareholder continued to hold for an additional two
and a half years, any subsequent redemption will not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM-advised mutual
funds with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange privilege. Certain funds may suspend the continuous
offering of their shares at any time and may thereafter resume such offering
from time to time. The exchange privilege is available only to U.S. shareholders
in states where the exchange legally may be made.
27
<PAGE> 86
DISTRIBUTIONS AND TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute substantially all
of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, will not be eligible for the dividends received deduction allowed to
corporations under the Code. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of record
on a specified day in one of such months, then such dividend will be treated for
tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of
28
<PAGE> 87
the Fund will be required to include their proportionate shares of such
withholding taxes in their U.S. income tax returns as gross income, treat such
proportionate shares as taxes paid by them, and deduct such proportionate shares
in computing their taxable incomes or, alternatively, use them as foreign tax
credits against their U.S. income taxes. No deductions for foreign taxes,
however, may be claimed by noncorporate shareholders who do not itemize
deductions. A shareholder that is a nonresident alien individual or a foreign
corporation may be subject to U.S. withholding tax on the income resulting from
the Fund's election described in this paragraph but may not be able to claim a
credit or deduction against such U.S. tax for the foreign taxes treated as
having been paid by such shareholder. The Fund will report annually to its
shareholders the amount per share of such withholding taxes. For this purpose,
the Fund will allocate foreign taxes and foreign source income among the Class
A, Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission rule permitting the issuance and sale
of multiple classes of stock) that is based on the gross income allocable to
Class A, Class B, Class C and Class D shareholders during the taxable year, or
such other method as the Internal Revenue Service may prescribe.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non-equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain
29
<PAGE> 88
or loss from Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions to shareholders.
The mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest or currency exchange rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures, and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders as
ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than the
shareholder's basis in Fund shares (assuming the shares were held as a capital
asset). These rules and the mark-to-market rules described above, however, will
30
<PAGE> 89
not apply to certain transactions entered into by the Fund solely to reduce the
risk of currency fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time, the Fund may include its average annual total return and
other total return data, as well as yield, in advertisements or information
furnished to present or prospective shareholders. Total return and yield figures
are based on the Fund's historical performance and are not intended to indicate
future performance. Average annual total return and yield are determined
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of the Class B and
Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (ii) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
annual rates of return reflect compounding; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods of time.
31
<PAGE> 90
Set forth in the tables below is total return information for Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated. As a
result of the implementation of the Merrill Lynch Select Pricing(SM) System,
Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares, and historical performance data pertaining to such
shares is provided below under the caption "Class D."
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------- ----------------------------
REDEEMABLE REDEEMABLE
EXPRESSED AS VALUE OF A EXPRESSED AS VALUE OF A
A PERCENTAGE HYPOTHETICAL A PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
- ---------------------------------------------------- ------------ ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December 31, 1996.................... 2.04% $1,020.40 0.57% $1,005.70
Five Years Ended December 31, 1996.................. -- -- 1.96% $1,102.00
Inception (August 3, 1990) to December 31, 1996..... -- -- 3.08% $1,215.00
Inception (October 21, 1994) to December 31, 1996... 3.51% $1,078.70 -- --
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended December 31, 1996........................ 6.29% $1,062.90 4.52% $1,045.20
Year Ended December 31, 1995........................ 7.14% $1,071.40 6.31% $1,063.10
Year Ended December 31, 1994........................ -- -- (3.30)% $ 967.00
Inception (October 21, 1994) to December 31, 1994... (1.33)% $ 986.70 -- --
Year Ended December 31, 1993........................ -- -- 6.15% $1,061.50
Year Ended December 31, 1992........................ -- -- (3.39)% $ 966.10
Year Ended December 31, 1991........................ -- -- 6.63% $1,066.30
Inception (August 3, 1990) to December 31, 1990..... -- -- 3.40% $1,034.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (August 3, 1990) to December 31, 1996..... -- -- 21.50% $1,215.00
Inception (October 21, 1994) to December 31, 1996... 7.87% $1,078.70 -- --
YIELD
30 days ended December 31, 1996..................... 4.27% -- 3.72% --
</TABLE>
<TABLE>
<CAPTION>
CLASS C CLASS D
----------------------------- ----------------------------
REDEEMABLE REDEEMABLE
EXPRESSED AS VALUE OF A EXPRESSED AS VALUE OF A
A PERCENTAGE HYPOTHETICAL A PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
- ---------------------------------------------------- ------------- ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December 31, 1996.................... 3.94% $1,039.40 0.88% $1,008.80
Five Years Ended December 31, 1996.................. -- -- 1.66% $1,085.70
Inception (August 3, 1990) to December 31, 1996..... -- -- 2.99% $1,207.50
Inception (October 21, 1994) to December 31, 1996... 2.99% $1,066.80 -- --
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended December 31, 1996........................ 4.93% $1,049.30 5.09% $1,050.90
Year Ended December 31, 1995........................ 3.48% $1,034.80 6.87% $1,068.70
Year Ended December 31, 1994........................ -- -- (2.91)% $ 970.90
Inception (October 21, 1994) to December 31, 1994... (1.74)% $ 982.60 -- --
Year Ended December 31, 1993........................ -- -- 6.69% $1,066.90
Year Ended December 31, 1992........................ -- -- (2.79)% $ 972.10
Year Ended December 31, 1991........................ -- -- 7.23% $1,072.30
Inception (August 3, 1990) to December 31, 1990..... -- -- 3.73% $1,037.30
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (August 3, 1990) to December 31, 1996..... -- -- 20.75% $1,207.50
Inception (October 21, 1994) to December 31, 1996... 6.68% $1,066.80 -- --
30 days ended December 31, 1996..................... 3.69% -- 4.08% --
</TABLE>
32
<PAGE> 91
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares," respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charges or may not take into account the
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or the waiver of sales charges, a lower amount of expenses is
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on April 18, 1990. As of the
date of this Statement of Additional Information, it has an authorized capital
of 2,600,000,000 shares of Common Stock, par value $0.10 per share, divided into
four classes, designated Class A, Class B, Class C and Class D Common Stock as
follows: Class A Common Stock -- 1,000,000,000 shares; Class B Common
Stock -- 1,000,000,000 shares; Class C Common Stock -- 300,000,000 shares; and
Class D Common Stock -- 300,000,000 shares. Class A, Class B, Class C and Class
D shares represent an interest in the same assets of the Fund and are identical
in all respects except that the Class B, Class C and Class D shares bear certain
expenses related to the account maintenance and/or distribution of such shares
and have exclusive voting rights with respect to matters relating to such
account maintenance and/or distribution expenditures. See "Purchase of Shares."
All shares of the Fund have equal voting rights, except that as noted
above, each class of shares will have exclusive voting rights with respect to
matters relating to the distribution and/or account maintenance expenses being
borne solely by such class. Each issued and outstanding share is entitled to one
vote and to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund remaining after satisfaction of
outstanding liabilities upon liquidation or dissolution. There normally will be
no meetings of shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors holding office have
been elected by shareholders, at which time the Directors then in office will
call a shareholders' meeting for the election of Directors. Shareholders may, in
accordance with the terms of the Articles of Incorporation, cause a meeting of
shareholders to be held for the purpose of voting on the removal of Directors.
