<PAGE>
Rule 497(c)
Registration No. 33-37103
PROSPECTUS
OCTOBER 21, 1994
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
Merrill Lynch Global Utility Fund, Inc. (the 'Fund') is a diversified
mutual fund seeking both capital appreciation and current income through
investment of at least 65% of its total assets in equity and debt securities
issued by domestic and foreign companies which are, in the opinion of Merrill
Lynch Asset Management, L.P. (the 'Manager' or 'MLAM'), primarily engaged in
the ownership or operation of facilities used to generate, transmit or
distribute electricity, telecommunications, gas or water. There can be no
assurance that the Fund's investment objective will be achieved. The Fund may
employ a variety of instruments and techniques to enhance income and to hedge
against market and currency risk. Investments on an international basis
involve special considerations. See 'Special and Risk Considerations.'
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. 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 9011, Princeton, New Jersey 08543-9011,
(609) 282-2800, and other securities dealers which have entered into selected
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) for confirming purchases and repurchases. Purchases and redemptions
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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
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 October 21, 1994 (the 'Statement of Additional
Information'), has been filed with the Securities and Exchange 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--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
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(C) CLASS D(C)
---------- ------------------ ---------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on
Purchases (as a
percentage of
offering price)... 4.00%(d) None None 4.00%(d)
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(e) 4.0% during the 1% for one None(e)
first year, year
decreasing 1.0%
annually
thereafter to 0.0%
after the fourth
year
Exchange Fee........ None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS)(F)
Investment Advisory
Fees(g)........... 0.60% 0.60% 0.60% 0.60%
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.... 0.02% 0.02% 0.02% 0.02%
Shareholder
Servicing
Costs(i)........ 0.07% 0.09% 0.09% 0.07%
Other............. 0.13% 0.13% 0.13% 0.13%
---------- ------------------ ---------- ----------
Total Other
Expenses...... 0.22% 0.24% 0.24% 0.22%
---------- ------------------ ---------- ----------
TOTAL FUND OPERATING
EXPENSES................ 0.82% 1.59% 1.64% 1.07%
========== ================== ========== ==========
</TABLE>
- ------------------
<TABLE>
<S> <C>
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs. See
'Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares'--page 28.
(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) Prior to the date of this Prospectus, the Fund has not offered its Class C
and Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. 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 28.
(e) Class A and Class D shares may not be subject to a contingent deferred sales
charge ('CDSC'), except that purchases of $1,000,000 or more which are not
subject to an initial sales charge will instead be subject to a CDSC of 1.0%
of amounts redeemed within the first year of purchase.
(f) Information for Class A and Class B shares is stated for the fiscal year
ended November 30, 1993. Information under 'Other Expenses' for Class C and
Class D shares is estimated for the fiscal year ending November 30, 1994.
(g) See 'Management of the Fund--Management and Advisory Arrangements'--page 24.
(h) See 'Purchase of Shares--Distribution Plans'--page 33.
(i) See 'Management of the Fund--Transfer Agency Services'--page 25.
</TABLE>
2
<PAGE>
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 $40.00 initial
sales charge (Class A and Class D
shares only) and assuming (1) the
Total Fund Operating Expenses for each
class set forth above, (2) a 5% annual
return throughout the periods and (3)
redemption at the end of the period:
Class A............................. $48.00 $65.00 $84.00 $137.00
Class B............................. $56.00 $70.00 $87.00 $189.00
Class C............................. $27.00 $52.00 $89.00 $194.00
Class D............................. $50.00 $73.00 $97.00 $165.00
An investor would pay the following
expenses on the same $1,000 investment
assuming no redemption at the end of
the period:
Class A............................. $48.00 $65.00 $84.00 $137.00
Class B............................. $16.00 $50.00 $87.00 $189.00
Class C............................. $17.00 $52.00 $89.00 $194.00
Class D............................. $50.00 $73.00 $97.00 $165.00
</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 expenses set forth under 'Other Expenses' are based on
estimated amounts through the end of the Fund's first full fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as
mandated by Securities and Exchange Commission (the '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 own 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 charge permitted under the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. (the
'NASD'). Merrill Lynch may charge its customers a processing fee (presently
$4.85) for confirming purchases and repurchases. Purchases and redemptions
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 mutual funds advised by Merrill
Lynch Asset Management, L.P., doing business as Merrill Lynch Asset
Management ('MLAM') or an affiliate of MLAM, Fund Asset Management, L.P.
('FAM'). Funds advised by MLAM or FAM 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 of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges 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, will be imposed
3
<PAGE>
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 most beneficial under his particular circumstances.
More detailed information as to each class of shares is set forth under
'Purchase of Shares.'
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(2)(3)
B CDSC for a period of 4 0.25% 0.50% B shares convert
years, at a rate of 4.0% to D shares
during the first year, automatically
decreasing 1.0% annually after
to 0.0% approximately ten
years(4)
C 1.0% CDSC for one year 0.25% 0.55% No
D Maximum 4.00% initial 0.25% No No
sales charge(3)
</TABLE>
- ------------------
<TABLE>
<S> <C>
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ('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. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year. See 'Class
A' and 'Class D' below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is 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.
</TABLE>
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 are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares in a shareholder account
are entitled to purchase additional Class A shares in that account.
Other eligible investors include certain retirement plans and
participants in certain investment programs. In addition, Class A
shares will be offered to directors and employees of Merrill Lynch &
4
<PAGE>
Co., Inc. and its subsidiaries (the term 'subsidiaries,' when used
herein with respect to Merrill Lynch & Co., Inc., includes MLAM,
FAM and certain other entities directly or indirectly wholly-owned
and controlled by Merrill Lynch & Co., Inc.) and to members of the
Boards of MLAM-advised mutual funds. 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 will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Sales charges also are
reduced under a right of accumulation which 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%, an ongoing distribution fee of 0.50% of the Fund's average
net assets attributable to the Class B shares, and a CDSC if they
are redeemed within four years 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. 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 into 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 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 the Class C shares. Class C shares are also
subject to a CDSC if they are redeemed within one year of purchase.
Although Class C shares are subject to a 1.0% 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 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 the Class D
shares. Class D shares are not subject to an ongoing distribution
fee or any CDSC when they are redeemed. Purchases of $1,000,000 or
more are not subject to an initial sales charge but if the initial
sales charge is waived such purchases will be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. The
schedule of initial sales charges and reductions for Class D shares
is the same as the schedule for Class A shares. Class D shares will
also 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.'
5
<PAGE>
The following is 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 most
beneficial under his 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 of the 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 deferred sales charges 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. Although some
investors that previously purchased Class A shares may no longer be eligible
to purchase Class A shares of other MLAM-advised mutual funds, those
previously purchased Class A shares, together with 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 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
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 Sales Charges.'
6
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below (other than for the
six-month period ended May 31, 1994, which is unaudited), 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 year
ended November 30, 1993 and the independent auditors' report thereon, as well
as for the six months ended May 31, 1994, are included in the Statement of
Additional Information. Financial information is not presented for Class C or
Class D since no shares of those classes are publicly issued as of the date of
this Prospectus. 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.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------
FOR FOR THE
THE PERIOD
SIX DEC. 28,
MONTHS 1990+
ENDED FOR THE YEAR TO NOV.
MAY 31, ENDED NOV. 30, 30,
1994 1993 1992 1991
<S> <C> <C> <C> <C>
The following per share data and
ratios have been derived from
information provided in the
financial statements.
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 13.22 $ 11.23 $ 10.67 $ 10.00
Investment income--net............ .23 .40 .47 .49
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net++............. (.53) 2.01 .57 .56
Total from investment operations.... (.30) 2.41 1.04 1.05
Less dividends and distributions:
Investment income--net............ (.22) (.41) (.48) (.38)
Realized gain on
investments--net................ (.04) (.01) -- --
Total dividends and distributions... (.26) (.42) (.48) (.38)
Net asset value, end of period...... $ 12.66 $ 13.22 $ 11.23 $ 10.67
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................... (2.32)%++ 21.80% 10.05% 10.83%++
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution
fees............................ .83%* .82% 1.01% 1.28%*
Expenses.......................... .83%* .82% 1.01% 1.28%*
Investment income--net............ 3.42%* 3.57% 4.47% 5.57%*
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)...................... $73,713 $81,718 $29,772 $ 20,579
Portfolio turnover................ 2.61% 8.92% 30.91% 20.51%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------------
FOR THE
PERIOD
FOR THE DEC.
SIX 28,
MONTHS 1990+
ENDED FOR THE YEAR ENDED TO NOV.
MAY 31, NOV. 30, 30,
1994 1993 1992 1991
<S> <C> <C> <C> <C>
The following per share data and
ratios have been derived from
information provided in the
financial statements.
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 13.17 $ 11.20 $ 10.65 $ 10.00
Investment income--net............ .18 .33 .39 .40
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net++............. (.52) 1.98 .57 .58
Total from investment operations.... (.34) 2.31 .96 .98
Less dividends and distributions:
Investment income--net............ (.17) (.33) (.41) (.33)
Realized gain on
investments--net................ (.04) (.01) -- --
Total dividends and distributions... (.21) (.34) (.41) (.33)
Net asset value, end of period...... $ 12.62 $ 13.17 $ 11.20 $ 10.65
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share........................... (2.63)%++ 20.86% 9.20% 10.05%++
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution
fees............................ .84%* .84% 1.02% 1.29%*
Expenses.......................... 1.59%* 1.59% 1.77% 2.04%*
Investment income--net............ 2.65%* 2.81% 3.65% 4.78%*
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)...................... $576,549 $596,455 $200,396 $90,966
Portfolio turnover................ 2.61% 8.92% 30.91% 20.51%
</TABLE>
- --------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
++ Foreign currency transaction amounts have been reclassified to conform
to the 1993 presentation.
7
<PAGE>
SPECIAL AND RISK CONSIDERATIONS
Because of its emphasis on securities of companies in the utilities
industries, the Fund should be considered a vehicle for diversification and
not as a balanced investment program.
As a global fund, the Fund may invest in United States 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 United States governmental laws or
restrictions applicable to such investments. Since the Fund may invest in
securities denominated or quoted in currencies other than the United States
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 United States 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 that currency 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 United States 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 United States instrument, and foreign
entities may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States entities. In
addition, certain foreign investments may be subject to foreign withholding
taxes. Investors will be able to deduct such taxes in computing their taxable
income or to use such amounts as credits against their United States income
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. See 'Additional
Information--Taxes.' Foreign financial markets, while growing in volume,
generally have substantially less volume than United States markets, and
securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable domestic companies. 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
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
with transactions in United States securities. There is generally less
government supervision and regulation of exchanges, financial institutions and
issuers in foreign countries than there is in the United States.
Investment in the securities of issuers in Eastern European markets
involves certain additional risks not involved in investment in securities of
issuers in more developed capital markets, such as (i) low or non-existent
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trading volume, resulting in a lack of liquidity and increased volatility in
price for such securities, as compared to securities of comparable issuers in
more developed capital markets, (ii) uncertain national policies and social,
political and economic instability, increasing the potential for expropriation
of assets, confiscatory taxation, high rates of inflation or unfavorable
diplomatic developments, (iii) possible fluctuations in exchange rates,
differing legal systems and the existence or possible imposition of exchange
controls, custodial restrictions or other foreign or United States
governmental laws or restrictions applicable to such investments, (iv)
national policies which may limit the Fund's investment opportunities such as
restrictions on investment in issuers or industries deemed sensitive to
national interests, and (v) the lack of developed legal structures governing
private and foreign investments and private property.
Also, there may be less publicly available information about issuers in
Eastern Europe than would be available about issuers in more developed capital
markets, and such issuers may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to United States
companies. In certain Eastern European countries, no reporting standards
currently exist. As a result, traditional investment measurements used in the
United States, such as price/earnings ratios, may not be applicable in certain
Eastern European markets. In addition, the currencies of certain Eastern
European countries are not, at present, freely convertible into other
currencies and are not internationally traded. Also, it is possible that
certain Eastern European countries may not have available institutions
qualified under the Investment Company Act of 1940, as amended (the
'Investment Company Act') to hold Fund assets. Therefore, the Fund or the
Fund's custodian may need to seek an exemptive order from the Commission prior
to investing in such Eastern European countries. There is no assurance that
the Commission will issue such an order.
Reforms currently under way and anticipated throughout Eastern Europe are
directed at political and economic liberalization, with efforts to develop
increasingly market-oriented economies and to decentralize the economic and
political decision-making processes currently in the forefront. There can be
no assurance that these reforms will continue or, if continued, will achieve
their goals.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in United States
securities because the expenses of the Fund, such as custodial and brokerage
costs, are higher.
The Fund may engage in various portfolio strategies to seek to increase
its return through the use of options on portfolio securities and to hedge its
portfolio against movements in the securities markets and exchange rates
between currencies by the use of options, futures and options thereon.
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--Portfolio Strategies Involving Options and Futures.'
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 debt and equity securities of utility companies can be expected
to rise. Conversely, when interest rates rise, the value of a portfolio of
debt and equity securities of utility companies can be expected to decline.
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INVESTMENT OBJECTIVE AND POLICIES
The Fund is a diversified, open-end management investment company. The
Fund's investment objective is to seek both capital appreciation and current
income through investment of at least 65% of its total assets in equity and
debt securities issued by domestic and foreign companies which are, in the
opinion of the Manager, primarily engaged in the ownership or operation of
facilities used to generate, transmit or distribute electricity,
telecommunications, gas or water. This objective is a fundamental policy which
the Fund may not change without a vote of a majority of the Fund's outstanding
voting securities, as defined in the Investment Company Act. There can be no
assurance that the Fund's investment objective will be achieved. The Fund may
employ a variety of instruments and techniques to enhance income and to hedge
against market and currency risk, as described below under 'Portfolio
Strategies Involving Options and Futures.'
The Fund at all times, except during temporary defensive periods, will
maintain at least 65% of its total assets invested in equity and debt
securities issued by domestic and foreign companies in the utilities
industries. The Fund reserves the right to hold, as a temporary defensive
measure or as a reserve for redemptions, short-term U.S. Government
securities, money market securities, including repurchase agreements, or cash
in such proportions as, in the opinion of the Manager, prevailing market or
economic conditions warrant. Except during temporary defensive periods, such
securities or cash will not exceed 20% of its total assets. Under normal
circumstances, the Fund will invest at least 65% of its total assets in
issuers domiciled in at least three countries, one of which may be the United
States, although the Manager expects the Fund's portfolio to be more
geographically diversified. Under normal conditions, it is anticipated that
the percentage of assets invested in U.S. securities will be higher than that
invested in securities of any other single country. It is possible that at
times the Fund may have 65% or more of its total assets invested in foreign
securities.
The Fund will invest in common stocks (including preferred or debt
securities convertible into common stocks), preferred stocks and debt
securities. The relative weightings among common stocks, debt securities and
preferred stocks will vary from time to time based upon the Manager's judgment
of the extent to which investments in each category will contribute to meeting
the Fund's investment objective. Fixed income securities in which the Fund
will invest generally will be limited to those rated investment grade, that
is, rated in one of the four highest rating categories by Standard & Poor's
Ratings Group ('S&P') or Moody's Investors Service, Inc. ('Moody's'), or
deemed to be of equivalent quality (i.e., securities rated at least BBB by S&P
or Baa by Moody's) in the judgment of the Manager. Securities rated Baa by
Moody's are described by it as having speculative characteristics and,
according to S&P, fixed income securities rated BBB normally exhibit adequate
protection parameters, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal. The Fund's commercial paper investments at the time of
purchase will be rated 'A-1' or 'A-2' by S&P or 'Prime-1' or 'Prime-2' by
Moody's or, if not rated, will be of comparable quality as determined by the
Directors of the Fund. The Fund may also invest up to 5% of its total assets
at the time of purchase in fixed income securities having a minimum rating no
lower than Caa by Moody's or CCC by S&P. The Fund may, but need not, dispose
of any security if it is subsequently downgraded. For a description of ratings
of debt securities, see the Appendix to the Statement of Additional
Information.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in United States
securities because the expenses of the Fund, such as custodial and brokerage
costs, are higher.
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The Fund may invest in the securities of foreign issuers in the form of
American Depository Receipts ('ADRs'), European Depository Receipts ('EDRs')
or other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically
issued by an American bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. Generally,
ADRs, which are issued in registered form, are designed for use in the United
States securities markets, and EDRs, which are issued in bearer form, are
designed for use in European securities markets. The Fund may invest in ADRs
and EDRs through both sponsored and unsponsored arrangements. In a sponsored
ADR or EDR arrangement, the foreign issuer assumes the obligation to pay some
or all of the depository's transaction fees, whereas in an unsponsored
arrangement the foreign issuer assumes no obligations and the depository's
transaction fees are paid by the ADR or EDR holders. Foreign issuers in
respect of whose securities unsponsored ADRs or EDRs have been issued are not
necessarily obligated to disclose material information in the markets in which
the unsponsored ADRs or EDRs are traded and, therefore, there may not be a
correlation between such information and the market value of such securities.
A change in prevailing interest rates is likely to affect the Fund's net
asset value because prices of debt and equity securities of utility companies
tend to increase when interest rates decline and decrease when interest rates
rise.