Also, the Fund will be required to call a special meeting of shareholders in
accordance with the requirements of the Investment Company Act to seek approval
of new management and advisory arrangements, of a material increase in
distribution and/or account maintenance fees or of a change in the fundamental
policies, objective or restrictions of the Fund.
Shares issued are fully paid and nonassessable and have no preemptive
rights. Redemption and conversion rights are discussed elsewhere herein and in
the Prospectus. Shares do not have cumulative voting rights, and the holders of
more than 50% of the shares of the Fund voting for the election of Directors can
elect all of the Directors if they choose to do so, and in such event the
holders of the remaining shares would not be able to elect any Directors. No
amendments may be made to the Articles of Incorporation without the affirmative
vote of a majority of the outstanding shares of the Fund.
The Investment Adviser provided the initial capital for the Fund by
purchasing 10,000 shares of the Fund for $100,000. Such shares were acquired for
investment and can only be disposed of by redemption.
33
<PAGE> 92
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on December 31, 1996, is set forth
below.
<TABLE>
<CAPTION>
CLASS
A CLASS B CLASS C CLASS D
------ ------------ -------- -----------
<S> <C> <C> <C> <C>
Net Assets...................................... $2,682 $239,419,009 $155,407 $17,948,282
====== =========== ======== ==========
Number of Shares Outstanding.................... 340 30,649,850 20,253 2,296,911
====== =========== ======== ==========
Net Asset Value Per Share (net assets divided by
number of shares outstanding)................. $ 7.89 $ 7.81 $ 7.67 $ 7.81
Sales Charge for Class A and Class D shares:
4.00% of offering price (4.17% of
net asset value per share)*................... .033 ** ** 0.33
------ ------------ -------- -----------
Offering Price.................................. $ 8.22 $ 7.81 $ 7.67 $ 8.14
====== =========== ======== ==========
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares"
in the Prospectus and "Redemption of Shares -- Deferred Sales
Charges -- Class B and Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the independent Directors of the
Fund. The independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
The Chase Manhattan Bank, N.A., Global Securities Services, 4 Chase
MetroTech Center, 18th Floor, Brooklyn, New York 11245 (the "Custodian"), acts
as the custodian of the Fund's assets. The Custodian is responsible for
safeguarding and controlling the Fund's cash and securities, handling the
delivery of securities and collecting interest on the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. See "Management of the Fund -- Transfer Agency Services"
in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
34
<PAGE> 93
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on December 31 (formerly October 31) of
each year. The Fund sends to its shareholders at least semi-annually reports
showing the Fund's portfolio and other information. An annual report, containing
financial statements audited by independent auditors, is sent to shareholders
each year. After the end of each year shareholders will receive Federal income
tax information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act and the Investment Company Act, to which
reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on March 31, 1997.
35
<PAGE> 94
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Short-Term Global Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Short-Term Global Income Fund,
Inc. as of December 31, 1996, the related statements of operations for the year
then ended and changes in net assets for the year then ended, for the period
November 1, 1995 to December 31, 1995 and for the year ended October 31, 1995,
and the financial highlights for the periods presented. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Short-Term Global Income Fund, Inc. as of December 31, 1996, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 1997
36
<PAGE> 95
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Maturity Interest Value Percent of
COUNTRIES Amount Date Issue Rate++ (Note 1a) Net Assets
<S> <S> <C> <S> <S> <C> <C> <C>
Australia A$ 15,950,000 5/14/97 Queensland Treasury Corp. (3) 8.00 % $ 12,758,316 4.96%
13,294,585 1/21/97 Swiss Bank Corp., Time Deposit (2) 5.625 10,558,559 4.10
Total Investments in Australia
(Cost--$23,136,036) 23,316,875 9.06
Canada C$ 3,258,000 9/02/97 General Electric Capital Corp. (2) 6.25 2,418,768 0.94
5,235,000 12/19/97 Toyota Motor Credit Corp. (2) 6.25 3,897,591 1.51
Total Investments in Canada
(Cost--$6,337,889) 6,316,359 2.45
Germany DM 9,060,000 7/11/97 Depfa Bank (2) 3.125 5,886,792 2.29
6,936,215 1/08/97 Deutsche Bank AG, Time Deposit (2) 3.125 4,508,427 1.75
4,916,866 1/03/97 Dresdner Bank, Time Deposit (2) 3.00 3,195,883 1.24
4,925,471 1/24/97 Dresdner Bank, Time Deposit (2) 2.937 3,201,476 1.24
Total Investments in Germany
(Cost--$16,857,040) 16,792,578 6.52
Ireland Iep 7,320,000 7/27/97 Irish Government Treasury Gilt (1) 8.75 12,563,792 4.88
Total Investments in Ireland
(Cost--$12,085,996) 12,563,792 4.88
Italy Lit 4,990,000,000 10/14/97 ABB Finance Inc. (2) 11.40 3,391,524 1.32
3,420,000,000 9/05/97 Abbey National Treasury Services PLC (2) 10.70 2,302,342 0.89
14,960,000,000 8/01/97 Buoni Poliennali del Tesoro (Italian
Government Bonds) (1) 8.50 9,899,850 3.85
2,360,000,000 6/02/97 Council of Europe (1) 11.40 1,577,734 0.61
1,770,000,000 5/12/97 Electricite de France (2) 8.00 1,167,510 0.45
Total Investments in Italy
(Cost--$18,053,425) 18,338,960 7.12
New Zealand NZ$ 31,600,000 3/12/97 New Zealand Treasury Bill (1) 9.05 22,061,205 8.57
17,000,000 6/18/97 New Zealand Treasury Bill (1) 9.50 11,638,131 4.52
Total Investments in New Zealand
(Cost--$32,569,067) 33,699,336 13.09
Spain Pta 2,000,000,000 2/28/97 Bonos del Estado (Spanish Government
Bonds) (1) 9.00 15,453,915 6.00
Total Investments in Spain
(Cost--$16,014,575) 15,453,915 6.00
United Pound 3,600,000 2/28/97 Halifax Building Society (2) 6.537 6,160,266 2.39
Kingdom Sterling 8,750,000 8/06/97 United Kingdom Gilt (1) 7.00 15,014,408 5.83
Total Investments in the United Kingdom
(Cost--$20,611,439) 21,174,674 8.22
United States US$ 10,000,000 1/02/97 BZW Security, Repurchase Agreement*
purchased on 12/26/96 (2) 5.50 10,000,000 3.88
12,000,000 1/06/97 Chase Manhattan Bank, Repurchase
Agreement* purchased on 12/30/96 (2) 5.20 12,000,000 4.66
10,000,000 1/02/97 Citibank New York State, Repurchase
Agreement* purchased on 12/26/96 (2) 5.55 10,000,000 3.88
27,200,000 2/06/97 Federal Home Loan Mortgage Corp. (3) 5.20 27,054,480 10.50
22,700,000 2/07/97 Federal National Mortgage
Association (3) 5.20 22,575,377 8.77
13,853,000 1/02/97 HSBC Holdings PLC, Repurchase
Agreement* purchased on 12/31/96 (2) 6.50 13,853,000 5.38
</TABLE>
37
<PAGE> 96
<TABLE>
<S> <S> <C> <S> <S> <C> <C> <C>
14,000,000 1/02/97 Morgan (J.P.) & Company, Inc.,
Repurchase Agreement* purchased on
12/31/96 (2) 6.50 14,000,000 5.44
Total Investments in the United States
(Cost--$109,497,449) 109,482,857 42.51
Total Investments (Cost--$255,162,916) 257,139,346 99.85
Nominal Value Expiration Strike
Covered by Options Date Price
Currency Put US$ 9,058,000 January 1997 New Zealand Dollar NZ $ .7000 (9,058) 0.00
Options Written
Total Options Written (Premiums
Received--$6,341) (9,058) 0.00
Total Investments, Net of Options Written (Cost--$255,156,575) 257,130,288 99.85
Unrealized Depreciation on Forward Foreign Exchange Contracts++++ (420,936) (0.16)
Other Assets Less Liabilities 816,028 0.31
------------ -------
Net Assets $257,525,380 100.00%
============ =======
<FN>
Corresponding industry groups for securities (percent of net
assets):
(1)Sovereign Government Obligations--34.26%
(2)Financial Services--41.36%
(3)Sovereign/Regional Government Obligations--Agency--24.23%
*Repurchase Agreements are fully collateralized by US Government
& Agency Obligations.