UTILITY INDUSTRIES--DESCRIPTION AND RISKS
Under normal circumstances, the Fund will invest at least 65% of its
total assets in common stocks (including preferred or debt securities
convertible into common stocks), debt securities and preferred stocks of
domestic and/or foreign companies in the utility industries. To meet its
objective of current income, the Fund may invest in domestic utility companies
that pay higher than average dividends, but have a lesser potential for
capital appreciation. The average dividend yields of common stocks issued by
domestic utility companies historically have significantly exceeded those of
industrial companies' common stocks, while the prices of domestic utility
stocks have tended to be less volatile than stocks of industrial companies.
For certain periods, the total return of utility companies' securities has
underperformed that of industrial companies' securities. There can be no
assurance that positive relative returns on utility securities will occur in
the future. The Manager believes that the average dividend yields of common
stocks issued by foreign utility companies have also historically exceeded
those of foreign industrial companies' common stocks. To meet its objective of
capital appreciation, the Fund may invest in foreign utility companies which
pay lower than average dividends, but have a greater potential for capital
appreciation.
The utility companies in which the Fund will invest include companies
which are, in the opinion of the Manager, primarily engaged in the ownership
or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
Risks that are intrinsic to the utility industries include difficulty in
obtaining an adequate return on invested capital, difficulty in financing
large construction programs during an inflationary period, restrictions on
operations and increased cost and delays attributable to environmental
considerations and regulation, difficulty in raising capital in adequate
amounts on reasonable terms in periods of high inflation and unsettled capital
markets, technological innovations which may render existing plants, equipment
or products obsolete, the potential impact of natural or man-made disasters,
increased costs and reduced availability of certain types of fuel,
occasionally reduced availability and high costs of natural gas for resale,
the effects of energy conservation, the effects of a
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national energy policy and lengthy delays and greatly increased costs and
other problems associated with the design, construction, licensing, regulation
and operation of nuclear facilities for electric generation, including, among
other considerations, the problems associated with the use of radioactive
materials and the disposal of radioactive wastes. There are substantial
differences between the regulatory practices and policies of various
jurisdictions, and any given regulatory agency may make major shifts in policy
from time to time. There is no assurance that regulatory authorities will, in
the future, grant rate increases or that such increases will be adequate to
permit the payment of dividends on common stocks. Additionally, existing and
possible future regulatory legislation may make it even more difficult for
these utilities to obtain adequate relief. Certain of the issuers of
securities of the portfolio may own or operate nuclear generating facilities.
Governmental authorities may from time to time review existing policies, and
impose additional requirements governing the licensing, construction and
operation of nuclear power plants. Prolonged changes in climatic conditions
can also have a significant impact on both the revenues of an electric and gas
utility as well as the expenses of a utility, particularly a hydro-based
electric utility.
Utility companies in the United States and in foreign countries are
generally subject to regulation. In the United States, most utility companies
are regulated by state and/or federal authorities. Such regulation is intended
to ensure appropriate standards of service and adequate capacity to meet
public demand. Generally, prices are also regulated in the United States and
in foreign countries with the intention of protecting the public while
ensuring that the rate of return earned by utility companies is sufficient to
allow them to attract capital in order to grow and continue to provide
appropriate services. There can be no assurance that such pricing policies or
rates of return will continue in the future.
The nature of regulation of the utility industries is evolving both in
the United States and in foreign countries. In recent years, changes in
regulation in the United States increasingly have allowed utility companies to
provide services and products outside their traditional geographic areas and
lines of business, creating new areas of competition within the industries. In
some instances, utility companies are operating on an unregulated basis.
Because of trends toward deregulation and the evolution of independent power
producers as well as new entrants to the field of telecommunications,
non-regulated providers of utility services have become a significant part of
their respective industries. The Manager believes that the emergence of
competition and deregulation will result in certain utility companies being
able to earn more than their traditional regulated rates of return, while
others may be forced to defend their core business from increased competition
and may be less profitable. The Manager seeks to take advantage of favorable
investment opportunities that may arise from these structural changes. Of
course, there can be no assurance that favorable developments will occur in
the future.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to that in the United States. Foreign
utility companies may be more heavily regulated by their respective
governments than utilities in the United States and, as in the U.S., generally
are required to seek government approval for rate increases. In addition, many
foreign utilities use fuels that cause more pollution than those used in the
United States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States.
The Fund's investment policies are designed to enable it to capitalize on
evolving investment opportunities throughout the world. For example, the rapid
growth of certain foreign economies will necessitate expansion of capacity in
the utility industries in those countries. Although many foreign utility
companies currently are government-owned, thereby limiting current investment
opportunities for the Fund, the Manager believes that, in
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order to attract significant capital for growth, foreign governments are
likely to seek global investors through the privatization of their utility
industries. Privatization, which refers to the trend toward investor ownership
of assets rather than government ownership, is expected to occur in newer,
faster-growing economies and in mature economies. In addition, efforts toward
modernization in Eastern Europe, as well as the potential of economic
unification of European markets, in the view of the Manager, may improve
economic growth, reduce costs and increase competition in Europe which could
result in opportunities for investment by the Fund in utility industries in
Europe. Of course, there is no assurance that such favorable developments will
occur or that investment opportunities in foreign markets for the Fund will
increase.
The revenues of domestic and foreign utility companies generally reflect
the economic growth and developments in the geographic areas in which they do
business. The Manager will take into account anticipated economic growth rates
and other economic developments when selecting securities of utility
companies. The principal sectors of the global utility industries are
discussed below.
Electric. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric
energy, although many also provide other energy-related services. In recent
years, domestic electric utility companies, in general, have been favorably
affected by lower fuel and financing costs and the full or near completion of
major construction programs. In addition, many of these companies recently
have generated cash flows in excess of current operating expenses and
construction expenditures, permitting some degree of diversification into
unregulated businesses. Some electric utilities have also taken advantage of
the right to sell power outside of their traditional geographic areas.
Electric utility companies have historically been subject to the risks
associated with increases in fuel and other operating costs, high interest
costs on borrowings needed for capital construction programs, costs associated
with compliance with environmental and safety regulations and changes in the
regulatory climate. As interest rates have declined, many utilities have
refinanced high cost debt and in doing so have improved their fixed charges
coverage. Regulators, however, have lowered allowed rates of return as
interest rates have declined and thereby caused the benefits of the rate
declines to be shared wholly or in part with customers.
In the United States, the construction and operation of nuclear power
facilities is subject to increased scrutiny by, and evolving regulations of,
the Nuclear Regulatory Commission and state agencies having comparable
jurisdiction. Increased scrutiny might result in higher operating costs and
higher capital expenditures, with the risk that the regulators may disallow
inclusion of these costs in rate authorizations or the risk that a company may
not be permitted to operate or complete construction of a facility. In
addition, operators of nuclear power plants may be subject to significant
costs for disposal of nuclear fuel and for de-commissioning of such plants.
In October 1993, S&P stiffened its debt-ratings formula for the electric
utility industry, stating that the industry is in long-term decline. In
addition, Moody's stated that it expected a drop in the next three years in
its average credit ratings for the industry. Reasons set forth for these
outlooks included slowing demand and increasing cost pressures as a result of
competition from rival providers.
Telecommunications. The telephone industry is large and highly
concentrated. Companies that distribute telephone services and provide access
to the telephone networks comprise the greatest portion of this segment. Since
the mid 1980's, companies engaged in telephone communication services have
expanded their non-regulated activities into other businesses, including
cellular telephone services, data processing, equipment retailing, computer
software and hardware services, and financial services. This expansion has
provided
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significant opportunities for certain telephone companies to increase their
earnings and dividends at faster rates than had been allowed in traditional
regulated businesses. Increasing competition, technological innovations and
other structural changes, however, could adversely affect the profitability of
such utilities. Technological breakthroughs and the merger of
telecommunications with video and entertainment is now associated with the
expansion of the role of cable companies as providers of utility services in
the telecommunications industry and the competitive response of traditional
telephone companies. Given mergers and certain marketing tests currently
underway, it is likely that both traditional telephone companies and cable
companies will soon provide a greatly expanded range of utility services,
including two-way video and informational services.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to
energy prices. In the recent decade, gas utility companies have been adversely
affected by disruptions in the oil industry and have also been affected by
increased concentration and competition. In the opinion of the Manager,
however, environmental considerations could improve the gas industry outlook
in the future. For example, natural gas is the cleanest of the hydrocarbon
fuels, and this may result in incremental shifts in fuel consumption toward
natural gas and away from oil and coal.
Water. Water supply utilities are companies that collect, purify,
distribute and sell water. In the United States and around the world, the
industry is highly fragmented because most of the supplies are owned by local
authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth. In the opinion of the
Manager, there may be opportunities for certain companies to acquire other
water utility companies and for foreign acquisition of domestic companies. The
Manager believes that favorable investment opportunities may result from
consolidation of this segment.
There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur
or that risk factors other than those noted above will not develop in the
future.
INVESTMENT OUTSIDE THE UTILITY INDUSTRIES
The Fund is permitted to invest up to 35% of its assets in securities of
issuers that are outside the utility industries. Such investments may include
common stocks, debt securities or preferred stocks and will be selected to
meet the Fund's investment objective of both capital appreciation and current
income. These securities may be issued by either U.S. or non-U.S. companies.
Some of these issuers may be in industries related to utility industries and,
therefore, may be subject to similar risks. Securities that are issued by
foreign companies or are denominated in foreign currencies are subject to the
risks outlined above. See 'Special and Risk Considerations.'
The Fund is also permitted to invest in securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities ('U.S. Government
Securities'). Such investments may be backed by the 'full faith and credit' of
the United States, including U.S. Treasury bills, notes and bonds as well as
certain agency securities and mortgage-backed securities issued by the
Government National Mortgage Association ('GNMA'). The guarantees on these
securities do not extend to the securities' yield or value or to the yield or
value of the Fund's shares. Other investments in agency securities are not
necessarily backed by the 'full faith and credit' of the
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United States, such as certain securities issued by the Federal National
Mortgage Association ('FNMA'), the Federal Home Loan Mortgage Corporation, the
Student Loan Marketing Association and the Farm Credit Bank.
The Fund may invest in securities issued or guaranteed by foreign
governments. Such securities are typically denominated in foreign currencies
and are subject to the currency fluctuation and other risks of foreign
securities investments outlined above. See 'Special and Risk Considerations.'
The foreign government securities in which the Fund intends to invest
generally will consist of obligations supported by national, state or local
governments or similar political subdivisions. Foreign government securities
also include debt obligations of supranational entities, including
international organizations designated or supported by governmental entities
to promote economic reconstruction or development and international banking
institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the 'World Bank'), the
European Investment Bank, the Asian Development Bank and the Inter-American
Development Bank.
Foreign government securities also include debt securities of
'quasi-governmental agencies' and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the twelve member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by
entities owned by either a national or local government or are obligations of
a political unit that is not backed by the national government's full faith
and credit and general taxing powers. Foreign government securities also
include mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities including quasi-governmental agencies. Foreign
government securities will not be considered government securities for
purposes of determining the Fund's compliance with diversification and
concentration policies.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund may engage in various portfolio strategies to seek to increase
its return through the use of options on portfolio securities and to hedge its
portfolio against adverse movements in the equity, debt and currency markets.
The Fund has authority to write (i.e., sell) covered put and call options on
its portfolio securities, purchase put and call options on securities and
engage in transactions in stock index options, stock index futures and
financial futures, and related options on such futures. The Fund may also deal
in forward foreign exchange transactions and foreign currency options and
futures, and related options on such futures. Each of these portfolio
strategies is described below. Although certain risks are involved in options
and futures transactions (as discussed below and in 'Risk Factors in Options
and Futures Transactions' below), the Manager believes that, because the Fund
will (i) write only covered options on portfolio securities, and (ii) engage
in other options and futures 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. While the Fund's use of hedging strategies is intended
to reduce the volatility of the net asset value of Fund shares, the Fund's net
asset value will fluctuate. There can be no assurance that the Fund's hedging
transactions will be effective. Furthermore, the Fund will only engage in
hedging activities from time to time and may not necessarily be engaging in
hedging activities when movements in the equity, debt and currency markets
occur. Reference is made to the Statement of Additional Information for
further information concerning these strategies.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter
into closing purchase transactions with respect to certain of such options. A
covered call option is an option where the Fund in return for a premium gives
another party a right to buy
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<PAGE>
specified securities owned by the Fund at a specified future date and price
set at the time of the contract. The principal reason for writing call options
is to attempt to realize, through the receipt of premiums, a greater return
than would be realized on the securities alone. By writing covered call
options, the Fund gives up the opportunity, while the option is in effect, to
profit from any price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. 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.
Covered call options serve as a partial hedge against the price of the
underlying security declining.
The Fund also 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, through its custodian, have deposited and maintained cash, cash
equivalents, U.S. Government Securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S. currencies with a
securities depository 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 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.
Purchasing Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its securities. By buying a put
option the Fund has a right to sell the underlying security 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 option expires. The amount of any
appreciation in the value of the underlying security will be partially offset
by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option
it has purchased. In certain circumstances, the Fund 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. The Fund may also purchase put
options on U.S. Treasury securities for the purpose of hedging its portfolio
of interest rate sensitive equity securities against the adverse effects of
anticipated movements in interest rates. The Fund will not purchase options on
securities (including stock index options discussed below) if as a result of
such purchase, the aggregate cost of all outstanding options on securities
held by the Fund would exceed 5% of the market value of the Fund's total
assets.
Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures, and related options on such futures. The Fund may purchase
or write put and call options on stock indices to hedge against the risks of
market-wide stock price movements in the securities in which the Fund invests.
Options on indices are similar to options on securities except that on
exercise or assignment, the parties to the contract pay or receive an amount
of cash equal to the difference between the closing value of the index and the
exercise price of the option times a specified multiple. The Fund may invest
in stock index options based on a broad market index, e.g., the S&P 500 Index,
or on a narrow index representing an industry or market segment, e.g., the
AMEX Oil & Gas Index.
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The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ('futures contracts') as a hedge against adverse
changes in the market value of its portfolio securities 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 security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities, but results in cash settlement based upon the difference in value
of the index between the time the contract was entered into and the time of
its settlement. The Fund may effect transactions in stock index futures
contracts in connection with equity securities in which it invests and in
financial futures contracts in connection with the debt securities in which it
invests. Transactions by the Fund in stock index futures and financial futures
are subject to limitations as described below under 'Restrictions on the Use
of Futures Transactions.'
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market
advance, it may purchase futures in order to gain rapid market exposure that
may in part or entirely offset increases in the cost of securities that the
Fund intends to purchase. As such purchases are made, an equivalent amount of
futures contracts will be terminated by offsetting sales. The Fund does not
consider purchases of futures contracts to be a speculative practice under
these circumstances. It is anticipated that, in a substantial majority of
these transactions, the Fund will purchase such securities upon termination of
the long futures position, whether the long position is the purchase of a
futures contract or the purchase of a call option or the writing of a put
option on a future, but under unusual circumstances (e.g., the Fund
experiences a significant amount of redemptions), a long futures position may
be terminated without the corresponding purchase of securities.
The Fund also has authority to purchase and write call and put options on
futures contracts and stock indices 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 and stock indices rather
than selling the underlying futures contract in anticipation of a decrease in
the market value of its securities. Similarly, the Fund may purchase call
options, or write put options on futures contracts and stock indices, as a
substitute for the purchase of such futures to hedge against the increased
cost resulting from an increase in the market value of securities which the
Fund intends to purchase. The Fund may also purchase put options on futures
contracts for U.S. Treasury securities for the purpose of hedging its
portfolio of interest rate sensitive equity securities against the adverse
effects of anticipated movements in interest rates.
The Fund may engage in options and futures transactions on U.S. and
foreign exchanges and in options in the over-the-counter markets ('OTC
options'). 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 options transactions are two-party contracts with price and terms
negotiated by the buyer and seller. See 'Restrictions on OTC Options' below
for information as to restrictions on the use of OTC options.
Foreign Currency Hedging. The Fund has authority to deal in forward
foreign exchange among 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 among these currencies. This is accomplished
through contractual agreements to purchase or sell a specified currency at a
specified future date (up to one year) and price set at the time of the
contract. The Fund's dealings in forward foreign exchange will be limited to
hedging involving either
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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 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.
The Fund is also authorized to 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-U.S. 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. As an illustration, the Fund may use
such techniques to hedge the stated value in United States dollars of an
investment in a 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 yen relative to
the dollar 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 may also 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 'straddle'). By selling such 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. The Manager believes
that 'straddles' of the type which may be utilized by the Fund constitute
hedging transactions and are consistent with the policies described above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. A futures contract
on a foreign currency is an agreement between two parties to buy and sell a
specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade of
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 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 high quality
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
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with respect to currency and securities positions, including net liabilities
with respect to cross-currency hedges, of more than 33 1/3% of its total
assets from foreign currency options, futures or related options and forward
currency transactions.
Restrictions on the Use of Futures Transactions. Under regulations of
the Commodity Futures Trading Commission ('CFTC'), the futures trading
activities described herein will not result in the Fund being deemed to be a
'commodity pool,' as defined under such regulations, provided that the Fund
adheres to certain restrictions. In particular, the Fund may (i) purchase and
sell futures contracts and options thereon for bona fide hedging purposes, as
defined under CFTC regulations, without regard to the percentage of the Fund's
assets committed to margin and option premiums, and (ii) the Fund may enter
into non-hedging transactions, provided that the Fund not enter into such
non-hedging transactions if, immediately thereafter, the sum of the amount of
the initial margin deposits on the Fund's existing futures positions and
option premiums would exceed 5% of the market value of the Fund's liquidating
value, after taking into account unrealized profits and unrealized losses on
any such transactions. However, the Fund intends to engage in futures
transactions and options thereon only for hedging purposes. Margin deposits
may consist of cash or securities acceptable to the broker and the relevant
contract market.
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 broker, equals the market value of the futures contract,
thereby insuring that the use of such futures is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options,
including over-the-counter stock index options, over-the-counter foreign
currency options and options on foreign currency futures, only with member
banks of the Federal Reserve System and primary dealers in United States
Government securities or with affiliates of such banks or dealers which have
capital of at least $50 million or whose obligations are guaranteed by an
entity having capital of at least $50 million. The Fund will acquire only
those OTC options for which the Manager 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).
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 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 exceed 10% 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 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
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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.
Risk Factors in Options and Futures Transactions. Utilization of options
and futures transactions to hedge the portfolio 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.
If the price of the options or futures moves more or less than the price of
the hedged securities or currencies, the Fund will experience a gain or loss
which will not be completely offset by movements in the price of the subject
of the hedge. This risk applies particularly to the Fund's use of
cross-hedging, which means that the security which is the subject of the
hedged transaction is different from the security being hedged. The successful
use of options and futures also depends on the Manager's ability to correctly
predict price movements in the market involved in a particular options or
futures transaction. To compensate for imperfect correlations, the Fund may
purchase or sell stock index options or futures contracts in a greater dollar
amount than the hedged securities if the volatility of the hedged securities
is historically greater than the volatility of the stock index options or
futures contracts. Conversely, the Fund may purchase or sell fewer stock index
options or futures contracts if the volatility of the price of the hedged
securities is historically less than that of the stock index options or
futures contracts. The risk of imperfect correlation generally tends to
diminish as the maturity date of the stock index option or futures contract
approaches.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures or, in the case of over-
the-counter transactions, the Manager believes the Fund can receive on each
business day at least two independent bids or offers. However, there can be no
assurance that a liquid secondary market will exist at any specific time.
Thus, it may not be possible to close an options or futures position. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge 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 the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security or 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 Manager 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. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain
of such exchanges. See 'Special and Risk Considerations' above. 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 are generally traded on a
net basis and do not normally involve either brokerage commissions or transfer
taxes. Securities firms may receive brokerage commissions on certain portfolio
transactions, including
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options, futures and options on futures transactions and the purchase and sale
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 may serve as its broker in transactions conducted on an exchange
and in over-the-counter transactions conducted on an agency basis. In
addition, consistent with the Rules of Fair Practice 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
with transactions in United States securities, although the Fund will endeavor
to achieve the best net results in effecting such transactions.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the
Fund at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government Securities or
other high grade liquid debt or equity securities denominated in U.S. dollars
or non-U.S. currencies in an aggregate amount equal to the amount of its
commitment in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which
may be issued and sold to the Fund at the option of the issuer. The price and
coupon of the security is fixed at the time of the commitment. At the time of
entering into the agreement the Fund is paid a commitment fee, regardless of
whether or not the security is ultimately issued, which is typically
approximately 0.5% of the aggregate purchase price of the security which the
Fund has committed to purchase. The Fund will enter into such agreements only
for the purpose of investing in the security underlying the commitment at a
yield and price which is considered advantageous to the Fund. The Fund will
not enter into a standby commitment with a remaining term in excess of 45 days
and will limit its investment in such commitments so that the aggregate
purchase price of the securities subject to such commitments, together with
the value of portfolio securities subject to legal restrictions on resale,
will not exceed 10% of its assets taken at the time of acquisition of such
commitment or security. The Fund will at all times maintain a segregated
account with its custodian of cash, cash equivalents, U.S. Government
Securities or other high grade liquid debt or equity securities denominated in
U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued and the value of the
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security will thereafter be reflected in the calculation of the Fund's net
asset value. The cost basis of the security will be adjusted by the amount of
the commitment fee. In the event the security is not issued, the commitment
fee will be recorded as income on the expiration date of the standby
commitment.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the bank or primary
dealer or an affiliate thereof 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. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect accrued interest on the underlying
obligation. 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. 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 only constitute 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
disposition of the collateral. In the event of a default under such a
repurchase agreement, instead of the contractual fixed rate, the rate of
return to the Fund shall be dependent upon intervening fluctuations of the
market value of such security and the accrued interest on the security. 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. The Fund may not invest more than 10% of
its net assets in repurchase agreements maturing in more than seven days.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the United States
Government. Such collateral will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. This
limitation is a fundamental policy, and it may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act. During the period of
such a loan, the Fund receives the income on the loaned securities and either
receives the income on the collateral or other compensation, i.e., negotiated
loan premium or fee, for entering into the loan and thereby increases its
yield. In the event that the borrower defaults on its obligation to return
borrowed securities, because of insolvency or otherwise, the Fund could
experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent that the value of the collateral falls below the
market value of the borrowed securities.
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 which 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 (a) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (b) more than 50% of the outstanding shares). Among the Fund's
more significant investment policies, the Fund may not invest in the
securities of any one issuer if, immediately after and as a result of such
investment, the value of the
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holdings of the Fund in the securities of such issuer exceeds 5% of the Fund's
total assets, taken at market value, or the Fund owns more than 10% of the
outstanding voting securities of such issuer, except that such restriction
shall not apply to securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Fund will concentrate in equity and debt
securities issued by domestic and foreign companies in the utilities
industries. Other fundamental policies include policies which (i) limit
investments in securities which cannot be readily resold because of legal or
contractual restrictions or which are not otherwise readily marketable,
including repurchase agreements and purchase and sale contracts maturing in
more than seven days, if, regarding all such securities, more than 10% of its
net assets, taken at market value, would be invested in such securities, (ii)
limit investments in securities of other investment companies, except in
connection with certain specified transactions and with respect to investments
of up to 10% of the Fund's assets in securities of closed-end investment
companies and (iii) restrict the issuance of senior securities and limit bank
borrowings except that the Fund may borrow amounts of up to 10% of its assets
for extraordinary purposes or to meet redemptions. The Fund will not purchase
securities while borrowings exceed 5% of its total assets. The Fund has no
present intention to borrow money in amounts exceeding 5% of its total assets.
Moreover, the Fund does not presently intend to make any investment that would
result in the Fund becoming subject to the provisions of the Public Utility
Holding Company Act of 1935 ('PUCA'). Although not a fundamental policy, the
Fund will include OTC options and the securities underlying such options in
calculating the amount of its total assets subject to the limitation set forth
in clause (i) above. However, as discussed above, the Fund may treat the
securities it uses as cover for written OTC options as liquid, and therefore,
will be excluded from this restriction, provided it follows a specified
procedure. The Fund will not change or modify this policy prior to the change
or modification by the Commission staff of its position regarding OTC options,
as discussed above.
The Board of Directors of the Fund, at a meeting held on August 4, 1994,
approved certain changes to the fundamental and non-fundamental investment
restrictions of the Fund. These changes were proposed in connection with the
creation of a set of standard fundamental and non-fundamental investment
restrictions that would be adopted, subject to shareholder approval, by
substantially all of the non-money market mutual funds advised by MLAM or FAM.
The proposed uniform investment restrictions are designed to provide each of
these funds, including the Fund, with as much investment flexibility as
possible under the Investment Company Act and applicable state securities
regulations, help promote operational efficiencies and facilitate monitoring
of compliance. The investment objectives and policies of the Fund will be
unaffected by the adoption of the proposed investment restrictions.
The full text of the proposed investment restrictions is set forth under
'Investment Objective and Policies-- Proposed Uniform Investment Restrictions'
in the Statement of Additional Information. Shareholders of the Fund are
currently considering whether to approve the proposed revised investment
restrictions. If such shareholder approval is obtained, the Fund's current
investment restrictions will be replaced by the proposed restrictions, and the
Fund's Prospectus and Statement of Additional Information will be supplemented
to reflect such change.
Portfolio Turnover. The Manager will effect portfolio transactions
without regard to a 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 turnover rate should not exceed 100%
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
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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. For the fiscal years ended
November 30, 1993 and November 30, 1992, the rate of portfolio turnover for
the Fund was 8.92% and 30.91%, respectively.
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 of the Fund 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 and Chief Investment Officer of the
Manager and its affiliate, FAM; President and Director of Princeton
Services, Inc.; Executive Vice President of Merrill Lynch & Co., Inc.
('ML & Co.'), and Executive Vice President of Merrill Lynch; Director of
Merrill Lynch Funds Distributor, Inc.
RONALD W. FORBES--Professor of Finance, School of Business, State
University of New York at Albany.
CYNTHIA A. MONTGOMERY--Professor, Harvard Business School since
1989.
CHARLES C. REILLY--Adjunct Professor, Columbia University School of
Business. Former President and Chief Investment Officer of Verus Capital,
Inc.; Former Senior Vice President of Arnhold and S. Bleichroeder, Inc.
KEVIN A. RYAN--Professor of Education at Boston University since
1982; Founder and current Director of The Boston University Center for
the Advancement of Ethics and Character.
RICHARD R. WEST--Professor of Finance, and Dean from 1984 to 1993,
New York University Leonard N. Stern School of Business Administration.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, with offices at 800 Scudders Mill Road, Plainsboro, New
Jersey (mailing address: P.O. Box 9011, Princeton, New Jersey 08543-9011) acts
as the manager for the Fund and provides the Fund with management and
investment advisory services. The Manager is owned and controlled by ML & Co.,
a financial services holding company and the parent of Merrill Lynch. The
Manager or its affiliate, FAM, acts as the manager for more than 100 other
registered investment companies. The Manager also offers portfolio management
and portfolio analysis services to individuals and institutions. As of August
31, 1994, the Manager
- ----------
* Interested person, as defined in the Investment Company Act, of the Fund.
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and FAM had a total of approximately $165.7 billion in investment company and
other portfolio assets under management, including accounts of certain
affiliates of the Manager.
The management agreement with the Manager (the 'Management Agreement')
provides that, subject to the direction of the Board of Directors of the Fund,
the Manager is responsible for the actual management of the Fund's portfolio.
The responsibility for making decisions to buy, sell or hold a particular
security rests with the Manager, subject to review by the Board of Directors.
Walter D. Rogers is the portfolio manager for the Fund. Mr. Rogers is a
Vice President of the Manager and has been employed by the Manager in this
capacity since 1987. For the past five years, Mr. Rogers has acted as
portfolio manager of one or more other registered investment companies
sponsored by the Manager, and continues to act in such capacity.
The Manager is obligated to perform certain administrative and management
services for the Fund and is obligated to provide all of the office space,
facilities, equipment and personnel necessary to perform its duties under the
Management Agreement.
The Fund pays the Manager a monthly fee at the annual rate of 0.60% of
the average daily net assets of the Fund. In addition, the Management
Agreement obligates the Fund to pay certain expenses incurred in its
operations including, among other things, the investment advisory fee, legal
and audit fees, registration fees, unaffiliated Directors' fees and expenses,
custodian and transfer agency fees, accounting costs, the costs of issuing and
redeeming shares and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information. For the fiscal
year ended November 30, 1993, the fee paid by the Fund to the Manager was
$2,346,433 (based upon average net assets of approximately $391.1 million).
For the fiscal year ended November 30, 1993, the ratio of total expenses to
average net assets was 0.82% for the Class A shares and 1.59% for the Class B
shares, no Class C or Class D shares had been issued during that year.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the 'Transfer Agent'), which is a
wholly-owned subsidiary of ML & Co., acts as the Fund's Transfer Agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
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 Transfer
Agent receives a fee of $11.00 per Class A and Class D shareholder account and
$14.00 per Class B and Class C shareholder account and is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. For the fiscal year ended November 30, 1993, the total fee
paid by the Fund to the Transfer Agent was $341,643. At August 31, 1994, the
Fund had 5,185 Class A shareholder accounts, 46,475 Class B shareholder
accounts, no Class C shareholder accounts and no Class D shareholder accounts.
At this level of accounts, the annual fee payable to the Transfer Agent would
aggregate approximately $707,685 plus out-of-pocket expenses.
REIMBURSEMENT FOR PORTFOLIO ACCOUNTING SERVICES
Accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services on a
semi-annual basis. For the fiscal year ended November 30, 1993, the Fund
reimbursed the Manager $81,576 for accounting services.
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PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the 'Distributor'), an affiliate
of both the Manager and Merrill Lynch, acts as the distributor of shares of
the Fund. 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 for
retirement plans, the minimum initial purchase is $100 and the minimum
subsequent purchase is $1. Different minimums may apply through the Merrill
Lynch Blueprint(SM) Program.
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 4:15 P.M., New
York time, which includes orders received after the determination of net
asset value on the previous day, the applicable offering price will be based on
the net asset value as of 4:15 P.M., New York time, on the day the orders
are placed with the Distributor, provided the orders are received by
the Distributor prior to 4:30 P.M., New York time, on that day. If the
purchase orders are not received prior to 4:30 P.M., New York time, 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) to confirm a sale of shares to such
customers. Purchases directly through the Fund's 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 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
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 of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges 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.
26
<PAGE>
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. 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>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(2)(3)
B CDSC for a period of 4 0.25% 0.50% B shares convert
years, at a rate of 4.0% to D shares
during the first year, automatically
decreasing 1.0% annually after
to 0.0% approximately ten
years(4)
C 1.0% CDSC for one year 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 may be 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 'Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors.'
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is 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.
27
<PAGE>
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 alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS
SALES LOAD AS PERCENTAGE* DISCOUNT TO
A PERCENTAGE OF THE NET SELECTED DEALERS
OF AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE 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 made on or after October 21, 1994. If the sales charge
is waived, such purchases will be subject to a CDSC of 1.0% if the shares
are redeemed within one year after purchase. Class A purchases made prior
to October 21, 1994 may be subject to a CDSC, in lieu of an initial sales
charge, if the shares are redeemed within one year of purchase at the
following rates: 1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on
purchases of $2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001 to
$5,000,000; and 0.25% on purchases of more than $5,000,000. 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 401(k) plans.
The Distributor may reallow discounts to such 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
of 1933, as amended (the 'Securities Act'). During the fiscal year ended
November 30, 1993, the Fund sold 4,349,217 Class A shares for aggregate net
proceeds of $56,997,490. The gross sales charges for the sale of Class A
shares of the Fund for that year were $1,510,325, of which $89,960 and
$1,420,365 were received by the Distributor and Merrill Lynch, respectively.
CDSCs of $0 and $468 were received with respect to Class A shares for which
the initial sales charge was waived during the fiscal year ended November 30,
1993 and the six months ended May 31, 1994, respectively.
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. Investors that currently own Class A shares in a
shareholder account, including participants in the Merrill Lynch Blueprint(SM)
Program, are entitled to purchase additional Class A shares in that account.
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)
28
<PAGE>
Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services and certain purchases made in connection with the Merrill
Lynch Mutual Fund Adviser program. In addition, Class A shares will be 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 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 and Class D shares of the Fund if certain conditions
set forth in the Statement of Additional Information are met for closed-end
funds that commenced operations prior to October 21, 1994. For example, 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. who wish to reinvest the net proceeds from a sale of certain of their
shares of common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in
shares of such 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
also may 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.'
Class D shares are offered at net asset value 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
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. Class D shares also are
offered at net asset value, without sales charge, to an investor who has a
business relationship with a Merrill Lynch financial consultant and who has
(i) 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,
or (ii) invested in a mutual fund sponsored by a non-Merrill Lynch company for
which Merrill Lynch has not served as a selected dealer, if certain conditions
set forth in the Statement of Additional Information are met.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored Retirement
or Savings Plans, 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,
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
29
<PAGE>
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 as
discussed below under 'Distribution Plans.' In addition, Class B and Class C
shares are subject to distribution fees of 0.50% and 0.55%, respectively.
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' below.
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.
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 Sales Charges' below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. 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 which
are redeemed within four years of 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.
30
<PAGE>
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
YEAR SINCE PURCHASE OF 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>
For the fiscal year ended November 30, 1993, the Distributor received
CDSCs of $158,726 with respect to redemptions of Class B shares, all of which
was paid to Merrill Lynch.
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 from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
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 first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the 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).
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 Internal Revenue Code of 1986, as amended) of a shareholder.
The Class B CDSC also is waived on redemptions of shares by certain eligible
401(a) and eligible 401(k) plans and in connection with certain group plans
placing orders through the Merrill Lynch Blueprint(SM) Program. The CDSC also is
wavied for any Class B shares which are purchased by eligible 401(k) or
eligible 401(a) 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. 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. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which
are redeemed within one year of 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
31
<PAGE>
purchase price. In addition, no Class C CDSC will be assessed on shares
derived from reinvestment of dividends or capital gains distributions.