++Commercial Paper and certain US Treasury and Foreign Treasury
Obligations are traded on a discount basis; the interest rates
shown represent the yield-to-maturity at the time of purchase
by the Fund. Other securities bear interest at the rates shown,
payable at fixed dates or upon maturity. Interest rates on
floating rate securities are adjusted periodically based on
appropriate indexes; the interest rates shown are those in
effect at December 31, 1996.
++++Forward foreign exchange contracts as of December 31, 1996 are
as follows:
Unrealized
Appreciation
Expiration (Depreciation)
Date (Note 1d)
Foreign Currency Purchased
A$ 2,290,995 January 1997 $ (1,865)
C$ 6,097,380 January 1997 (69,311)
Chf 11,808,540 January 1997 80,354
DM 27,199,000 January 1997 113,141
Pound 2,777,314 January 1997 104,621
Sterling
Pta 575,945,000 January 1997 36,315
Total (US$ Commitment--$41,712,308) $ 263,255
============
Foreign Currency Sold
A$ 32,086,007 January 1997 $ 51,787
C$ 8,934,654 January 1997 169,694
Chf 11,578,498 January 1997 176,064
DM 55,558,777 January 1997 (345,369)
IEP 7,534,422 January 1997 (204,394)
Pound 16,271,495 January 1997 (451,046)
Sterling
Lit 29,244,886,449 January 1997 (13,400)
NZ$ 47,823,911 January 1997 (58,010)
Pta 2,005,314,921 January 1997 (9,517)
Total (US$ Commitment--$185,217,925) $ (684,191)
------------
Total Unrealized Depreciation--Net on
Forward Foreign Exchange Contracts $ (420,936)
============
See Notes to Financial Statements.
</TABLE>
38
<PAGE> 97
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of December 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$255,162,916) (Note 1a) $ 257,139,346
Cash 242
Foreign cash (Note 1c) 1,995,338
Receivables:
Interest $ 3,129,763
Securities sold 1,819,954
Capital shares sold 17,868
Options written 6,341 4,973,926
-------------
Prepaid registration fees and other assets (Note 1g) 165,301
-------------
Total assets 264,274,153
-------------
Liabilities: Options written, at value (premiums received--$6,341)
(Notes 1a & 1d) 9,058
Unrealized depreciation on forward foreign exchange contracts
(Note 1d) 420,936
Payables:
Securities purchased 3,199,368
Capital shares redeemed 1,286,662
Dividends to shareholders (Note 1h) 747,728
Option transactions 170,696
Distributor (Note 2) 159,980
Investment adviser (Note 2) 123,014 5,687,448
-------------
Accrued expenses and other liabilities 631,331
-------------
Total liabilities 6,748,773
-------------
Net Assets: Net assets $ 257,525,380
=============
Net Assets Class A Shares of Common Stock, $0.10 par value, 1,000,000,000
Consist of: shares authorized $ 34
Class B Shares of Common Stock, $0.10 par value, 1,000,000,000
shares authorized 3,064,985
Class C Shares of Common Stock, $0.10 par value, 300,000,000
shares authorized 2,025
Class D Shares of Common Stock, $0.10 par value, 300,000,000
shares authorized 229,691
Paid-in capital in excess of par 299,535,869
Accumulated realized capital losses on investments and foreign
currency transactions--net (Note 6) (46,882,133)
Unrealized appreciation on investments and foreign currency
transactions--net 1,574,909
-------------
Net assets $ 257,525,380
=============
Net Asset Class A--Based on net assets of $2,682 and 340 shares
Value: outstanding $ 7.89
=============
Class B--Based on net assets of $239,419,009 and 30,649,850
shares outstanding $ 7.81
=============
Class C--Based on net assets of $155,407 and 20,253 shares
outstanding $ 7.67
=============
Class D--Based on net assets of $17,948,282 and 2,296,911
shares outstanding $ 7.81
=============
See Notes to Financial Statements.
</TABLE>
39
<PAGE> 98
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1996
<S> <S> <C> <C>
Investment Income Interest and discount earned (net of $149,122 foreign withholding tax) $ 23,842,159
(Notes 1e & 1f):
Expenses: Account maintenance and distribution fees--Class B (Note 2) 2,265,534
Investment advisory fees (Note 2) 1,778,380
Transfer agent fees--Class B (Note 2) 695,814
Printing and shareholder reports 171,263
Custodian fees 169,835
Accounting services (Note 2) 125,960
Registration fees (Note 1g) 95,725
Professional fees 86,136
Account maintenance fees--Class D (Note 2) 52,898
Transfer agent fees--Class D (Note 2) 40,507
Directors' fees and expenses 22,129
Account maintenance and distribution fees--Class C (Note 2) 605
Transfer agent fees--Class C (Note 2) 150
Transfer agent fees--Class A (Note 2) 71
Other 21,460
-------------
Total expenses 5,526,467
-------------
Investment income--net 18,315,692
-------------
Realized & Realized loss from:
Unrealized Gain Investments--net $ (1,347,992)
(Loss) on Foreign currency transactions--net (4,369,292) (5,717,284)
Investments & -------------
Foreign Currency
Transactions--Net Change in unrealized appreciation/depreciation on:
(Notes 1c, 1d, Investments--net 1,205,690
1f & 3): Foreign currency transactions--net 553,119 1,758,809
------------- -------------
Net realized and unrealized loss on investments and foreign
currency transactions (3,958,475)
-------------
Net Increase in Net Assets Resulting from Operations $ 14,357,217
=============
See Notes to Financial Statements.