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 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 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 purchasers 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
32
<PAGE>
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 per share.
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 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 rate of
0.50% and 0.55%, respectively, 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.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing
distribution fee, accrued daily and payable monthly, at the annual rate of
0.75% of average daily net assets of the Class B shares of the Fund under a
distribution plan previously adopted by the Fund (the 'Prior Plan') to
compensate the Distributor and Merrill Lynch for providing account maintenance
and distribution-related activities and services to the Class B shareholders.
The fee rate payable and the services provided under the Prior Plan are
identical to the aggregate fee rate payable and the services provided under
the Class B Distribution Plan, the difference being that the account
maintenance and distribution services have been unbundled.
For the fiscal year ended November 30, 1993, the Fund paid the
Distributor $2,574,752 (based on average net assets relating to the Class B
shares of approximately $343.3 million) pursuant to the Class B Distribution
Plan, all of which was paid to Merrill Lynch for providing account maintenance
and distribution-related services in connection with the Class B shares. The
Fund did not begin to offer shares of Class C or Class D publicly until the
date of this Prospectus. Accordingly, no payments have been made pursuant to
the Class C or Class D Distribution Plans prior to the date of this
Prospectus.
33
<PAGE>
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 distribution fees and CDSCs and
the expenses consist of financial consultant compensation. As of December 31,
1993, the last date for which fully allocated accrual data is available, the
fully allocated accrual expenses incurred by the Distributor and Merrill Lynch
since the Fund commenced operations on December 28, 1990 exceeded fully
allocated revenues for such period by approximately $12,187,000 (approximately
1.93% of net assets at that date). As of December 31, 1993, direct cash
expenses for the period since commencement of operations exceeded direct cash
revenues by $2,461,808 (0.39% of 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 the Class B, Class C and Class D shares, and there is no
assurance that the Board of 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. Payment 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 SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the Fund's
distribution fee and the CDSC borne by the Class B and Class C shares, but not
the account maintenance fee. Charges are 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 reinvestment 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
34
<PAGE>
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.
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
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 without charge by
tendering the shares directly to the Fund's Transfer Agent, Financial Data
Services, Inc., Transfer Agency Mutual Fund Operations, P.O. Box 45289,
Jacksonville, Florida 32232-5289. Redemption requests delivered other than by
mail should be delivered to Financial Data Services, Inc., Transfer Agency
Mutual Fund Operations, 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Redemption requests should not be sent to the Fund. 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. The notice in either event 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' as such term is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, 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. The Fund may delay or cause to be delayed
the mailing of a redemption check until such time as it has assured itself
that good payment (e.g., cash or certified check drawn on a United States
bank) has been collected for the purchase of such shares. Normally, this delay
will not exceed 10 days.
REPURCHASE
The Fund 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
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dealer prior to the close of business on the New York Stock Exchange on the
day received, and such request is received by the Fund from such dealer not
later than 4:30 P.M., New York time, on the same day.
The foregoing 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 transaction 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) to confirm a
repurchase of shares to such customers. Redemptions 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. A
shareholder whose order for repurchase is rejected by the Fund, however, may
redeem shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time 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. 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. The reinstatement privilege is a one-time privilege
and may be exercised by the Class A or Class D shareholder only the first time
such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in its shares.
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 plans
and services, 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. Included in such services are the following:
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 gains 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 gains
distributions. A shareholder may make additions to his 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 are to be
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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. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account 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
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 at any time 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 his 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 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 will be exchangeable with shares of
the same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be 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 of the newly
acquired shares of the other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable
for shares of certain MLAM-advised money market funds specifically designated
as available for exchange by holders of Class A, Class B,
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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.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser Program
('MFA'). First, the initial allocation of assets is made under the MFA
program. Then, any subsequent exchange under the MFA program of Class A or
Class D shares of a MLAM-advised mutual fund for Class A or Class D shares of
the Fund will be made solely on the basis of the relative net asset values of
the shares being exchanged. Therefore, there will not be a charge for any
difference between the sales charge previously paid on the shares of the other
MLAM-advised mutual fund and the sales charge payable on the shares of the
Fund being acquired in the exchange under the MFA program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS 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 on the ex-dividend
date of such dividends and distributions. A shareholder may at any time, by
written notification or by telephone (1-800-MER-FUND) to the Transfer Agent,
elect to have subsequent dividends or capital gains distributions, or both,
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 upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
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 being transferred will not take delivery of shares of the Fund, the
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
continue to maintain a retirement account at Merrill Lynch for those shares.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic
withdrawal payments from such shareholder's Investment Account in the form of
payments by check or through automatic payment by direct deposit to such
shareholder's bank account on either a monthly or quarterly basis. A Class A
or Class D shareholder whose shares are held within a CMA(Registered),
CBA(Registered) or Retirement Account may elect to have shares redeemed on a
monthly, bi-monthly, quarterly, semiannual or annual basis through the
Systematic Redemption Program, subject to certain conditions.
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AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be
made in an investor's Investment Account by prearranged charges of $50 or more
to such investor's regular bank account. Investors who maintain
CMA(Registered) accounts may arrange to have periodic investments made in the
Fund in their CMA(Registered) account or in certain related accounts in
amounts of $100 or more through the CMA(Registered) Automated Investment
Program.
Retirement Plans. Self-directed individual retirement accounts and other
retirement plans are available from Merrill Lynch. Under these plans,
investments may be made in the Fund and in certain of the other mutual funds
sponsored by Merrill Lynch as well as in other securities. Merrill Lynch
charges an initial establishment fee and an annual custodial fee for each
account. In addition, eligible shareholders of the Fund may participate in a
variety of qualified employee benefit plans which are available from the
Distributor. The minimum initial purchase to establish any such plan is $100
and the minimum subsequent purchase is $1.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return
for various specified time periods in advertisements or information furnished
to present or prospective shareholders. Average annual total return is
computed separately for Class A, Class B, Class C and Class D shares in
accordance with a formula 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 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 any 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 and the maximum sales charge in the case of Class A
and Class D 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 charges 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 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 a longer period of time. In advertisements directed to
investors whose purchases are subject to waiver of the CDSC in the case of
Class B and 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 charge or may not take into account the CDSC and therefore may reflect
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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.
Total return figures are based on the Fund's historical performance and
are not intended to indicate future performance. The Fund's total return 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 Financial
Times-Actuaries World Index, Financial Times-Actuaries Utility Index, Standard
& Poor's 500 Composite Stock Price Index, the Value Line Composite Index or
the Dow Jones Industrial Average, or to data contained in publications such as
Lipper Analytical Services, Inc., or performance data published by Morningstar
Publications, Inc., Money Magazine, U.S. News and World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine and Fortune Magazine. From
time to time, the Fund may include the Fund's Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature. As
with other performance data, performance comparisons should not be considered
representative of the Fund's relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment
income, if any. Dividends from such net investment income are paid quarterly.
All net realized long-or short-term capital gains, if any, are distributed to
the Fund's shareholders at least annually. The per share dividends and
distributions on each class of shares will be reduced as a result of any
account maintenance, distribution and transfer agent fees applicable to that
class. See 'Additional Information--Determination of Net Asset Value.'
Dividends and distributions may be reinvested automatically in shares of the
Fund, at net asset value without sales charge. Shareholders may elect in
writing to receive any such dividends or distributions or both, in cash.
Dividends and distributions are taxable to shareholders as described below
whether they are reinvested in shares of the Fund or received in cash. From
time to time, the Fund may declare a special distribution at or about the end
of the calendar year in order to comply with a Federal income tax requirement
that certain percentages of its ordinary income and capital gains be
distributed during the calendar year.
Certain gains or losses attributable to foreign currency related gains or
losses from certain of the Fund's investments may increase or decrease the
amount of the Fund's income available for distribution to shareholders. If
such losses exceed other income during a taxable year, (a) the Fund would not
be able to make any ordinary dividend distributions, and (b) distributions
made before the losses were realized would be recharacterized as a return of
capital to shareholders, rather than as an ordinary dividend, reducing each
shareholder's tax basis in his Fund shares for Federal income tax purposes.
For a detailed discussion of the Federal tax considerations relevant to
foreign currency transactions, see 'Additional Information--Taxes.' If in any
fiscal year the Fund has net income from certain foreign currency
transactions, such income will be distributed at least annually.
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All net realized long-or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders annually after the close of the Fund's
fiscal year. Capital gains distributions will be automatically reinvested in
shares unless the shareholder elects to receive such distributions in cash.
See 'Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gains Distributions' for information as to how to elect either dividend
reinvestment or cash payments. Dividends and distributions are taxable to
shareholders as described below whether they are reinvested in shares of any
portfolio or received in cash.
DETERMINATION OF NET ASSET VALUE
Net asset value of the shares of all classes of the Fund is determined once
daily as of 4:15 P.M., New York time, as of the close of trading on each day
during which the New York Stock Exchange is open. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies will be translated
into U.S. dollars at the prevailing market rates as quoted by one or more banks
or dealers on the day of valuation. The net asset value is computed by dividing
the market value of the securities held by the Fund plus any cash or other
assets (including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the fees payable to the Manager
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 the
Class B and Class C shares and the daily expense accruals of the account
maintenance fees applicable with respect to Class D shares; moreover, 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. It is expected, however, that the
per share net asset value of the classes will tend to converge immediately after
the payment of dividends or distributions, which will differ by approximately
the amount of the expense accrual differentials between the classes. The Fund
employs Merrill Lynch Securities Pricing Service ('MLSPS'), an affiliate of the
Manager, to provide certain securities prices for the Fund. The Fund's
arrangement with MLSPS was not effective until after the close of the Fund's
most recently completed fiscal year. Consequently, no fees were paid by the Fund
to MLSPS for pricing services during the Fund's most recently completed fiscal
year.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price 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 quoted bid prices
as at the close of trading on the New York Stock Exchange on each day by brokers
that make markets in the securities. Portfolio securities which are traded both
in the over-the-counter market and on a stock exchange are valued according to
the broadest and most representative market. Other investments, including
futures contracts and related options, are stated at market value. Securities
and assets for which market quotations are not readily available are valued at
fair market value, as determined in good faith by or under the direction of the
Board of Directors of the Fund, including valuations furnished by a pricing
service retained by the Fund.
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TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ('RICs') under the Internal Revenue Code
of 1986, as amended (the 'Code'). If it so qualifies, in any taxable year in
which it distributes at least 90% of its taxable net income, the Fund (but not
its shareholders) will not be subject to Federal income tax to the extent that
it distributes its net investment income and 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 and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as 'ordinary income dividends') are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options) are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares.
Under Code Section 988, foreign currency gains or losses from certain
forward contracts not traded in the interbank market, from futures contracts
that are not 'regulated futures contracts' and from unlisted options will
generally be treated as ordinary income or loss. Such 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
dividend distributions, and any 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 each shareholder's basis in his Fund
shares.
Dividends and distributions 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 amount of any ordinary income dividends or
capital gains dividends. A portion of the Fund's ordinary income dividends may
be eligible for the 70% dividends received deduction allowed to corporations
under the Code, if certain requirements are met. If the Fund pays a dividend in
January which was declared in the previous October, November or December to
shareholders of record on a date in such month, then such dividend or
distribution will be treated for tax purposes as being paid by the RIC and
received by its shareholders on December 31 of the year in which the dividend
was declared.
Redemptions and exchanges of Fund shares are taxable events, and,
accordingly, shareholders may realize gains or losses on such transactions.
Under the Code, if a shareholder exercises the exchange privilege within 90 days
of acquiring Class A shares of the Fund to acquire shares in a second fund ('New
Fund'), then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent the charge paid to the Fund
reduces any charge the shareholder would have owed upon purchase of the New Fund
shares in the absence of the exchange privilege. Instead, such charges will be
treated as an amount paid for the New Fund shares and will be included in the
basis of such shares. See 'Shareholder Services--Exchange Privilege.'
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States 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. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
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Pursuant to the investment objectives of the Fund, the Fund may invest in
foreign securities. Dividends and interest received by the Fund with respect to
these investments may give rise to withholding and other taxes imposed by
foreign countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Shareholders may be able to claim
United States foreign tax credits with respect to such taxes, subject to certain
provisions and limitations contained in the Code. If more than 50% in value of
the Fund's total assets at the close of its taxable year consists of stock or
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 share
of such withholding taxes in their United States income tax returns as gross
income, treat such proportionate share as taxes paid by them, and deduct such
proportionate share in computing their taxable income or, alternatively, use
them as foreign tax credits against their United States income taxes. The Fund
will report annually to its shareholders the amount per share of such
withholding taxes. Please note that foreign tax credits cannot be claimed on the
investments of foreign securities held in the Fund by certain retirement
accounts.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains 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 he is not
otherwise subject to backup withholding.
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.
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.
A loss on the sale or exchange of shares of the Fund held by a shareholder
for less than 6 months will be a capital loss to the extent of any long-term
capital gains distributions paid with respect to such shares.
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 these Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes.
Shareholders are urged to consult their advisers as to whether any portion
of the dividends they receive from the Fund is exempt from state income tax and
as to any other 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.
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ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on September 26, 1990. It has
an authorized capital of 400,000,000 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, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent interests 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 associated with
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, as
applicable. See 'Purchase of Shares.' The Fund has received an order from the
Commission permitting the issuance and sale of multiple classes of Common Stock.
The Board of 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 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 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 except that, as noted above, the Class B, Class C and Class D shares
bear certain additional expenses. Shares issued are fully-paid and
non-assessable by the Fund and have no pre-emptive rights. Shares have the
conversion rights described in this Prospectus. Voting rights for Directors are
not cumulative.
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.
44
<PAGE>
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:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, Florida 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 Financial Data Services, Inc. at 800-637-3863.
45
<PAGE>
[This page has been intentionally left blank].
46
<PAGE>
MERRILL LYNCH GLOBAL UTILITY FUND, INC.--AUTHORIZATION FORM (PART 1)
Note: This form may not be used for purchases through the Merrill Lynch
Blueprint(SM) Program. You may request a Merrill Lynch Blueprint(SM)
Program application by calling toll free (800) 637-3766.
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 Global Utility 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 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.)
<TABLE>
<S> <C>
1....................................................... 4.......................................................
2....................................................... 5.......................................................
3....................................................... 6.......................................................
Name ............................................................................................................
First Name Initial Last
Name of Co-Owner (if any) .......................................................................................
First Name Initial Last Name
Address ................................................
........................................................ Name and Address of Employer ..............................
(Zip Code)
Occupation .......................................... ............................................................
..................................................... ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Long-Term Capital Gains
Dividends
Select / / Reinvest Select / / Reinvest
One: / / Cash One: / / Cash
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 Global Utility 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 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.
47
<PAGE>
3. SOCIAL SECURITY NUMBER OR TAXPAYER INDENTIFICATION 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
'Additional Information--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 UNDERREPORTING 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)
Dear Sir/Madam:
.............................. , 19 ......
Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Global Utility 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 Global Utility 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 Global Utility Fund, Inc. held as security.
<TABLE>
<S> <C>
By.................................................... .....................................................
Signature of Owner Signature of Co-Owner
(If registered in joint parties, 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.
[INDICIA]
This form when completed should be mailed to:
Merrill Lynch Global Utility Fund, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
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 made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the shareholder's signature.
.............................................................................
Dealer Name and Address
By............................................................................
Authorized Signature of Dealer
........... ....... .....................
Branch-Code F/C No. F/C Last Name
.............................
Dealer's Customer Account No.
48
<PAGE>
MERRILL LYNCH GLOBAL UTILITY VALUE FUND, INC.--AUTHORIZATION FORM (PART 2)
Note: This form is required to apply for the Systematic Withdrawal or
Automatic Investment Plans only.
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
Name of Owner ....................................... ...........................................................
Social Security No.
Name of Co-Owner (if any) ........................... or Taxpayer Identification No.
Address .............................................
..................................................... Account Number ...........................................................
(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 Global
Utility 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 withdrawal on ............. (month), or as soon as possible
thereafter.
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 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 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.
49
<PAGE>
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that 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 Global Utility 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.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account
for investment in Merrill Lynch Global Utility 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 preparing 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 credit my bank account. I further agree that if a debit is not honored
upon presentation, 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 FINANCIAL DATA SERVICES, INC.
To ..................................................................... Bank
(Investor's Bank)
Bank Address ................................................................
City ............ State ............ Zip Code .............................
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 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.
50
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
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
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN
The Chase Manhattan Bank, N.A.
4 Metro Tech Center, 18th Floor
Brooklyn, New York 11245
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, New York 10022
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE
STATEMENT OF ADDITIONAL INFORMATION, 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 MANAGER, 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.............................. 7
Special and Risk Considerations................... 8
Investment Objective and Policies................. 10
Management of the Fund............................ 24
Purchase of Shares................................ 26
Initial Sales Charge Alternatives--Class A and
Class D Shares............................... 28
Deferred Sales Charge Alternatives--Class B and
Class C Shares............................... 29
Distribution Plans.............................. 33
Limitations on the Payment of Deferred
Sales Charges................................ 34
Redemption of Shares.............................. 35
Redemption...................................... 35
Repurchase...................................... 35
Reinstatement Privilege--Class A and Class D
Shares....................................... 36
Shareholder Services.............................. 36
Performance Data.................................. 39
Additional Information............................ 40
Dividends and Distributions..................... 40
Determination of Net Asset Value................ 41
Taxes........................................... 42
Organization of the Fund........................ 44
Shareholder Inquiries........................... 44
Shareholder Reports............................. 45
Authorization Form................................ 47
</TABLE>
Code # 11281-1094
[LOGO]
MERRILL LYNCH
GLOBAL UTILITY
FUND, INC.