</TABLE>
40
<PAGE> 99
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the
For the Period For the
Year Ended Nov. 1, 1995 Year Ended
Dec. 31, to Dec. 31, Oct. 31,
Increase (Decrease) in Net Assets: 1996 1995 1995
<S> <S> <C> <C> <C>
Operations: Investment income--net $ 18,315,692 $ 4,308,676 $ 34,243,785
Realized gain (loss) on investments and foreign
currency transactions--net (5,717,284) 2,259,658 (17,288,580)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net 1,758,809 (3,501,943) 423,350
------------- ------------- -------------
Net increase in net assets resulting from
operations 14,357,217 3,066,391 17,378,555
------------- ------------- -------------
Dividends & Investment income--net:
Distributions to Class A (2,092) (829) (1,391)
Shareholders Class B (14,841,426) (4,016,322) (15,511,689)
(Note 1h): Class C (3,463) (1,650) (1,005)
Class D (1,135,414) (289,875) (1,111,053)
Return of capital:
Class A (305) -- (1,474)
Class B (2,166,725) -- (16,438,660)
Class C (506) -- (1,065)
Class D (165,761) -- (1,177,448)
------------- ------------- -------------
Net decrease in net assets resulting from
dividends to shareholders (18,315,692) (4,308,676) (34,243,785)
------------- ------------- -------------
Capital Share Net decrease in net assets derived from capital
Transactions share transactions (138,983,406) (23,220,490) (357,893,795)
(Note 4): ------------- ------------- -------------
Net Assets: Total decrease in net assets (142,941,881) (24,462,775) (374,759,025)
Beginning of period 400,467,261 424,930,036 799,689,061
------------- ------------- -------------
End of period $ 257,525,380 $ 400,467,261 $ 424,930,036
============= ============= =============
See Notes to Financial Statements.
</TABLE>
41
<PAGE> 100
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A++++
For the For the
The following per share data and ratios have been For the Period For the Period
derived from information provided in the financial Year Nov. 1, Year Oct. 21,
statements. Ended 1995 to Ended 1994++ to
Dec. 31, Dec. 31, Oct. 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 7.91 $ 7.93 $ 8.11 $ 8.11
Operating -------- -------- -------- --------
Performance: Investment income--net .54 .09 .49 .01
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net (.06) (.02) (.12) --
-------- -------- -------- --------
Total from investment operations .48 .07 .37 .01
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.44) (.09) (.27) --
Return of capital (.06) -- (.28) (.01)
-------- -------- -------- --------
Total dividends and distributions (.50) (.09) (.55) (.01)
-------- -------- -------- --------
Net asset value, end of period $ 7.89 $ 7.91 $ 7.93 $ 8.11
======== ======== ======== ========
Total Investment Based on net asset value per share 6.29% .92%+++ 4.62% .12%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses .95% 1.02%* .96% .97%*
Net Assets: ======== ======== ======== ========
Investment income--net 6.45% 6.91%* 6.75% 6.28%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 3 $ 75 $ 66 $ 59
Data: ======== ======== ======== ========
Portfolio turnover 349.34% 25.09% 312.13% 259.50%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
42
<PAGE> 101
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class B
The following per share data For the
and ratios have been derived Period
from information provided in For the Ended
the financial statements. Year Nov. 1,
Ended 1995 to
Increase (Decrease) in Net Dec. 31, Dec. 31, For the Year October 31,
Asset Value: 1996++++ 1995++++ 1995++++ 1994++++ 1993 1992
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 7.90 $ 7.93 $ 8.10 $ 8.65 $ 8.85 $ 9.84
Performance: -------- -------- -------- -------- ---------- ----------
Investment income--net .44 .08 .47 .50 .57 .72
Realized and unrealized
loss on investments and
foreign currency
transactions--net (.09) (.03) (.15) (.58) (.20) (.99)
-------- -------- -------- -------- ---------- ----------
Total from investment
operations .35 .05 .32 (.08) .37 (.27)
-------- -------- -------- -------- ---------- ----------
Less dividends and
distributions:
Investment income--net (.38) (.08) (.24) -- -- --
Return of capital (.06) -- (.25) (.47) (.57) (.72)
-------- -------- -------- -------- ---------- ----------
Total dividends and
distributions (.44) (.08) (.49) (.47) (.57) (.72)
-------- -------- -------- -------- ---------- ----------
Net asset value, end of
period $ 7.81 $ 7.90 $ 7.93 $ 8.10 $ 8.65 $ 8.85
======== ======== ======== ======== ========== ==========
Total Investment Based on net asset value
Return:** per share 4.52% .66%+++ 3.96% (1.02%) 4.63% (3.00%)
======== ======== ======== ======== ========== ==========
Ratios to Average Expenses 1.74% 1.80%* 1.73% 1.52% 1.60% 1.50%
Net Assets: ======== ======== ======== ======== ========== ==========
Investment income--net 5.62% 6.13%* 5.95% 5.68% 7.26% 7.60%
======== ======== ======== ======== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $239,419 $376,049 $398,136 $750,750 $1,664,602 $3,182,520
======== ======== ======== ======== ========== ==========
Portfolio turnover 349.34% 25.09% 312.13% 259.50% 284.62% 120.77%
======== ======== ======== ======== ========== ==========
<CAPTION>
Class C++++
For the For the
The following per share data and ratios have been For the Period For the Period
derived from information provided in the financial Year Nov. 1, Year Oct. 21,
statements. Ended 1995 to Ended 1994++ to
Dec. 31, Dec. 31, Oct. 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 7.72 $ 7.74 $ 8.10 $ 8.11
Operating -------- -------- -------- --------
Performance: Investment income--net .38 .08 .35 .01
Realized and unrealized loss on investments and
foreign currency transactions--net (.01) (.02) (.28) (.01)
-------- -------- -------- --------
Total from investment operations .37 .06 .07 --
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.37) (.08) (.21) --
Return of capital (.05) -- (.22) (.01)
-------- -------- -------- --------
Total dividends and distributions (.42) (.08) (.43) (.01)
-------- -------- -------- --------
</TABLE>
43
<PAGE> 102
<TABLE>
<S> <S> <C> <C> <C> <C>
Net asset value, end of period $ 7.67 $ 7.72 $ 7.74 $ 8.10
======== ======== ======== ========
Total Investment Based on net asset value per share 4.93% .78%+++ .89% .00%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 1.73% 1.83%* 1.83% 2.14%*
Net Assets: ======== ======== ======== ========
Investment income--net 5.23% 6.09%* 5.99% 5.63%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 155 $ 103 $ 109 $ 1
Data: ======== ======== ======== ========
Portfolio turnover 349.34% 25.09% 312.13% 259.50%
======== ======== ======== ========
<CAPTION>
Class D
The following per share data For the
and ratios have been derived Period
from information provided in For the Ended
the financial statements. Year Nov. 1,
Ended 1995 to
Increase (Decrease) in Net Dec. 31, Dec. 31, For the Year October 31,
Asset Value: 1996++++ 1995++++ 1995++++ 1994++++ 1993 1992
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 7.90 $ 7.93 $ 8.11 $ 8.66 $ 8.85 $ 9.85
Performance: -------- -------- -------- -------- ---------- ----------
Investment income--net .48 .09 .52 .54 .61 .77
Realized and unrealized
loss on investments and
foreign currency
transactions--net (.09) (.03) (.17) (.58) (.19) (1.00)
-------- -------- -------- -------- ---------- ----------
Total from investment
operations .39 .06 .35 (.04) .42 (.23)
-------- -------- -------- -------- ---------- ----------
Less dividends and
distributions:
Investment income--net (.42) (.09) (.26) -- -- --
Return of capital (.06) -- (.27) (.51) (.61) (.77)
-------- -------- -------- -------- ---------- ----------
Total dividends and
distributions (.48) (.09) (.53) (.51) (.61) (.77)
-------- -------- -------- -------- ---------- ----------
Net asset value, end
of period $ 7.81 $ 7.90 $ 7.93 $ 8.11 $ 8.66 $ 8.85
======== ======== ======== ======== ========== ==========
Total Investment Based on net asset value
Return:** per share 5.09% .75%+++ 4.40% (.51%) 5.28% (2.60%)
======== ======== ======== ======== ========== ==========
Ratios to Average Expenses 1.20% 1.27%* 1.20% 1.01% .98% 1.00%
Net Assets: ======== ======== ======== ======== ========== ==========
Investment income--net 6.13% 6.67%* 6.49% 6.19% 7.24% 8.11%
======== ======== ======== ======== ========== ==========
Supplemental Net assets, end of
Data: period (in thousands) $ 17,948 $ 24,240 $ 26,619 $ 48,879 $ 99,037 $ 188,623
======== ======== ======== ======== ========== ==========
Portfolio turnover 349.34% 25.09% 312.13% 259.50% 284.62% 120.77%
======== ======== ======== ======== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
44
<PAGE> 103
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Short-Term Global Income Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. The Fund offers
four classes of shares under the Merrill Lynch Select Pricing SM
System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its
account maintenance and distribution expenditures. The following is
a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. Options written are valued at the last sale
price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last asked price.
Options purchased are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last bid price. Short-term securities
are valued at amortized cost, which approximates market value.
Other investments, including futures contracts and related options,
are stated at market value. Securities and assets for which market
quotations are not available are valued at fair value as determined
in good faith by or under the direction of the Fund's Board of
Directors.
(b) Repurchase agreements--The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank of
the Federal Reserve System or a primary dealer in US Government
securities. Under such agreements, the bank or primary dealer agrees
to repurchase the security at a mutually agreed upon time and price.
The Fund takes possession of the underlying securities, marks to
market such securities and, if necessary, receives additions to such
securities daily to ensure that the contract is fully
collateralized.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(d) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* Options--The Fund is authorized to purchase and write call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current value of the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
paid or received (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
45
<PAGE> 104
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts as
a hedge against adverse changes in the interest rate. A futures
contract is an agreement between two parties to buy and sell a
security, respectively, for a set price on a future date. Upon
entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or
payment are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
(e) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to
its shareholders. Therefore, no Federal income tax provision is
required. Under the applicable foreign tax law, a withholding tax
may by imposed on interest and capital gains at various rates.
(f) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified
cost basis.
(g) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(h) Dividends and distributions--Dividends from net investment
income, excluding transaction gains/losses, are declared daily and
paid monthly. Distributions of capital gains are recorded on the ex-
dividend dates. A portion of the ordinary income distributions paid
by the Fund during the fiscal year ended December 31, 1996 and
October 31, 1995 are characterized as a return of capital.
(i) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$2,333,297 have been reclassified between accumulated net realized
capital losses and paid-in capital in excess of par. These
reclassifications have no effect on net assets or net asset values
per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets, at the following annual rates: 0.55%
of the Fund's average daily net assets not exceeding $2 billion;
0.525% of average daily net assets in excess of $2 billion but not
exceeding $4 billion; 0.50% of average daily net assets in excess of
$4 billion but not exceeding $6 billion; 0.475% of average daily net
assets in excess of $6 billion but not exceeding $10 billion; 0.45%
of average daily net assets in excess of $10 billion but not
exceeding $15 billion; and 0.425% of average daily net assets in
excess of $15 billion. MLAM has entered into a Sub-Advisory
Agreement with Merrill Lynch Asset Management U.K., Ltd. ("MLAM
U.K."), an affiliate of MLAM, pursuant to which MLAM pays MLAM U.K.
a fee in an amount to be determined from time to time by MLAM and
MLAM U.K. but in no event in excess of the amount that MLAM actually
receives. For the year ended December 31, 1996, MLAM paid MLAM U.K.
a fee of $161,870 pursuant to such Agreement.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
46
<PAGE> 105
NOTES TO FINANCIAL STATEMENTS (continued)
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended December 31, 1996, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class D Shares as follows:
MLFD MLPF&S
Class D $312 $3,245
For the year ended December 31, 1996, MLPF&S received no contingent
deferred sales charges relating to transactions in Class B Shares
and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, MLAM U.K., and/or ML &
Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1996 were $449,610,812 and
$555,634,475, respectively.
Net realized and unrealized gains (losses) as of December 31, 1996
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Investments:
Long-term $ (4,718,113) $ 1,991,022
Short-term 3,335,996 (14,592)
Options written 34,125 --
------------ ------------
Total investments (1,347,992) 1,976,430
------------ ------------
Currency transactions:
Options purchased (399,901) --
Options written 195,755 (2,717)
Forward foreign exchange
contracts (7,828,510) (420,936)
Foreign currency transactions 3,663,364 22,132
------------ ------------
Total currency transactions (4,369,292) (401,521)
------------ ------------
Total $ (5,717,284) $ 1,574,909
============ ============
Transactions in call options written for the year ended December 31,
1996 were as follows:
Nominal Value
Covered by Premiums
Written Options Received
Outstanding call options
written at beginning of year -- --
Options written 972,804,034 $ 970,886
Options exercised (129,201,000) (233,093)
Options expired (843,603,034) (737,793)
------------ ------------
Outstanding call options at
end of year -- $ --
============ ============
Transactions in put options written for the year ended December 31,
1996 were as follows:
Nominal Value
Covered by Premiums
Written Options Received
Outstanding put options
written at beginning of year -- --
Options written 1,118,893,000 $ 933,787
Options exercised (200,398,000) (186,726)
Options expired (909,437,000) (740,720)
------------ ------------
Outstanding put options
written at end of year 9,058,000 $ 6,341
============ ============
As of December 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $1,976,430, of which $2,741,868
related to appreciated securities and $765,438 related to
depreciated securities. At December 31, 1996, the aggregate cost of
investments for Federal income tax purposes was $255,162,916.