[ART]
Prospectus
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
Merrill Lynch Global Utility Fund, Inc. (the 'Fund') is a diversified
mutual fund seeking both capital appreciation and current income through
investment of at least 65% of its total assets in equity and debt securities
issued by domestic and foreign companies which are, in the opinion of Merrill
Lynch Asset Management, L.P. (the 'Manager' or 'MLAM'), primarily engaged in
the ownership or operation of facilities used to generate, transmit or
distribute electricity, telecommunications, gas or water. There can be no
assurance that the Fund's investment objective will be achieved. The Fund may
employ a variety of instruments and techniques to enhance income and to hedge
against market and currency risk.
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 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
October 21, 1994 (the 'Prospectus'), which has been filed with the Securities
and Exchange 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--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
The date of this Statement of Additional Information is October 21, 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a diversified, open-end management investment company. The
Fund's investment objective is to seek both capital appreciation and current
income through investment of at least 65% of its total assets in equity and
debt securities issued by domestic and foreign companies which are, in the
opinion of the Manager, primarily engaged in the ownership or operation of
facilities used to generate, transmit or distribute electricity,
telecommunications, gas or water. This objective is a fundamental policy which
the Fund may not change without a vote of a majority of the Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as
amended (the 'Investment Company Act'). There can be no assurance that the
Fund's investment objective will be achieved. The Fund may employ a variety of
instruments and techniques to enhance income and to hedge against market and
currency risk, as described under 'Portfolio Strategies Involving Options and
Futures' below.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption 'Investment
Objective and Policies--Portfolio Strategies Involving Options and Futures' in
the Prospectus for information with respect to various portfolio strategies
involving options and futures. The Fund may seek to increase its return
through the use of options on portfolio securities and to hedge its portfolio
against movements in the equity, debt and currency markets. The Fund has
authority to write (i.e., sell) covered put and call options on its portfolio
securities, purchase put and call options on securities and engage in
transactions in stock index options, stock index futures and stock futures and
financial futures, and related options on such futures. The Fund may also deal
in forward foreign transactions and foreign currency options and futures, and
related options on such futures. Each of such portfolio strategies is
described in the Prospectus. Although certain risks are involved in options
and futures transactions (as discussed in the Prospectus and below), the
Manager believes that, because the Fund will (i) write only covered call
options on portfolio securities, and (ii) engage in other options and futures
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. While
the Fund's use of hedging strategies is intended to reduce the volatility of
the net asset value of Fund shares, the Fund's net asset value will fluctuate.
There can be no assurance that the Fund's hedging transactions will be
effective. The following is further information relating to portfolio
strategies involving options and futures the Fund may utilize.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter
into closing purchase transactions with respect to certain of such options. A
covered call option is an option where the Fund, in return for a premium,
gives another party a right to buy specified securities owned by the Fund at a
specified future date and price set at the time of the contract. The principal
reason for writing call options is to attempt to realize, through the receipt
of premiums, a greater return than would be realized on the securities alone.
By writing covered call options, the Fund gives up the opportunity, while the
option is in effect, to profit from any price increase in the underlying
security above the option exercise price. In addition, the Fund's ability to
sell the underlying security will be limited while the option is in effect
unless the Fund effects a closing purchase transaction. 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. Covered call options serve as a particular hedge
against the price of the underlying security declining.
2
<PAGE>
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised,
the writer realizes a gain or loss from the sale of the underlying security.
The Fund also 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, through its custodian, have deposited and maintained cash, cash
equivalents, U.S. Government securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S. currencies with a
securities depository 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 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.
Options referred to herein and in the Fund's Prospectus may be options
issued by The Options Clearing Corporation (the 'Clearing Corporation') which
are currently traded on the Chicago Board Options Exchange, American Stock
Exchange, New York Stock Exchange, Philadelphia Stock Exchange, Pacific Stock
Exchange and Midwest Stock Exchange. Options referred to herein and in the
Fund's Prospectus may also be options traded on foreign securities exchanges
such as the London Stock Exchange and the Amsterdam Stock Exchange. An option
position may be closed out only on an exchange which provides a secondary
market for an option of the same series. If a secondary market does not exist,
it might not be possible to effect closing transactions in particular options,
with the result, in the case of a covered call option, that the Fund will not
be able to sell the underlying security until the option expires or it
delivers the underlying security upon exercise. Reasons for the absence of a
liquid secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or
both; (iii) trading halts, suspensions or other restrictions may be imposed
with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Clearing
Corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by the
Clearing Corporation as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
The Fund may also enter into over-the-counter option transactions ('OTC
options'), which are two-party contracts with price and terms negotiated
between the buyer and seller. The Fund will only enter into over-the-counter
option transactions 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). The staff of the Securities and Exchange Commission (the
'Commission') has taken the position that OTC options and the assets used as
cover for written OTC options are illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus
3
<PAGE>
limiting the Fund's risk of loss through a decline in the market value of the
security until the put option expires. The amount of any appreciation in the
value of the underlying security will be offset partially by the amount of the
premium paid for the put option and any related transaction costs. Prior to
its expiration, a put option may be sold in a closing sale transaction; profit
or loss from the sale will depend on whether the amount received is more or
less than the premium paid for the put option plus the related transaction
cost. A closing sale transaction cancels out the Fund's position as the
purchaser of an option by means of an offsetting sale of an identical option
prior to the expiration of the option it has purchased. In certain
circumstances, the Fund 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. The Fund may purchase either exchange traded options or
OTC options. The Fund may also purchase put options on U.S. Treasury
securities for the purpose of hedging its portfolio of interest rate sensitive
equity securities against the adverse effects of anticipated movements in
interest rates. The Fund will not purchase options on securities (including
stock index options discussed below) if as a result of such purchase, the
aggregate cost of all outstanding options on securities held by the Fund would
exceed 5% of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. As described in
the Prospectus, the Fund is authorized to engage in transactions in stock
index options and futures and financial futures, and related options on such
futures. The Fund may also purchase put options on futures contracts for U.S.
Treasury securities for the purpose of hedging its portfolio of interest rate
sensitive equity securities against the adverse effects of anticipated
movements in interest rates. Set forth below is further information concerning
futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and
accept a cash settlement for a set price on a future date. A majority of
transactions in futures contracts, however, do not result in the actual
delivery of the underlying instrument or cash settlement, but are settled
through liquidation, i.e., by entering into an offsetting transaction. Futures
contracts have been designed by boards of trade which have been designated as
'contracts markets' by the Commodities Futures Trading Commission ('CFTC').
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead,
an amount of cash or securities acceptable to the broker and the relevant
contract market, which varies, but is generally about 5% of the contract
amount, must be deposited with the broker. This amount is known as 'initial
margin' and represents a 'good faith' deposit assuring the performance of both
the purchaser and seller under the futures contract. Subsequent payments to
and from the broker, called 'variation margin,' are required to be made on a
daily basis as the price of the futures contract fluctuates, making the long
and short positions in the futures contract more or less valuable, a process
known as 'mark to the market.' At any time prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite
position which will operate to terminate the position in the futures contract.
A final determination of variation margin is then made, additional cash is
required to be paid to or released by the broker and the purchaser realizes a
loss or gain. In addition, a nominal commission is paid on each completed sale
transaction.
An order has been obtained from the Commission exempting the Fund from
the provisions of Section 17(f) and Section 18(f) of the Investment Company
Act in connection with its strategy of investing in futures contracts. Section
17(f) relates to the custody of securities and other assets of an investment
company and may be deemed to prohibit certain arrangements between the Fund
and commodities brokers with respect to initial and variation margin. Section
18(f) of the Investment Company Act prohibits an open-end investment company
such as the
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Fund from issuing a 'senior security' other than a borrowing from a bank. The
staff of the Commission has in the past indicated that a futures contract may
be a 'senior security' under the Investment Company Act.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund permit the Fund's futures and options on futures
transactions to include (i) bona fide hedging transactions without regard to
the percentage of the Fund's assets committed to margin and option premiums,
and (ii) non-hedging transactions, provided that the Fund not enter into such
non-hedging transactions if, immediately thereafter, the sum of the amount of
initial margin deposits on the Fund's existing futures positions and option
premiums would exceed 5% of the market value of the Fund's liquidating value
after taking into account unrealized profits and unrealized losses on any such
transactions. However, the Fund intends to engage in futures transactions and
options thereon only for hedging purposes.
When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or short-term, high-grade, fixed income securities 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 broker, equals the market value of the futures contract,
thereby ensuring that the use of such futures is unleveraged.
Foreign Currency Hedging. Generally, the foreign exchange transactions
of the Fund will be conducted on a spot, i.e., cash basis at the spot rate of
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 among currencies of the different countries
in which it will invest as a hedge against possible variations in the foreign
exchange rate among 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 equity or debt securities in a separate account 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 enter into
such transactions only to the extent, if any, deemed appropriate by the
Manager. The Fund will not enter into a forward contract with a term of more
than one year.
The Fund is also authorized to 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-U.S. 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. As an illustration, the Fund may use
such techniques to hedge the stated value in
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United States dollars of an investment in a 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 Japanese 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 yen relative to the dollar will tend to be offset by
an increase in the value of the put option. To offset, in whole or part, the
cost of acquiring such a put option, the Fund may also 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 'straddle'). By
selling such 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. The Manager believes that 'straddles' of the type which
may be utilized by the Fund constitute hedging transactions and are consistent
with the policies described above.
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 currencies involved, the length of the contract period and the
market conditions then prevailing. Since transactions in foreign currency
exchange usually are conducted on a principal basis, no fees or commissions
are involved.
Risk Factors in Options and Futures Transactions. Utilization of 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 is the subject of the hedge. If the price of the options and
futures moves more or less than the price of the hedged securities or
currency, the Fund will experience a gain or loss which will not be completely
offset by movements in the price of the subject of the hedge. This risk
applies particularly to the Fund's use of cross-hedging, which means that the
security which is the subject of the hedged transaction is different from the
security being hedged. The successful use of options and futures also depends
on the Manager's ability to correctly predict price movements in the market
involved in a particular options or futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
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. 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. 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 over-the-counter
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). 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 would 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 security 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
effectively its portfolio. 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.
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The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security or 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. 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 Manager
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
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the
Fund at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt or equity securities denominated in U.S. dollars
or non-U.S. currencies in an aggregate amount equal to the amount of its
commitment in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which
may be issued and sold to the Fund at the option of the issuer. The price and
coupon of the security is fixed at the time of the commitment. At the time of
entering into the agreement the Fund is paid a commitment fee, regardless of
whether or not the security is ultimately issued, which is typically
approximately 0.5% of the aggregate purchase price of the security which the
Fund has committed to purchase. The Fund will enter into such agreement only
for the purpose of investing in the security underlying the commitment at a
yield and price which is considered advantageous to the Fund. The Fund will
not enter into a standby commitment with a remaining term in excess of 45 days
and will limit its investment in such commitments so that the aggregate
purchase price of the securities subject to such commitments, together with
the value of portfolio securities subject to legal restrictions on resale,
will not exceed 10% of its assets taken at the time of acquisition of such
commitment or security. The Fund will at all times maintain a segregated
account with its custodian of cash, cash equivalents, U.S. Government
securities or other high grade liquid debt or equity securities denominated in
U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued and the value of the
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<PAGE>
security will thereafter be reflected in the calculation of the Fund's net
asset value. The cost basis of the security will be adjusted by the amount of
the commitment fee. In the event the security is not issued, the commitment
fee will be recorded as income on the expiration date of the standby
commitment.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer in United States
Government securities or an affiliate thereof. Under such agreements, the bank
or primary dealer or an affiliate thereof 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. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect the accrued interest on the underlying
obligations. Such agreements usually cover short periods, often 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. 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, instead of the contractual fixed rate of return the rate
of return to the Fund will depend on intervening fluctuations of the market
value of such security and the accrued interest on the security. 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. The Fund may not invest more than 10% of its
net assets in repurchase agreements maturing in more than seven days.
Lending of Portfolio Securities. Subject to investment restriction (9)
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 United States 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 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.
Restricted Securities 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 10% of its net assets in illiquid investments,
which includes securities for which there is no readily available
8
<PAGE>
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 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.
The Board of Directors monitors the Fund's investments in these
securities purchased pursuant to Rule 144A, focusing on such factors, among
others, as valuation, liquidity and availability of information. These
investments in securities purchased pursuant to Rule 144A 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.
High Yield-High Risk Bonds. Fixed income securities in which the Fund
will invest generally will be limited to those rated investment grade; that
is, rated in one of the four highest rating categories by Standard & Poor's
Ratings Group ('S&P') or Moody's Investors Service, Inc. ('Moody's'), or
deemed to be of equivalent quality (i.e., securities rated at least BBB by S&P
or Baa by Moody's) in the judgment of the Manager. The Fund is authorized to
invest up to 5% of its total assets at the time of purchase in fixed income
securities having a minimum rating no lower than Caa by Moody's or CCC by S&P
('high yield-high risk bonds'). Investment in high yield-high risk bonds
involves substantial risk. Investments in high yield-high risk bonds will be
made only when, in the judgment of the Manager, such securities provide
attractive total return potential, relative to the risk of such securities, as
compared to higher quality debt securities. Securities rated BB or lower by
S&P or Ba or lower by Moody's are considered by those rating agencies to have
varying degrees of speculative characteristics. Consequently, although high
yield-high risk bonds can be expected to provide higher yields, such
securities may be subject to greater market price fluctuations and risk of
loss and principal than lower yielding, higher rated fixed income securities.
The Fund will not invest in debt securities in the lowest rating categories
(CC or lower for S&P or Ca or lower for Moody's) unless the Manager believes
that the financial condition of the issuer or the protection afforded the
particular securities is stronger than would otherwise be indicated by such
low ratings.
High yield-high risk bonds may be issued by less creditworthy companies
or by larger, highly leveraged companies, and are frequently issued in
corporate restructurings such as mergers and leveraged buy-outs. Such
securities are particularly vulnerable to adverse changes in the issuer's
industry and in general economic conditions. High yield-high risk bonds
frequently are junior obligations of their issuers, so that in the event of
the issuer's bankruptcy, claims of the holders of high yield-high risk bonds
will be satisfied only after satisfaction of the claims of senior
securityholders. While the high yield-high risk bonds in which the Fund may
invest normally do not include securities which, at the time of investment,
are in default or the issuers of which are in bankruptcy, there can be no
assurance that such events will not occur after the Fund purchases a
particular security, in which case the Fund may experience losses and incur
costs. The terms 'high yield-high risk' and 'below investment grade bonds' are
commonly known as 'junk bonds.'
Current Investment Restrictions. The Fund has adopted the following
restrictions and policies relating to the investment of its assets and its
activities, which are fundamental policies and 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). The Fund may not:
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<PAGE>
1. Invest in the securities of any one issuer if, immediately after
and as a result of such investment, the value of the holdings of the Fund
in the securities of such issuer exceeds 5% of the Fund's total assets,
taken at market value, or the Fund owns more than 10% of the outstanding
voting securities of such issuer, except that such restriction shall not
apply to securities issued or guaranteed by the Government of the United
States or any of its agencies or instrumentalities.
2. Invest less than 65% of its total assets in equity and debt
securities issued by domestic and foreign companies in the utilities
industries, except during temporary defensive periods.
3. Make investments for the purpose of exercising control or
management.
4. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization,
or by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other
than customary broker's commission, is involved and only if immediately
thereafter not more than (i) 3% of the total outstanding voting stock of
such company is owned by the Fund, (ii) 5% of the Fund's total assets,
taken at market value, would be invested in any one such company, or
(iii) 10% of the Fund's total assets, taken at market value, would be
invested in such securities.
5. Purchase or sell real estate (including real estate limited
partnerships), except that the Fund may invest in securities secured by
real estate or interests therein or issued by companies, including real
estate investment trusts, which invest in real estate or interests
therein.
6. Purchase any securities on margin, except that the Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities. The payment by the Fund of
initial or variation margin in connection with futures or related options
transactions, if applicable, shall not be considered the purchase of a
security on margin.
7. Make short sales of securities or maintain a short position.
8. Make loans to other persons, except that the acquisition of
bonds, debentures or other corporate debt securities and investment in
government obligations, short-term commercial paper, certificates of
deposit, bankers' acceptances and repurchase agreements and purchase and
sale contracts shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities as set forth in
(9) below.
9. Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value; provided that such loans may only be made
in accordance with the guidelines set forth above.
10. Issue senior securities, borrow money or pledge its assets
except that the Fund may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions in amounts not
exceeding 10% (taken at the market value) of its total assets and pledge
its assets to secure such borrowings. (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 will not
purchase securities while borrowings exceed 5% (taken at market value) of
its total assets.