47
<PAGE> 106
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $138,983,406, $23,220,490 and $357,893,795 for the year ended
December 31, 1996, for the period November 1, 1995 to December 31,
1995 and for the year ended October 31, 1995, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 13,395 $ 105,688
Shares issued to shareholders
in reinvestment of dividends 207 831
------------ ------------
Total issued 13,602 106,519
Shares redeemed (22,814) (178,935)
------------ ------------
Net decrease (9,212) $ (72,416)
============ ============
Class A Shares for the Period Dollar
Nov. 1, 1995 to Dec. 31, 1995 Shares Amount
Shares sold 1,115 $ 8,833
Shares issued to shareholders in
reinvestment of dividends 123 975
------------ ------------
Net increase 1,238 $ 9,808
============ ============
Class A Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 19,710 $ 156,702
Shares issued to shareholders
in reinvestment of dividends 306 2,424
------------ ------------
Total issued 20,016 159,126
Shares redeemed (18,948) (150,761)
------------ ------------
Net increase 1,068 $ 8,365
============ ============
Class B Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 484,935 $ 3,805,839
Shares issued to shareholders
in reinvestment of dividends 1,105,083 8,669,991
------------- -------------
Total issued 1,590,018 12,475,830
Automatic conversion of shares (253,004) (1,985,115)
Shares redeemed (18,275,411) (143,419,152)
------------- -------------
Net decrease (16,938,397) $(132,928,437)
============= =============
Class B Shares for the Period Dollar
Nov. 1, 1995 to Dec. 31, 1995 Shares Amount
Shares sold 620,889 $ 4,905,975
Shares issued to shareholders in
reinvestment of dividends 398,231 3,149,817
------------ ------------
Total issued 1,019,120 8,055,792
Automatic conversion of shares (18,623) (147,125)
Shares redeemed (3,644,789) (28,831,450)
------------ ------------
Net decrease (2,644,292) $(20,922,783)
============ ============
Class B Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 1,165,649 $ 8,282,644
Shares issued to shareholders
in reinvestment of dividends 2,111,691 16,712,284
------------- -------------
Total issued 3,277,340 24,994,928
Automatic conversion of shares (44,087) (350,642)
Shares redeemed (45,649,821) (361,409,238)
------------- -------------
Net decrease (42,416,568) $(336,764,952)
============= =============
Class C Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 18,676 $ 144,329
Shares issued to shareholders in
reinvestment of dividends 226 1,217
------------ ------------
Total issued 18,902 145,546
Shares redeemed (11,957) (92,313)
------------ ------------
Net increase 6,945 $ 53,223
============ ============
Class C Shares for the Period Dollar
Nov. 1, 1995 to Dec. 31, 1995 Shares Amount
Shares sold 12,066 $ 93,387
Shares issued to shareholders in
reinvestment of dividends 122 945
------------ ------------
Total issued 12,188 94,332
Shares redeemed (12,969) (100,120)
------------ ------------
Net decrease (781) $ (5,788)
============ ============
48
<PAGE> 107
NOTES TO FINANCIAL STATEMENTS (concluded)
Class C Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 77,597 $ 607,611
Shares issued to shareholders
in reinvestment of dividends 10 76
------------ ------------
Total issued 77,607 607,687
Shares redeemed (63,628) (499,869)
------------ ------------
Net increase 13,979 $ 107,818
============ ============
Class D Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 550,920 $ 4,350,585
Shares issued to shareholders in
reinvestment of dividends 93,940 737,010
Automatic conversion of shares 252,835 1,985,115
------------ ------------
Total issued 897,695 7,072,710
Shares redeemed (1,667,413) (13,108,496)
------------ ------------
Net decrease (769,718) $ (6,035,786)
============ ============
Class D Shares for the Period Dollar
Nov. 1, 1995 to Dec. 31, 1995 Shares Amount
Shares sold 11,529 $ 91,195
Shares issued to shareholders in
reinvestment of dividends 33,954 268,726
Automatic conversion of shares 18,623 147,125
------------ ------------
Total issued 64,106 507,046
Shares redeemed (354,944) (2,808,773)
------------ ------------
Net decrease (290,838) $ (2,301,727)
============ ============
Class D Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 141,026 $ 1,012,351
Shares issued to shareholders in
reinvestment of dividends 142,590 1,231,159
Automatic conversion of shares 44,065 350,642
------------ ------------
Total issued 327,681 2,594,152
Shares redeemed (3,000,651) (23,839,178)
------------ ------------
Net decrease (2,672,970) $(21,245,026)
============ ============
5. Commitments:
At December 31, 1996, the Fund had entered into foreign exchange
contracts, in addition to the contracts listed on the Schedule of
Investments, under which it had agreed to buy and sell various
foreign currencies with values of approximately $173,000 and
$1,991,000, respectively.
6. Capital Loss Carryforward:
At December 31, 1996, the Fund had a capital loss carryforward of
approximately $45,595,000, of which $32,232,000 expires in 1999,
$10,816,000 expires in 2001, $1,042,000 expires in 2002, and
$490,000 expires in 2003 and $1,015,000 expires in 2004. This amount
will be available to offset like amounts of any future taxable
gains.
49
<PAGE> 108
APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
STANDARD & POOR'S RATINGS SERVICES ("STANDARD & POOR'S") BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in a small degree.
The "AA" rating may be modified by the addition of a plus or minus sign to
show relative standing within that major rating category.
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings:
Aaa -- judged to be of the best quality, carry the smallest degree of investment
risk; and Aa -- judged to be of high quality by all standards.
IBCA'S CORPORATE BOND RATINGS
Bonds rated AAA are obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly. Bonds rated
AA are obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk albeit not very significantly.
"+" or "-" may be appended to a long-term rating to denote relative status
within major rating categories.
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The highest category is as follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus sign (+)
designation.
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
Standard & Poor's by the issuer or obtained by Standard & Poor's from other
sources it considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended or withdrawn as a result of
changes in or unavailability of such information.
A-1
<PAGE> 109
MOODY'S COMMERCIAL PAPER RATINGS
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following designations, judged to be investment grade, to
indicate the relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading market
positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
IBCA'S COMMERCIAL PAPER RATINGS
Commercial paper rated A1+ are obligations supported by the highest
capacity for timely repayment. Commercial paper rated A1 are obligations
supported by a very strong capacity for timely repayment. Commercial paper rated
A2 are obligations supported by a satisfactory capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
A-2
<PAGE> 110
- ------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies.................. 2
Hedging Techniques................................ 2
Risk Factors in Options and Futures
Transactions.................................... 4
Forward Foreign Exchange Transactions............. 5
Other Investment Policies and Practices........... 6
Investment Restrictions........................... 7
Management of the Fund............................. 10
Directors and Officers............................ 10
Compensation of Directors......................... 11
Management and Advisory Arrangements.............. 12
Purchase of Shares................................. 14
Initial Sales Charge Alternatives -- Class A and
Class D Shares.................................. 14
Reduced Initial Sales Charges..................... 16
Employer-Sponsored Retirement or Savings Plans and
Certain Other Arrangements...................... 19
Distribution Plans................................ 19
Limitations on the Payment of Deferred Sales
Charges......................................... 20
Redemption of Shares............................... 21
Deferred Sales Charges -- Class B and Class C
Shares.......................................... 21
Portfolio Transactions and Brokerage............... 22
Determination of Net Asset Value................... 22
Shareholder Services............................... 23
Investment Account................................ 23
Automatic Investment Plans........................ 24
Automatic Reinvestment of Dividends and Capital
Gains Distributions............................. 24
Systematic Withdrawal Plans -- Class A and Class D
Shares.......................................... 25
Exchange Privilege................................ 26
Distributions and Taxes............................ 28
Tax Treatment of Options, Futures and Forward
Foreign Exchange Transactions................... 29
Special Rules for Certain Foreign Currency
Transactions.................................... 30
Performance Data................................... 31
General Information................................ 33
Description of Shares............................. 33
Computation of Offering Price Per Share........... 34
Independent Auditors.............................. 34
Custodian......................................... 34
Transfer Agent.................................... 34
Legal Counsel..................................... 34
Reports to Shareholders........................... 35
Additional Information............................ 35
Independent Auditors' Report....................... 36
Financial Statements............................... 37
Appendix A -- Bond and Commercial Paper Ratings.... A-1
Code # 11100-0497
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
SHORT-TERM GLOBAL
INCOME FUND, INC.