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<PAGE>
11. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which are not otherwise readily
marketable, including repurchase agreements and purchase and sale
contracts maturing in more than seven days, if at the time of acquisition
more than 10% of its net assets would be invested in such securities.
Asset-backed securities which the Fund has the option to put to the
issuer or a stand-by bank or broker and receive the principal amount or
redemption price thereof less transaction costs on no more than seven
days' notice or when the Fund has the right to convert such securities
into a readily marketable security in which it could otherwise invest
upon not less than seven days' notice are not subject to this
restriction.
12. Underwrite securities of other issuers except insofar as the
Fund technically may be deemed an underwriter under the Securities Act of
1933, as amended, in selling portfolio securities.
13. Purchase or sell interests in oil, gas or other mineral
exploration or development programs, except that the Fund may invest in
securities issued by companies that engage in oil, gas or other mineral
exploration or development activities.
Additional investment restrictions adopted by the Fund, which may be
changed by the Directors, provide that the Fund may not:
(i) Invest in warrants if at the time of acquisition its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York or American Stock Exchange. For purposes of this
restriction, warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
(ii) Purchase or sell commodities or commodity contracts, except
that the Fund may deal in forward foreign exchange between currencies of
the different countries in which it may invest and purchase and sell
stock index and currency options, stock index futures, financial futures
and currency futures contracts and related options on such futures.
(iii) Invest in securities of corporate issuers having a record,
together with predecessors, of less than three years of continuous
operation, if more than 5% of its total assets, taken at market value,
would be invested in such securities.
(iv) Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent described in the Fund's
Prospectus and in this Statement of Additional Information, as amended
from time to time.
(v) Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the Manager or any
subsidiary thereof each owning beneficially more than 1/2 of 1% of the
securities of such issuer, own in the aggregate more than 5% of the
securities of such issuer.
(vi) Invest in oil, gas or other mineral leases.
Proposed Uniform Investment Restrictions. As discussed in the Prospectus
under 'Investment Objective and Policies--Investment Restrictions,' the Board
of Directors of the Fund has approved the replacement of the Fund's existing
investment restrictions with the fundamental and non-fundamental investment
restrictions set forth below. These uniform investment restrictions have been
proposed for adoption by all of the non-money
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<PAGE>
market mutual funds advised by the Manager or its affiliate, FAM. The
investment objective and policies of the Fund will be unaffected by the
adoption of the proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve the
proposed revised investment restrictions. If such shareholder approval is
obtained, the Fund's current investment restrictions will be replaced by the
proposed restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, the Fund may not:
1. Make any investment inconsistent with the Fund's classification
as a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities) except that, under
normal circumstances, the Fund will invest more than 25% of its total
assets in the securities of issuers in the utility industry.
3. Make investments for the purpose of exercising control or
management.
4. 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.
5. 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.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. 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 may be amended from time to time, in connection with
hedging transactions, short sales, when-issued and forward commitment
transactions and similar investment strategies.
8. 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.
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<PAGE>
9. 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.
Under the proposed 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 inted 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.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment
restriction (c). Securities purchased in accordance with Rule 144A under
the Securities Act (a 'Rule 144A security') and determined to be liquid
by the Fund's Board of Directors are not subject to the limitations set
forth in this investment restriction (c). Notwithstanding the fact that
the Board may determine that a Rule 144A security is liquid and not
subject to the limitations set forth in this investment restriction (c),
the State of Ohio does not recognize Rule 144A securities as securities
that are free of restrictions as to resale. To the extent required by
Ohio law, the Fund will not invest more than 5% of its total assets in
securities of issuers that are restricted as to disposition, including
Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its
investments in warrants, valued at the lower of cost or market value,
would exceed 5% of the Fund's net assets; included within such
limitation, but not to exceed 2% of the Fund's net assets, are warrants
which are not listed on the New York Stock Exchange or American Stock
Exchange or a major foreign exchange. For purposes of this restriction,
warrants acquired by the Fund in units or attached to securities may be
deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Manager, the directors of such general partner or the
officers and directors of any subsidiary thereof each owning beneficially
more than one-half of one percent of the securities of such issuer own in
the aggregate more than 5% of the securities of such issuer.
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g. Invest in real estate limited partnership interests or interests
in oil, gas or other mineral leases, or exploration or development
programs, except that the Fund may invest in securities issued by
companies that engage in oil, gas or other mineral exploration or
development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be
amended from time to time.
i. Notwithstanding fundamental restriction (7) 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 such as the redemption of Fund
shares. In addition, the Fund will not purchase securities while
borrowings exceed 5% (taken at market value) of its total assets.
The staff of the Commission has taken the position that purchased
over-the-counter options ('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 exceed 10% 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 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.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving the Manager's
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ('Merrill
Lynch'), 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.
See 'Portfolio Transactions and Brokerage.' Without such an exemptive order,
the Fund is prohibited from engaging in portfolio transactions with Merrill
Lynch or its affiliates acting as principal and from purchasing securities in
public offerings which are not registered under the Securities Act of 1933 in
which such firms or any of their affiliates participate as an underwriter or
dealer.
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MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL--President and Director (1)(2)--President and Chief
Investment Officer of the Manager (which term as used herein includes its
corporate predecessors) since 1977; President and Chief Investment Officer of
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 since 1990
and Senior Vice President thereof from 1985 to 1990; Executive Vice President
of Merrill Lynch & Co., Inc. ('ML & Co.') since 1990; Director of Merrill
Lynch Funds Distributor, Inc. ('MLFD' or the 'Distributor').
RONALD W. FORBES--Director (2)--School of Business, BA 309, SUNY Albany,
1400 Washington Avenue, Albany, New York 12222. Professor of Finance, School
of Business, State University of New York at Albany, since 1989.
CYNTHIA A. MONTGOMERY--Director (2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School
since 1989; Associate Professor, J.L.--Kellogg Graduate School of Management,
Northwestern University, 1985-1989; Assistant Professor, Graduate School of
Business Administration, the University of Michigan, 1979-1985; Director, UNUM
Corporation.
CHARLES C. REILLY--Director (2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. President and Chief Investment Officer of Verus Capital, Inc. from
1979-1990; Senior Vice President of Arnhold and S. Bleichroeder, Inc. from
1973-1990; Adjunct Professor, Columbia University Graduate School of Business
since 1990; Adjunct Professor, Wharton School, University of Pennsylvania,
1990.
KEVIN A. RYAN--Director (2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Professor of Education at Boston University since 1982;
Founder and current Director of The Boston University Center for the
Advancement of Ethics and Character; Formerly taught on the faculties of the
University of Chicago, Stanford University and The Ohio State University.
RICHARD R. WEST--Director (2)--482 Tepi Drive, Southbury, Connecticut
06488. Professor of Finance, and Dean from 1984 to 1993, of New York
University Leonard N. Stern School of Business Administration since 1984;
Professor of Finance at the Amos Tuck School of Business Administration,
Dartmouth College, from 1976 to 1984 and Dean from 1976 to 1983; Director of
Bowne & Co., Inc., Director of Vornado, Inc. (real estate holding
corporation), Re Capital Corp. (reinsurance holding corporation), Smith Corona
Corporation (manufacturer of typewriters and word processors) and Alexander's
Inc. (department store).
TERRY K. GLENN--Executive Vice President (1)(2)--Executive Vice President
of the Manager and FAM since 1983; Executive Vice President of Princeton
Services since 1993; President of the Distributor since 1986 and Director
thereof since 1991.
NORMAN R. HARVEY--Senior Vice President (1)(2)--Senior Vice President of
the Manager and FAM since 1982.
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WALTER D. ROGERS--Vice President (1)(2)--Vice President of the Manager
since 1987; Vice President of Continental Insurance Asset Management from 1984
to 1987.
GERALD M. RICHARD--Treasurer (1)(2)--Senior Vice President and Treasurer
of the Manager and FAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Vice President of the Distributor since 1981,
and Treasurer since 1984.
DONALD C. BURKE--Vice President (1)(2)--Vice President and Director of
Taxation of the Manager since 1990; Employee with Deloitte & Touche LLP from
1982 until 1990.
PATRICK D. SWEENEY--Secretary (1)(2)--Vice President of the Manager since
1990; Vice President and Associate Counsel of Security Pacific Merchant Bank
from 1988 to 1990; Lawyer in private practice from 1981 to 1988.
- ----------
(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 other
investment companies for which the Manager or FAM acts as investment
adviser.
As of September 30, 1994, the officers and Directors of the Fund as a
group (12 persons) owned an aggregate of less than 1/4 of 1% of the
outstanding shares of Common Stock of ML & Co.
Pursuant to the terms of the management agreement with the Fund, the
Manager pays all compensation of officers of the Fund as well as the fees of
all Directors who are affiliated persons of the Manager. The Fund pays each
Director not affiliated with the Manager a fee of $1,000 per year plus $400
per meeting attended, together with such Director's out-of-pocket expenses
relating to attendance at meetings. The Fund also compensates members of its
Audit and Nominating Committee, which consists of all of the Directors of the
Fund who are not interested persons of the Fund, with a fee of $1,000 per
year; the Chairman of the Audit and Nominating Committee receives an
additional annual fee of $1,000 per year. For the fiscal year ended November
30, 1993, fees and expenses paid to the unaffiliated Directors aggregated
$31,371.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager is a Delaware limited partnership and is owned and controlled
by ML & Co., a financial services holding company and the parent of Merrill
Lynch. 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 held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. 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 purchases or sales
of securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its advisory clients 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
Manager 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.
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The Fund has entered into a management agreement with the Manager (the
'Management Agreement'). As discussed in the Prospectus, the Manager receives
for its services to the Fund monthly compensation at the annual rate of 0.60%
of the average daily net assets of the Fund. For the fiscal years ended
November 30, 1993 and November 30, 1992, and the period December 28, 1990
(commencement of operations) to November 30, 1991, the total management fees
paid by the Fund to the Manager aggregated $2,346,433, $939,280 and $468,312,
respectively.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Manager reimburse the Fund in an amount necessary
to prevent the ordinary operating expenses of the Fund (excluding interest,
taxes, distribution fees, brokerage fees and commissions and extraordinary
charges such as litigation costs) from exceeding 2.5% of the Fund's first $30
million of average daily net assets, 2.0% of the next $70 million of average
daily net assets and 1.5% of the remaining average daily net assets. The
Manager's obligation to reimburse the Fund is limited to the amount of the
management fee. No fee payment will be made to the Manager during any fiscal
year which will cause such expenses to exceed the most restrictive expense
limitation applicable at the time of such payment. To date, no reimbursement
of expenses has been required pursuant to the applicable expense limitation
provisions discussed above.
The Management Agreement obligates the Manager 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 Manager or any
of their affiliates. The Fund pays all other expenses incurred in the
operation of the Fund, including, among other things, taxes; expenses for
legal and auditing services; costs of printing proxies, stock certificates,
shareholder reports and prospectuses and statements of additional information
(except to the extent paid by the Distributor); charges of the Custodian, any
Sub-custodian and Transfer Agent; expenses of redemption of shares; Securities
and Exchange Commission fees; expenses of registering the shares under
Federal, state or foreign laws; fees and expenses of unaffiliated Directors;
accounting and pricing costs (including the daily calculation of net asset
value; insurance; interest; brokerage costs; litigation and other
extraordinary or non-recurring expenses; and other expenses properly payable
by the Fund). Accounting services are provided to the Fund by the Manager and
the Fund reimburses the Manager for its costs in connection with such services
on a semi-annual basis. As required by the Fund's distribution agreement, the
Distributor will pay the promotional expenses of the Fund incurred in
connection with the offering of its shares. Certain expenses in connection
with the offering of the Fund's Class B, Class C and Class D shares will be
financed by the Fund pursuant to each class's respective Distribution Plan in
compliance with Rule 12b-1 under the Investment Company Act. See 'Purchase of
Shares--Distribution Plans.'
Duration and Termination. Unless earlier terminated as described
herein,the Management Agreement will remain in effect for two years from the
date of its adoption. Thereafter, it will remain in effect from year to year
if approved annually (a) by the Board of Directors 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 contract 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 the vote of the shareholders of the Fund.
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<PAGE>
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 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 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 the account maintenance and/or distribution fees are paid.
Each class has different exchange privileges. See 'Shareholder
Services--Exchange Privilege.'
The Merrill Lynch Select Pricing(SM) System is used by more than 50 mutual
funds advised by the Manager or its affiliate, FAM. Funds advised by FAM or
the Manager 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 offering 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 Management
Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal
years ended November 30, 1993 and November 30, 1992, and the period December
28, 1990 (commencement of operations) to November 30, 1991, were $1,510,325,
$488,917 and $1,105,621, respectively, of which the Distributor received
$89,960, $12,177 and $14,201, respectively, and Merrill Lynch received
$1,420,365, $476,740 and $1,091,420, respectively. During the fiscal year
ended November 30, 1993 and the six months ended May 31, 1994, the Distributor
received CDSCs on Class A shares for which the initial sales charge was waived
of $0 and $468, respectively.
The term 'purchase,' as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, 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 spouse and their children under the
age of 21 years purchasing shares for his 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 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 of 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; provided,
however, that it
18
<PAGE>
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.
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 and 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 and Class D shares;
however, 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 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 at least five
percent of the intended amount will be held in 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 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.
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<PAGE>
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 Individual Retirement Accounts ('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 $5,000 at 3.5%, 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 1/2 of 1% 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. 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.
Class A and Class D shares are offered at net asset value to participants
in Blueprint 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
(see definition below) whose Trustee and/or Plan Sponsor offers the Merrill
Lynch Directed IRA Rollover Program.
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.
Employer Sponsored Retirement and Savings Plans. Class A and Class D
shares are offered at net asset value to employer sponsored retirement or
savings plans, such as tax qualified retirement plans within the meaning of
Section 401(a) of the Internal Revenue Code of 1986, as amended (the 'Code'),
deferred compensation plans within the meaning of Section 403(b) and 457 of
the Code, other deferred compensation arrangements, Voluntary Employee
Benefits Association ('VEBA') plans, and non-qualified After Tax Savings and
Investment programs, maintained on the Merrill Lynch Group Employee Services
system, herein referred to as 'Employer Sponsored Retirement or Savings
Plans,' provided the plan has accumulated at least $20 million in MLAM-advised
mutual funds (in the case of Class A shares) or $5 million in MLAM-advised
mutual funds in the case of Class D shares, Class D shares may be offered at
net asset value to new Employer Sponsored Retirement or Savings Plans,
provided the plan has $3 million or more initially invested in MLAM-advised
mutual funds. Assets of Employer Sponsored Retirement or Savings Plans
sponsored by the same sponsor or an affiliated sponsor may be aggregated.
Class A shares and Class D shares also are offered at net asset value to
Employer Sponsored Retirement or Savings Plans that have at least 1,000
employees eligible to participate in the plan (in the case of Class A shares)
or between 500 and 999 employees eligible to participate in the plan (in the
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<PAGE>
case of Class D shares). Employees eligible to participate in Employer
Sponsored Retirement or Savings Plans of the same sponsoring employer or its
affiliates may be aggregated. Tax qualified retirement plans within the
meaning of Section 401(a) of the Code meeting any of the foregoing
requirements and which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a wide
range of investments including individual corporate equities and other
securities in addition to mutual fund shares) by the Merrill Lynch Blueprint(SM)
Program, are offered Class A shares at a price equal to net asset value per
share plus a reduced sales charge of 0.50%. Any Employer Sponsored Retirement
or Savings Plan which does not meet the above described qualifications to
purchase Class A shares or Class D shares at net asset value has the option of
(i) purchasing Class A shares at the initial sales charge and possible CDSC
schedule disclosed in the Prospectus, if it is otherwise eligible to purchase
Class A shares, (ii) purchasing Class D shares at the initial sales charge and
possible CDSC schedule disclosed in the Prospectus, (iii) if the Employer
Sponsored Retirement or Savings Plan meets the specified requirements,
purchasing Class B shares with a waiver of the CDSC upon redemption, or (iv)
if the Employer Sponsored Retirement or Savings Plan does not qualify to
purchase Class B shares with a waiver of the CDSC upon redemption, purchasing
Class C shares at the CDSC schedule disclosed in the Prospectus. The minimum
initial and subsequent purchase requirements are waived in connection with all
the above referenced Employer Sponsored Retirement or Savings Plans.
Purchase Privileges of Certain Persons. Directors of the Fund, members
of the Boards of other MLAM-advised investment companies, directors and
employees of 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
any trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class A shares of the Fund at net asset value. Under such programs,
the Fund realizes economies of scale and reduction of sales-related expenses
by virtue of familiarity with the Fund.
Employees and directors or trustees wishing to purchase shares of the
Fund must satisfy the Fund's suitability standards.
Class D shares of the Fund will be offered at net asset value, without
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. Second, the investor must also 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 will be offered at net asset value, without
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 a redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than 6 months. Second, such purchase of Class D shares must
be made within 60 days after the redemption and the proceeds from the
redemption must have been maintained in the interim in cash or a money market
fund.
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<PAGE>
Class D shares of the Fund also will be offered at net asset value, without
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 ('notice'), 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 such fund was
subject to a sales charge either at the time of purchase or on a deferred basis.
Second, such purchase of Class D shares must be made within 90 days after such
notice.
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 Manager or FAM
who purchased such closed-end fund shares prior to October 21, 1994 and wish to
reinvest the net proceeds of 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 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.
Class A shares of the Fund are offered at net asset value to shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. ('Senior Floating Rate Fund')
who wish to reinvest the net proceeds from a sale of certain of their shares of
common stock of Senior Floating Rate Fund in shares of the Fund. In order to
exercise this investment option, Senior Floating Rate Fund shareholders must
sell their Senior Floating Rate Fund shares to the Senior Floating Rate Fund in
connection with a tender offer conducted by the Senior Floating Rate Fund and
reinvest the proceeds immediately in the Fund. This investment option is
available only with respect to the proceeds of Senior Floating Rate Fund shares
as to which no Early Withdrawal Charge (as defined in the Senior Floating Rate
Fund prospectus) is applicable. Purchase orders from Senior Floating Rate Fund
shareholders wishing to exercise this investment option will be accepted only on
the day that the related Senior Floating Rate Fund tender offer terminates and
will be effected at the net asset value of the Fund at such day.
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 personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases 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
22
<PAGE>
either by law or 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).
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.
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
shareholder. 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 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 shareholders, and all
material amendments are required to be approved by the vote of 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.
During the fiscal year ended November 30, 1993, the Fund paid $2,574,752
under the Class B Distribution Plan, an amount equal to 0.75% of the average
daily net assets of the Class B shares for such fiscal year. All such amounts
were paid to the Distributor and in turn were paid by the Distributor to
Merrill Lynch to defray a portion of its costs incurred in rendering account
maintenance and distribution services to the Fund, including advancement of
sales commissions to its account executives for the sale of the Class B shares
of the Fund.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ('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
23
<PAGE>
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 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 May 31, 1994
with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and the Distributor's voluntary maximum for the period December 28, 1990
(commencement of the public offering of Class B shares) to May 31, 1994. Since
Class C shares of the Fund had not been publicly issued prior to the date of
this Statement of Additional Information, information concerning Class C
shares is not yet provided below.
DATA CALCULATED AS OF MAY 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted........... $602,837 $ 37,677 $ 3,328 $41,004 $ 5,776 $ 35,229 $ 2,883
Under Distributor's Voluntary
Waiver............................. $602,837 $ 37,677 $ 3,014 $40,691 $ 5,776 $ 34,916 $ 2,883
</TABLE>
- ----------
(1) Purchase price of all eligible Class B shares sold since December 28, 1990
(commencement of the public offering of Class B shares) 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%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 6, 1993 under a prior plan at
the 0.75% rate, 0.50% has been treated as a distribution fee and 0.25% has
been treated as a service fee and not subject to the NASD maximum sales
charge rule. See 'Purchase of Shares--Distribution Plans' in the
Prospectus.
(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 voluntary maximum or the NASD
maximum.
24
<PAGE>
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 is restricted as determined by the Commission or such
Exchange 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.
Shares are redeemable at the option of the Fund if, in the opinion of the
Fund, ownership of the shares has or may become concentrated to the extent which
would cause the Fund to be deemed a personal holding company within the meaning
of the Code.
DEFERRED SALES CHARGE--CLASS B 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 connection with certain
post-retirement withdrawals from an 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 are: (a) any partial or
complete redemption in connection with a 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 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 November 30, 1993, and November 30, 1992, and the period
December 28, 1990 (commencement of operations) to November 30, 1991, the
Distributor received CDSCs of $537,201, $311,445 and $149,244, respectively, all
of which was paid to Merrill Lynch.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to
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 shareholders through Blueprint, however, may
differ from those available to other Class B investors. 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 a Blueprint automatic investment plan. Additional
information concerning these Blueprint programs, including any annual fees or
transaction charges, is available from Merrill
25
<PAGE>
Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program, P.O.
Box 30441, New Brunswick, New Jersey 08989-0441.
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A or Class D shares at net asset value has
the option of purchasing Class A or Class D shares at the sales charge
schedule disclosed in the Prospectus, or if the Retirement Plan meets the
following requirements, then it may purchase Class B shares with a waiver of
the CDSC upon redemption. The CDSC is waived for any Eligible 401(k) Plan
redeeming Class B shares. 'Eligible 401(k) Plan' is defined as a retirement
plan qualified under Section 401(k) of the Code with a salary reduction
feature offering a menu of investments to plan participants. The CDSC is also
waived for redemptions from a 401(a) plan qualified under the Code, provided,
however, that each such plan has the same or an affiliated sponsoring employer
as an Eligible 401(k) Plan purchasing Class B shares of MLAM-advised mutual
funds ('Eligible 401(a) Plan'). Other tax qualified retirement plans within
the meaning of Section 401(a) and 403(b) of the Code which are provided
specialized services (e.g., plans whose participants may direct on a daily
basis their plan allocations among a menu of investments) by independent
administration firms contracted through Merrill Lynch also may purchase Class
B shares with a waiver of the CDSC. The CDSC also is waived for any Class B or
Class C shares which are purchased by an Eligible 401(k) Plan or Eligible
401(a) Plan and are rolled over into a Merrill Lynch or Merrill Lynch Trust
Company custodied IRA and held in such account at the time of redemption. 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. The minimum initial and subsequent purchase
requirements are waived in connection with all the above-reference Retirement
Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to 'Investment Objective and Policies--Other Investment
Policies and Practices' in the Prospectus.
Subject to policies established by the Board of Directors of the Fund,
the Manager is primarily responsible for the execution of the Fund's portfolio
transactions. In executing such transactions, the Manager 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. Subject to obtaining
the best price and execution, brokers who provide supplemental investment
research to the Manager 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 Manager under the Management Agreement and the
expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information. If in the judgment of the Manager
the Fund will be benefitted by supplemental research services, the Manager is
authorized to pay brokerage commissions to a broker furnishing such services
which are in excess of commissions which another broker may have charged for
effecting the same transaction. In addition, consistent with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. and policies
established by the Directors of the Fund, the Manager 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.
26
<PAGE>
For the fiscal year ended November 30, 1993, the Fund paid total
brokerage commissions of $435,246, of which $11,578 or 2.7% was paid to
Merrill Lynch for effecting 2.0% of the aggregate amount of transactions in
which the Fund paid brokerage commissions. For the fiscal year ended November
30, 1992, the Fund paid total brokerage commissions of $212,168, of which
$4,605 or 2.17% was paid to Merrill Lynch for effecting 2.32% of the aggregate
amount of transactions in which the Fund paid brokerage commissions. For the
period December 28, 1990 (commencement of operations) to November 30, 1991,
the Fund paid total brokerage commissions of $173,914, of which $9,120 or 5.2%
was paid to Merrill Lynch for effecting 8.96% of the aggregate amount of
transactions in which the Fund paid brokerage commissions.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation
of foreign stock exchanges and brokers than in the United States.
The Fund invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with the dealers who make a market
in the securities involved, except in those circumstances in which better
prices and execution are available elsewhere. Under the Investment Company
Act, persons affiliated with the Fund are prohibited from dealing with the
Fund as principal in the purchase and sale of securities. Since transactions
in the over-the-counter market usually involve transactions with dealers
acting as principal for their own accounts, affiliated persons of the Fund,
including Merrill Lynch, will not serve as the Fund's dealer in such
transactions. However, affiliated persons of the Fund may serve as its broker
in over-the-counter transactions conducted on an agency basis provided that,
among other things, the fee or commission received by such affiliated broker
is reasonable and fair compared to the fee or commission received by
non-affiliated brokers in connection with comparable transactions.
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 in United States dollars, the Fund intends to manage its portfolio
so as to give reasonable assurance that it will be able to obtain United
States dollars to the extent necessary to meet anticipated redemptions. Under
present conditions, it is not believed that these considerations will have any
significant effect on its portfolio strategy.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, Merrill Lynch may execute transactions for the Fund on the floor of
any national securities exchange provided that prior authorization of such
transactions is obtained and Merrill Lynch furnishes a statement to the Fund
at least annually setting forth the compensation it has received in connection
with such transactions. Pursuant to prior Section 11(a) and Rule 11a2-2(T)
thereunder, Merrill Lynch was not permitted to execute transactions for the
Fund on the floor of any national securities exchange, but was allowed to
effect such transactions through transmitting orders for execution, providing
for clearance and settlement and arranging for the performance of such
functions. Under prior Section 11(a) and as permitted by the Rule, the Fund
entered into an agreement with the Manager and Merrill Lynch which permitted
Merrill Lynch to retain compensation for effecting transactions for the Fund
on national securities exchanges, and provided, among other things, that
Merrill Lynch must furnish the Fund at least annually with a statement setting
forth the total amount of all compensation retained by Merrill Lynch under the
agreement. For the fiscal year ended November 30, 1993, the Fund effected 9
such portfolio transactions
27
<PAGE>
pursuant to such contract and received $5,074,828 as compensation in
connection with such transactions. Because the recent amendments to Section
11(a) obviate the need for this type of agreement, the agreement has been
terminated.
The Directors have considered the possibilities 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 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
Reference is made to 'Additional Information--Determination of Net Asset
Value' in the Prospectus concerning the determination of net asset value. The
net asset value of the shares of the Fund is determined once daily Monday
through Friday as of 4:15 P.M., New York time, as of the close of trading on
each day the New York Stock Exchange is open. The New York Stock Exchange is
not open on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. 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. The net asset value is
computed by dividing the value of the securities held by the Fund plus any
cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time. Expenses, including the fees
payable to the Manager and the Distributor and any account maintenance and/or
distribution fees are accrued daily. The per share net asset value of the
Class B, Class C and Class D shares generally will be lower than the per share
net asset value of the Class A shares reflecting the daily expense accruals of
the account maintenance, distribution and higher transfer agency fees
applicable with respect to the Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to
the Class D shares; moreover the per share net asset value of the Class B and
Class C shares generally will be lower than the per share net asset value of
the Class D shares reflecting the daily expense accruals of the distribution
fees and higher transfer agency fees applicable with respect to the Class B
and Class C shares of the Fund. It is expected, however, that the per share
net asset value of the classes will tend to converge immediately after the
payment of dividends or distributions, which will differ by approximately the
amount of the expense accrual differential among the classes.
Securities traded in the over-the-counter market are valued at the last
available bid price or yield equivalents obtained from one or more dealers in
the over-the-counter market prior to the time of valuation. When the Fund
writes a call 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 upon the last asked price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter market, the
average of the last asked price as obtained from one or more dealers. Options
purchased by the Fund are valued at their last bid price in the case of
exchange-traded options or in the case of options traded in the
over-the-counter market, the average of the last bid price as obtained from
two or more dealers. Portfolio securities which are traded on stock exchanges
are valued at the last sale price on the principal market 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. Other
investments, including futures contracts and related options, are stated at
market value. Securities and assets for which market quotations are not
readily
28
<PAGE>
available are valued at fair market value, as determined in good faith by or
under the direction of the Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund. Such
valuations and procedures will be reviewed periodically by the Board of
Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which
are designed to facilitate investment in its shares. Full details as to each
of such services and copies of the various plans described below can be
obtained from the Fund, the Distributor or Merrill Lynch. Certain of these
services are available only to United States 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 income dividends and
long-term capital gain distributions. The quarterly 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.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. 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 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 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. If the new brokerage firm is willing
to accommodate the shareholder in this manner, the shareholder must request
that he be issued certificates for his shares, and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to the 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 transfer agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the 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
29
<PAGE>
regular basis to provide systematic additions to the Investment Account of
such shareholder. For investors who buy shares of the Fund through Merrill
Lynch Blueprint Program, no minimum charge to the investors bank account is
required. Investors who maintain CMA(Registered) accounts may arrange to have
periodic investments made in the Fund, in the CMA(Registered) accounts or in
certain related accounts in amounts of $100 or more ($1 for retirement
accounts) through the CMA Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions 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 shares of the Fund, without sales charge, as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing or by telephone
(1-800-MER-FUND) to receive either their income 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 that
they no longer wish to have their dividends and/or distributions reinvested in
shares of the Fund or vice versa and, commencing ten days after the 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 systematic withdrawals
from an Investment Account in the form of payments by check or through
automatic payment by direct deposit to such shareholders's bank 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
at the close of business on the New York Stock Exchange on the 24th day of
each month or the 24th day of the last month of each quarter, whichever is
applicable. If the Exchange is not open for business on such date, the Class A
or Class D shares will be redeemed at the close of business on the following
business day. The check for the withdrawal payment will be mailed, or the
direct deposit for 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 Fund Class A or Class D shares,
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, 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
30
<PAGE>
is greater. Periodic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a
CMA(Registered), CBA(Registered) or Retirement Account may elect to have
shares redeemed on a monthly, bi-monthly, quarterly, semiannual or annual
basis through the 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, bi-monthly 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 Systematic
Redemption Program, eligible shareholders should contact their financial
consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans
are available from Merrill Lynch. Under these plans, investments may be made
in the Fund and certain of the other mutual funds sponsored by Merrill Lynch
as well as in other securities. Merrill Lynch charges an initial establishment
fee and an annual custodial fee for each account. Information with respect to
these plans is available on request from Merrill Lynch. The minimum initial
purchase to establish any such plan is $100 and the minimum subsequent
purchase is $1.
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with
respect to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds listed below. 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 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 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 will be 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 also will be exchangeable for shares of
certain MLAM-advised money
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market funds specifically designated below as available for exchange by
holders of Class A, Class B, Class C or Class D shares. 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 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 shares, 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 charges 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, dividend reinvestment Class A and Class D shares shall be exchanged
into the Class A or Class D shares of the other funds or into shares of the
Class A and Class D 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 of another MLAM-
advised mutual fund ('new Class B or Class C shares') on the basis of relative
net asset value per Class B or Class C shares, 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 load that may be payable on a disposition of the new Class B or
Class C shares, the period of time that the outstanding Class B or Class C
shares were held will count toward satisfaction of 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's Class B shares for two and
a half years. The 2% sales load 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 the Fund's 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 new Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager 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
toward satisfaction of the holding period requirement for purposes of reducing
the CDSC or with respect to Class B shares, toward 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 the fund will be aggregated with previous holding periods
for
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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 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.
Set forth below is a description of the investment objectives of the
other funds into which exchanges can be made:
Funds issuing Class A, Class B, Class C and Class D shares:
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES
FUND, INC........................ High current income consistent with a
policy of limiting the degree of
fluctuation in net asset value by
investing primarily in a portfolio of
adjustable rate securities, consisting
principally of mortgage-backed and
asset-backed securities.
MERRILL LYNCH AMERICAS INCOME FUND,
INC.............................. A high level of current income,
consistent with prudent investment risk,
by investing primarily in debt
securities denominated in a currency
of a country located in the Western
Hemisphere (i.e., North and South
America and the surrounding waters).
MERRILL LYNCH ARIZONA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Arizona income
taxes as is consistent with prudent
investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Arizona Municipal Bonds.
MERRILL LYNCH ARIZONA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from Federal and Arizona
income taxes as is consistent with
prudent investment management.
MERRILL LYNCH ARKANSAS MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from
Federal and Arkansas income taxes as
is consistent with prudent investment
management.
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MERRILL LYNCH ASSET GROWTH FUND,
INC. ............................ High total investment return, consistent
with prudent risk, from investment in
United States and foreign equity,
debt and money market securities the
combination of which will be varied
both with respect to types of
securities and markets in response to
changing market and economic trends.
MERRILL LYNCH ASSET INCOME FUND,
INC. ............................ A high level of current income through
investment primarily in United States
fixed income securities.
MERRILL LYNCH BALANCED FUND FOR
INVESTMENT
AND RETIREMENT................... As high a level of total investment
return as is consistent with a
relatively low level of risk through
investment in common stock and other
types of securities, including fixed
income securities and convertible
securities.
MERRILL LYNCH BASIC VALUE FUND,
INC.............................. Capital appreciation and, secondarily,
income by investing in securities,
primarily equities, that are
undervalued and therefore represent
basic investment value.
MERRILL LYNCH CALIFORNIA INSURED
MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of insured income exempt from
Federal and California income taxes as
is consistent with prudent investment
management.
MERRILL LYNCH CALIFORNIA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide shareholders with as high a
level of income exempt from Federal
and California income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of
intermediate-term investment grade
California Municipal Bonds.
MERRILL LYNCH CALIFORNIA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and California income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CAPITAL FUND, INC.... The highest total investment return
consistent with prudent risk through a
fully managed investment
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policy utilizing equity, debt and
convertible securities.
MERRILL LYNCH COLORADO MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Colorado income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CONNECTICUT MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Connecticut income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CORPORATE BOND FUND,
INC.............................. Current income from three separate
diversified portfolios of fixed income
securities.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS
FUND, INC........................ Long-term appreciation through
investment in securities, principally
equities, of issuers in countries
having smaller capital markets.
MERRILL LYNCH DRAGON FUND, INC..... Capital appreciation primarily through
investment in equity and debt securities
of issuers domiciled in developing
countries located in Asia and the
Pacific Basin.