[MLYNCH COMPASS]
STATEMENT OF
ADDITIONAL
INFORMATION
April 25, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 111
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
</TABLE>
<PAGE> 112
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for the fiscal year ended December 31, 1996, for
the fiscal period November 1, 1995 to December 31, 1995, for each of the
years in the four-year period ended October 31, 1995, and for the fiscal
periods December 28, 1990 to October 31, 1991, and August 3, 1990
(commencement of operations) to December 27, 1990.
Contained in Part B:
Financial Statements:
Schedule of Investments as of December 31, 1996.
Statement of Assets and Liabilities as of December 31, 1996.
Statement of Operations for the year ended December 31, 1996.
Statement of Changes in Net Assets for the fiscal year ended December
31, 1996, the fiscal period November 1, 1995 to December 31, 1995 and the
fiscal year ended October 31, 1995.
Financial Highlights for the fiscal year ended December 31, 1996, for
the fiscal period November 1, 1995 to December 31, 1995 and for each of the
years in the four-year period ended October 31, 1995.
(b) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ------------------------------------------------------------------------------------
<S> <C> <C>
1 (a) -- Articles of Incorporation of the Registrant, dated April 17, 1990.(a)
(b) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated
October 19, 1994.(a)
(c) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated
October 21, 1994.(a)
2 -- Amended and Restated By-Laws of the Registrant.(b)
3 -- None.
4 -- Portions of the Articles of Incorporation, as amended, and the Amended and Restated
By-Laws of the Registrant.(c)
5 (a) -- Investment Advisory Agreement between the Registrant and Merrill Lynch Asset
Management, L.P.(b)
(b) -- Sub-Advisory Agreement between Merrill Lynch Investment Management, Inc. (now
Merrill Lynch Asset Management L.P.) and Merrill Lynch Asset Management U.K.
Limited.(b)
(c) -- Supplement to Investment Advisory Agreement between the Registrant and Merrill Lynch
Asset Management, L.P., dated January 3, 1994.(d)
6 (a) -- Class A Shares Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc.(d)
(b) -- Class B Shares Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc.(b)
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc.
with respect to the Merrill Lynch Mutual Fund Adviser Program.(e)
(d) -- Class C Shares Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc.(d)
(e) -- Class D Shares Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc.(d)
</TABLE>
C-1
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ------------------------------------------------------------------------------------
<S> <C> <C>
7 -- None.
8 -- Custodian Agreement between the Registrant and The Chase Manhattan Bank, N.A.(b)
9 (a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between the Registrant and Merrill Lynch Financial Data Services, Inc.(b)
(b) -- Form of License Agreement relating to the use of name between the Registrant and
Merrill Lynch & Co., Inc.(b)
10 -- Opinion of Brown & Wood LLP, counsel for the Registrant.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Asset Management, Inc.(b)
14 -- None.
15 (a) -- Class B Shares Distribution Plan and Class B Shares Distribution Plan Sub-Agreement
of the Registrant.(e)
(b) -- Class C Shares Distribution Plan and Class C Shares Distribution Plan Sub-Agreement
of the Registrant.(d)
(c) -- Class D Shares Distribution Plan and Class D Shares Distribution Plan Sub-Agreement
of the Registrant.(d)
16 (a) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class A Shares.(b)
(b) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class B Shares.(b)
(c) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class C Shares.(a)
(d) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class D Shares.(a)
17 (a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
18 -- Merrill Lynch Select PricingSM System Plan Pursuant to Rule 18f-3.(f)
</TABLE>
- ---------------
(a) Filed on March 1, 1995 as an Exhibit to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A under the Securities Act of
1933, as amended (File No. 33-34476) (the "Registration Statement").
(b)Filed on February 26, 1996 as an Exhibit to Post-Effective Amendment No. 7 to
the Registration Statement.
(c)Reference is made to Article III (Sections 3 and 4), Article V, Article VI
(Sections 2, 3, 4, 5 and 6), Article VII, Article VIII and Article X of the
Registrant's Articles of Incorporation, as amended and supplemented, filed as
Exhibits 1(a), 1(b) and 1(c) to the Registration Statement, and Article II,
Article III (Sections 1, 3, 5, 6 and 17), Article VI, Article VII, Article
XIII, and Article XIV of the Registrant's Amended and Restated By-Laws filed
as Exhibit 2 to the Registration Statement.
(d)Filed on October 17, 1994 as an Exhibit to Post-Effective Amendment No. 5 to
the Registration Statement.
(e)Filed on February 28, 1994 as an Exhibit to Post-Effective Amendment No. 4 to
the Registration Statement.
(f)Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A under the Securities Act of 1933, as
amended, filed on January 25, 1996, relating to the shares of Merrill Lynch
New York Municipal Bond Fund series of Merrill Lynch Multi-State Municipal
Series Trust (File No. 2-99473).
C-2
<PAGE> 114
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS MARCH 31, 1997*
- ------------------------------------------------------------------------------ ---------------
<S> <C>
Shares of Class A Common Stock, par value $0.10 per share..................... 15
Shares of Class B Common Stock, par value $0.10 per share..................... 29,155
Shares of Class C Common Stock, par value $0.10 per share..................... 8
Shares of Class D Common Stock, par value $0.10 per share..................... 1,981
</TABLE>
- ---------------
* Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's Amended and Restated By-Laws (the
"By-Laws"), Section 2-418 of the Maryland General Corporation Law and Section 9
of the Distribution Agreements.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. Absent a court determination that
an officer or director seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent directors, after
review of the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Each officer and director of the Registrant claiming indemnification within
the scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the General Laws of the State of Maryland; provided, however,
that the person seeking indemnification shall provide to the Registrant a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Registrant has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Registrant at the
time the advance is proposed to be made, that there is reason to believe that
the person seeking indemnification will ultimately be found to be entitled to
indemnification.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or purports
to protect such person from liability to the Registrant or to its stockholders
to which such officer or director would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
The Registrant may indemnify, make advances or purchase insurance to the
extent provided in Article VI of the By-Laws on behalf of an employee or agent
who is not an officer or director of the Registrant.
C-3
<PAGE> 115
In Section 9 of the Distribution Agreements relating to the securities
being offered hereby, the Registrant agrees to indemnify the Distributor and
each person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, as amended (the "Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus
and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
(a) Merrill Lynch Asset Management, L.P. ("MLAM" or the "Investment
Adviser"), acts as investment adviser for the following open-end investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc. and Merrill Lynch Variable Series Funds, Inc., and for the following
closed-end investment companies: Convertible Holdings, Inc., Merrill Lynch High
Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund,
Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Investment
Adviser, acts as the investment adviser for the following open-end investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series Trust,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers
Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal
Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund
Accumulation Program, Inc.; and for the following closed-end investment
companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund,
C-4
<PAGE> 116
Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc.,
MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality
Fund II, Inc., Senior High Income Portfolio, Inc., Taurus MuniCalifornia
Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest Fund,
Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of the MLAM, FAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281. The address of Merrill
Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since January 1, 1995, for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Richard is Treasurer and Mr. Glenn is Executive Vice President of substantially
all of the investment companies described in the first two paragraphs of this
Item 28, and Messrs. Giordano, Harvey, Kirstein and Monagle are directors,
trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
ML & Co........................ Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services............. General Partner General Partner of FAM
Arthur Zeikel.................. President President of FAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML & Co.
Terry K. Glenn................. Executive Vice President Executive Vice President of FAM;
Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Vincent R. Giordano............ Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Elizabeth Griffin.............. Senior Vice President Senior Vice President of FAM
Norman R. Harvey............... Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Michael J. Hennewinkel......... Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Philip L. Kirstein............. Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of FAM;
Secretary Senior Vice President, General
Counsel, Director and Secretary
of Princeton Services; Director
of MLFD
</TABLE>
C-5
<PAGE> 117
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
Ronald M. Kloss................ Senior Vice President and Senior Vice President and
Controller Controller of FAM; Senior Vice
President and Controller of
Princeton Services
Stephen M.M. Miller............ Senior Vice President Executive Vice President of
Princeton Administrators, L.P.;
Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr. ........ Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Michael L. Quinn............... Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services; Managing Director and
First Vice President of Merrill
Lynch from 1989 to 1995
Gerald M. Richard.............. Senior Vice President and Senior Vice President and Treasurer
Treasurer of FAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
Ronald L. Welburn.............. Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Anthony Wiseman................ Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic
Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology
Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc., Merrill Lynch World Income Fund, Inc. and Worldwide
DollarVest Fund, Inc. The address of each of these investment companies is P.O.
Box 9011, Princeton, New Jersey 08543-9011. The address of MLAM U.K. is Milton
Gate, 1 Moor Lane, London EC2Y 9HA, England.
C-6
<PAGE> 118
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since January 1,
1995, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Richard
and Yardley are officers of one or more of the registered investment companies
listed in the first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
Arthur Zeikel.................. Director and Chairman President of the Investment Adviser
and FAM; President and Director
of Princeton Services; Director
of MLFD; Executive Vice President
of ML & Co.
Alan J. Albert................. Senior Managing Director Vice President of the Investment
Adviser
Terry K. Glenn................. Director Executive Vice President of the
Investment Adviser and FAM;
Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Adrian Holmes.................. Managing Director Director of Merrill Lynch Global
Asset Management
Andrew John Bascand............ Director Director of Merrill Lynch Global
Asset Management
Edward Gobora.................. Director Director of Merrill Lynch Global
Asset Management
Richard Kilbride............... Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan................. Director Vice President, Institutional
Marketing, Debt and Equity Group,
Merrill Lynch Capital Markets
from 1989 to 1994
Gerald M. Richard.............. Senior Vice President Senior Vice President and Treasurer
of the Investment Adviser and FAM;
Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
Stephen J. Yardley............. Director Director of Merrill Lynch Global
Asset Management
Carol Ann Langham.............. Company Secretary None
Debra Anne Searle.............. Assistant Company None
Secretary
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc. and The Municipal Fund
Accumulation Program, Inc.; and MLFD also acts as the principal underwriter for
the following closed-end investment
C-7
<PAGE> 119
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND
POSITION(S) AND OFFICE(S) OFFICE(S)
NAME WITH MLFD WITH THE REGISTRANT
- ------------------------------------------- ------------------------- ------------------------
<S> <C> <C>
Terry K. Glenn............................. President and Director Executive Vice President
Arthur Zeikel.............................. Director President and Director
Philip L. Kirstein......................... Director None
William E. Aldrich......................... Senior Vice President None
Robert W. Crook............................ Senior Vice President None
Kevin P. Boman............................. Vice President None
Michael J. Brady........................... Vice President None
William M. Breen........................... Vice President None
Michael G. Clark........................... Vice President None
Mark A. DeSario............................ Vice President None
James T. Fatseas........................... Vice President None
Debra W. Landsman-Yaros.................... Vice President None
Michelle T. Lau............................ Vice President None
Gerald M. Richard.......................... Vice President and Treasurer
Treasurer
Salvatore Venezia.......................... Vice President None
William Wasel.............................. Vice President None
Robert Harris.............................. Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules thereunder are maintained at the
offices of the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey 08536)
and its transfer agent, Merrill Lynch Financial Data Services, Inc. (4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484).
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the caption "Management of the
Fund -- Management and Advisory Arrangements" in the Prospectus constituting
Part A of the Registration Statement and under "Management of the
Fund -- Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, the Registrant is
not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) The Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-8
<PAGE> 120
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro, and the State of New Jersey, on the 24th day of April
1997.
MERRILL LYNCH SHORT-TERM GLOBAL
INCOME FUND, INC.
(Registrant)
By: /s/ GERALD M. RICHARD
------------------------------------
(Gerald M. Richard, Treasurer)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to Registrant's Registration Statement has been signed
below by the following persons in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE(S)
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
ARTHUR ZEIKEL* President and Director (Principal
- ----------------------------------- Executive Officer)
(Arthur Zeikel)
GERALD M. RICHARD* Treasurer (Principal Financial and
- ----------------------------------- Accounting Officer)
(Gerald M. Richard)
DONALD CECIL* Director
- -----------------------------------
(Donald Cecil)
EDWARD H. MEYER* Director
- -----------------------------------
(Edward H. Meyer)
CHARLES C. REILLY* Director
- -----------------------------------
(Charles C. Reilly)
RICHARD R. WEST* Director
- -----------------------------------
(Richard R. West)
EDWARD D. ZINBARG* Director
- -----------------------------------
(Edward D. Zinbarg)
*By: /s/ GERALD M. RICHARD April 24, 1997
------------------------------
(Gerald M. Richard,
Attorney-in-Fact)
</TABLE>
C-9
<PAGE> 121
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ -----------------------------------------------------------------------------------
<S> <C> <C>
10 -- Opinion of Brown & Wood LLP, counsel for the Registrant.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
17(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
</TABLE>
<PAGE> 1
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: (212) 839-5300
FACSIMILE: (212) 839-5599
April 25, 1997
Merrill Lynch Short-Term Global
Income Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
This opinion is furnished in connection with the registration by
Merrill Lynch Short-Term Global Income Fund, Inc., a Maryland corporation (the
"Fund"), of shares of common stock, par value $0.10 per share, of the Fund (the
"Shares"), under the Securities Act of 1933, as amended, pursuant to the Fund's
registration statement on Form N-1A (File No. 33-34476), as amended (the
"Registration Statement"), in the amount set forth under "Amount Being
Registered" on the facing page of the Registration Statement.
As counsel for the Fund, we are familiar with the proceedings taken by
it in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended, the By-Laws of the Fund and such other documents as we
have deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of common stock.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT EXHIBIT 11
Merrill Lynch Short-Term Global Income Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 8 to Registration
Statement No. 33-34476 of our report dated February 10, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
April 25, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000862681
<NAME> MERRILL LYNCH SHORT TERM GLOBAL INCOME FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 255156575
<INVESTMENTS-AT-VALUE> 257130288
<RECEIVABLES> 4973926
<ASSETS-OTHER> 2160881
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 264265095
<PAYABLE-FOR-SECURITIES> 3199368
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3540347
<TOTAL-LIABILITIES> 6739715
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 302832604
<SHARES-COMMON-STOCK> 340
<SHARES-COMMON-PRIOR> 9552
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (46882133)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1574909
<NET-ASSETS> 2682
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 23842159
<OTHER-INCOME> 0
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