MERRILL LYNCH EUROFUND............. Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
MERRILL LYNCH FEDERAL SECURITIES
TRUST............................ High current return through investments
in U.S. Government and Government agency
securities, including GNMA
mortgage-backed certificates and other
mortgage-backed Government securities.
MERRILL LYNCH FLORIDA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment
management while seeking to offer
shareholders the opportunity to own
securities exempt from Florida
intangible personal property taxes
through investment in a portfolio
primarily of intermediate-term
investment grade Florida Municipal
Bonds.
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MERRILL LYNCH FLORIDA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
income taxes as is consistent with
prudent investment management while
seeking to offer shareholders the
opportunity to own securities exempt
from Florida intangible personal
property taxes.
MERRILL LYNCH FUND FOR TOMORROW,
INC.............................. Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic
and cultural changes as they affect
consumer markets.
MERRILL LYNCH FUNDAMENTAL GROWTH
FUND, INC........................ Long-term growth through investment in a
diversified portfolio of equity
securities in placing particular
emphasis on companies that have
exhibited an above-average growth rate
in earnings.
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC........................ High total return consistent with
prudent risk, through a fully-managed
investment policy utilizing United
States and foreign equity, debt and
money market securities, the
combination of which will be varied
from time to time both with respect to
types of securities and markets in
response to changing market and
economic trends.
MERRILL LYNCH GLOBAL BOND FUND FOR
INVESTMENT AND RETIREMENT........ High total investment return from
investment in government and corporate
bonds denominated in various
currencies and multi-national currency
units.
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC........................ High total return from investment
primarily in an internationally
diversified portfolio of convertible
debt securities, convertible preferred
stock and 'synthetic' convertible
securities consisting of a combination
of debt securities or preferred stock
and warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS, INC.
(residents of Arizona must meet
investor
suitability standards)........... The highest total investment return
consistent with prudent risk through
worldwide investment in an
internationally diversified portfolio
of securities.
MERRILL LYNCH GLOBAL RESOURCES
TRUST............................ Long-term growth and protection of
capital from investment in securities of
domestic and foreign
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companies that
possess substantial natural resource
assets.
MERRILL LYNCH GLOBAL SMALLCAP FUND,
INC.............................. Long-term growth of capital by investing
primarily in equity securities of
companies with relatively small market
capitalizations located in various
foreign countries and in the United
States.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT
AND RETIREMENT................... Growth of capital and, secondarily,
income from investment in a diversified
portfolio of equity securities placing
principal emphasis on those securities
which management of the fund believes
to be undervalued.
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents of Wisconsin must meet
investor
suitability standards)........... Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and services
in healthcare.
MERRILL LYNCH INTERNATIONAL EQUITY
FUND............................. Capital appreciation and, secondarily,
income by investing in a diversified
portfolio of equity securities of
issuers located in countries other
than the United States.
MERRILL LYNCH LATIN AMERICA FUND,
INC.............................. Capital appreciation by investing
primarily in Latin American equity and
debt securities.
MERRILL LYNCH MARYLAND MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Maryland income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MASSACHUSETTS LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Massachusetts
income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Massachusetts Municipal Bonds.
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MERRILL LYNCH MASSACHUSETTS
MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from both Federal and
Massachusetts income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MICHIGAN LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Michigan income taxes as
is consistent with prudent investment
management through investment in a
portfolio primarily of
intermediate-term investment grade
Michigan Municipal Bonds.
MERRILL LYNCH MICHIGAN MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Michigan income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MINNESOTA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Minnesota personal income taxes as
is consistent with prudent investment
management.
MERRILL LYNCH MUNICIPAL BOND FUND,
INC.............................. Tax-exempt income from three separate
diversified portfolios of municipal
bonds.
MERRILL LYNCH MUNICIPAL
INTERMEDIATE
TERM FUND........................ Currently the only portfolio of Merrill
Lynch Municipal Series Trust, a series
fund, whose objective is to provide as
high a level as possible of income
exempt from Federal income taxes by
investing in investment grade
obligations with a dollar weighted
average maturity of five to twelve
years.
MERRILL LYNCH NEW JERSEY LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and New Jersey
income taxes as is consistent with
prudent
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investment management through a
portfolio primarily of
intermediate-term investment grade New
Jersey Municipal Bonds.
MERRILL LYNCH NEW JERSEY MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and New Jersey state income taxes as
is consistent with prudent investment
management.
MERRILL LYNCH NEW MEXICO MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and New Mexico income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal, New York State
and New York City income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of
intermediate-term investment grade New
York Municipal Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal,
New York State and New York City
income taxes as is consistent with
prudent investment management.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and North Carolina income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH OHIO MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from both Federal and
Ohio income taxes as is consistent
with prudent investment management.
MERRILL LYNCH OREGON MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to
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provide investors with as high a level
of income exempt from both Federal and
Oregon income taxes as is consistent
with prudent investment management.
MERRILL LYNCH PACIFIC FUND, INC.... Capital appreciation by investing in
equity securities of corporations
domiciled in Far Eastern and Western
Pacific countries, including Japan,
Australia, Hong Kong, Singapore and
the Philippines.
MERRILL LYNCH PENNSYLVANIA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Pennsylvania
income taxes as is consistent with
prudent investment management through
investment in a portfolio of
intermediate-term investment grade
Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA
MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Pennsylvania state income taxes as
is consistent with prudent investment
management.
MERRILL LYNCH PHOENIX FUND, INC.... Long-term growth of capital by investing
in equity and fixed income securities,
including tax-exempt securities, of
issuers in weak financial condition or
experiencing poor operating results
believed to be undervalued relative to
the current or prospective condition
of such issuer.
MERRILL LYNCH SHORT-TERM GLOBAL
INCOME
FUND, INC........................ 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
multi-currency units having remaining
maturities not exceeding three years.
MERRILL LYNCH SPECIAL VALUE FUND,
INC.............................. Long-term growth of capital from
investments in securities, primarily
common stocks, or relatively small
companies believed to have special
investment value and emerging growth
companies regardless of size.
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MERRILL LYNCH STRATEGIC DIVIDEND
FUND............................. Long-term total return from investment
in dividend paying common stocks which
yield more than Standard & Poor's 500
Composite Stock Price Index.
MERRILL LYNCH TECHNOLOGY FUND,
INC.............................. Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and services
in technology.
MERRILL LYNCH TEXAS MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from Federal income
taxes as is consistent with prudent
investment management by investing
primarily in a portfolio of long-term,
investment grade obligations issued by
the State of Texas, its political
subdivisions, agencies and
instrumentalities.
MERRILL LYNCH UTILITY INCOME FUND,
INC.............................. High current income through investment
primarily in equity and debt securities
issued by companies primarily engaged
in the ownership or operation of
facilities used to generate, transmit
or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME FUND,
INC.............................. High current income by investing in a
global portfolio of fixed income
securities denominated in various
currencies, including multinational
currencies.
Class A Share Money Market Funds:
MERRILL LYNCH READY ASSETS TRUST... Preservation of capital, liquidity and
the highest possible current income
consistent with the foregoing
objectives from the short-term money
market securities in which the Trust
invests.
MERRILL LYNCH RETIREMENT RESERVES
MONEY FUND (available only for
exchanges within certain
retirement plans)................ Currently the only portfolio of Merrill
Lynch Retirement Series Trust, a series
fund, whose objectives are current
income, preservation of capital and
liquidity available from investing in
a diversified portfolio of short-term
money market securities.
MERRILL LYNCH U.S.A. GOVERNMENT
RESERVES......................... Preservation of capital, current income
and liquidity available from investing
in direct obligations of the
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U.S. Government and repurchase
agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY MONEY
FUND............................. Preservation of capital, liquidity and
current income through investment
exclusively in a diversified portfolio
of short-term marketable securities
which are direct obligations of the
U.S. Treasury.
Class B; Class C and Class D Share
Money Market Funds:
MERRILL LYNCH GOVERNMENT FUND...... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in securities issued or guaranteed by
the U.S. Government, its agencies and
instrumentalities and in repurchase
agreements secured by such
obligations.
MERRILL LYNCH INSTITUTIONAL FUND... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide maximum
current income consistent with
liquidity and the maintenance of a
high-quality portfolio of money market
securities.
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND.................. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income exempt from Federal income
taxes, preservation of capital and
liquidity available from investing in
a diversified portfolio of short-term,
high quality municipal bonds.
MERRILL LYNCH TREASURY FUND........ A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in direct obligations of the U.S.
Treasury and up to 10% of its total
assets in repurchase agreements
secured by such obligations.
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 funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire transfer 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
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privilege. Certain funds may suspend the continuous offering of their shares
to the general public 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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment
income, if any. Dividends from such net investment income are paid quarterly.
All net realized long- or short-term capital gains, if any, are distributed to
the Fund's shareholders at least annually. From time to time, the Fund may
declare a special distribution at or about the end of the calendar year in
order to comply with a Federal income tax requirement that certain percentages
of its ordinary income and capital gains be distributed during the taxable
year. Premiums from expired call options written by the Fund and net gains
from closing purchase transactions are treated as short-term capital gains for
Federal income tax purposes. See 'Shareholder Services--Automatic Reinvestment
of Dividends and Capital Gains Distributions' for information concerning the
manner in which dividends and distributions may be reinvested automatically in
shares of the Fund. Shareholders may elect in writing to receive any such
dividends or distributions, or both, in cash. Dividends and distributions are
taxable to shareholders as described below whether they are invested in shares
of the Fund or received in cash. The per share dividends and distributions on
Class B and Class C shares will be lower than the per share dividends and
distributions on Class A and Class D shares as a result of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to the Class B and Class C shares; similarly, the per share dividends
and distributions on Class D shares will be lower than the per share dividends
and distributions on Class A shares as a result of the account maintenance
fees applicable with respect to the Class D shares. See 'Determination of Net
Asset Value.'
TAXES
The Fund has qualified and intends to continue to qualify for the special
tax treatment afforded regulated investment companies ('RICs') under the
Internal Revenue Code of 1986, as amended (the 'Code'). As a RIC, the Fund
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'). In order
to qualify, the Fund must among other things, (i) derive at least 90% of its
gross income from dividends, interest, payments with respect to certain
securities loans, gains from the sale of securities, certain gains from
foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; (ii) derive less than 30%
of its gross income from gains from the sale or other disposition of
securities, options, futures, forward contracts and certain investments in
foreign currencies held for less than three months; (iii) distribute at least
90% of its dividend, interest and certain other taxable income each year; (iv)
at the end of each fiscal quarter maintain at least 50% of the value of its
total assets in cash, government securities, securities of other RICs, and
other securities of issuers which represent, with respect to each issuer, no
more than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer; and (v) at the end of each
fiscal quarter have no more than 25% of its assets invested in the securities
(other than those of the government or other RICs) of any one issuer or of two
or more issuers which the Fund controls and which are engaged in the same,
similar or related trades and businesses.
43
<PAGE>
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to
hereafter as 'ordinary income dividends') are taxable to shareholders as
ordinary income. Distributions made from the Fund's net realized long-term
capital gains (including long-term gains from certain transactions in futures
and options) are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares.
However, any loss on a subsequent sale or exchange of shares held for six
months or less will be treated as long-term capital loss to the extent of any
long-term capital gain distribution thereon.
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
dividends or capital gains distributions. The portion of the Fund's ordinary
income dividends which is attributable to dividends received by the Fund from
U.S. corporations (other than dividends received on preferred stocks of public
utilities) may be eligible for the 70% dividends received deduction allowed to
corporations under the Code, if certain requirements are met. For this
purpose, the Fund will allocate dividends eligible for the dividends received
deduction between the Class A, Class B, Class C and Class D shareholders
according to a method (which it believes is consistent with the Securities and
Exchange Commission exemptive order permitting the issuance and sale of
multiple classes of stock) that is based upon the gross income that is
allocable to the 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. If the Fund pays a dividend in January which was declared in the
previous October, November or December to shareholders of record on a date in
such a month, then such dividend or distribution will be treated for tax
purposes as being paid on December 31, and will be taxable to its shareholders
on December 31 of the year in which the dividend was declared.
Under certain provisions of the Code, some shareholders may be subject to
a 31% withholding tax on ordinary income dividends, capital gains dividends
and redemption payments ('backup withholding'). Generally, shareholders
subject to backup withholding will be those for whom a certified taxpayer
identification number is not 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 shareholder is not otherwise subject to backup withholding
taxes.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States 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. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States 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 United States may reduce or eliminate such taxes.
Shareholders may be able to claim United States foreign tax credits with
respect to such taxes, subject to certain provisions and limitations contained
in the Code. If more than 50% in value of the Fund's total assets at the close
of its taxable year consists of stock or 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 share of such withholding taxes in their United
States income tax returns as gross income, treat such proportionate share as
taxes paid by them, and deduct such proportionate share in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their United States income taxes. The Fund will report annually to its
shareholders the amount per share of such withholding taxes.
44
<PAGE>
For this purpose, the Fund will allocate foreign taxes and foreign source
income among the classes of shareholders according to a method similar to that
described above for the allocation of dividends eligible for the dividends
received deduction.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for 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 of the converted Class B shares.
If a shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss he can recognize on the exchange will be
reduced (or the gain increased) to the extent the sales charge paid to the
Fund reduces any sales charge the shareholder would have owed upon purchase of
the new shares in the absence of the exchange privilege. Instead, such 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 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 avoid 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 AND FUTURES TRANSACTIONS
The Fund may purchase or sell options and futures. 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. In general, unless the special election
referred to in the previous sentence is made, gain or loss from transactions
in options and futures contracts will be 60% long-term and 40% short-term
capital gain or loss. 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 rates with respect to its
investments.
Code Section 1092, which applies to certain 'straddles,' may affect the
taxation of the Fund's transactions in options and futures contracts. Under
Section 1092, the Fund may be required to postpone recognition for tax
purposes of losses incurred in certain closing transactions in options and
futures.
One of the requirements for qualification as a RIC is that less than 30%
of the Fund's gross income may 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.
45
<PAGE>
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, futures, forward foreign
currency or 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
forward contracts not traded in the interbank market, 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. 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, rather
than increasing or decreasing the amount of the Fund's net capital gain.
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 dividend distributions, and any 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 each shareholder's basis
in his Fund shares.
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 or administrative action
either prospectively or retroactively.
Dividends and capital gains distributions also may be subject to state
and local taxes.
Shareholders are urged to consult their own tax advisers regarding
specific questions as to Federal, state, local or foreign 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 in advertisements or information furnished to
present or prospective shareholders. Total return figures are based on the
Fund's historical performance and are not intended to indicate future
performance. Average annual total return is determined separately for Class A,
Class B, Class C and Class D shares in accordance with a formula specified by
the Securities and Exchange 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
46
<PAGE>
would be applicable to a complete redemption of the investment at the end of
the specified period in the case of 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. 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. Actual annual or annualized total return data
generally will be lower than average annual total return data since the
average rates of return reflect compounding of return; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
Set forth below is total return information for the Class A and Class B
shares of the Fund for the periods indicated. Since Class C and Class D shares
have not been issued prior to the date of this Statement of Additional
Information, performance information concerning Class C and Class D shares is
not yet provided.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
--------------------------- ---------------------------
REDEEMABLE EXPRESSED AS REDEEMABLE
VALUE OF A A VALUE OF A
EXPRESSED AS HYPOTHETICAL PERCENTAGE HYPOTHETICAL
A PERCENTAGE $1,000 BASED $1,000
BASED ON A INVESTMENT ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF $1,000 OF THE
PERIOD INVESTMENT THE PERIOD INVESTMENT PERIOD
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended May 31,
1994+................ 1.91% $ 1,019.10 1.43% $ 1,014.30
December 28, 1990
(Inception) to May
31, 1994+............ 10.16% $ 1,393.10 10.42% $ 1,404.20
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended May 31,
1994................. 6.15% $ 1,061.50 5.43% $ 1,054.30
Year Ended May 31,
1993................. 15.48% $ 1,154.80 14.53% $ 1,145.30
Year Ended May 31,
1992................. 16.36% $ 1,163.60 15.54% $ 1,155.40
December 28, 1990
(Inception) to May
31, 1991............. 1.73% $ 1,017.30 1.37% $ 1,013.70
<CAPTION>
AGGREGATE TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
December 28, 1990
(Inception) to May
31, 1994+............ 39.31 % $ 1,393.10 40.42% $ 1,404.20
</TABLE>
+ Semiannual.
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 charge 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 may be deducted.
47
<PAGE>
From time to time, the Fund may include the Fund's Morningstar
risk-adjusted performance rating in advertisements or supplemental sales
literature.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on September 26, 1990. It
has an authorized capital of 400,000,000 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 each of which consists of 100,000,000 shares. Class
A, Class B, Class C and Class D Common Stock each 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. The Fund has received an order from the
Commission permitting the issuance and sale of multiple classes of Common
Stock. The Board of 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 share held and fractional
votes for fractional shares held and will vote on the election of Directors
and any other matter submitted to a shareholder vote. The Fund does not intend
to hold meetings of shareholders in any year in which the Investment Company
Act does not require shareholders to act upon any of the following matters:
(i) election of Directors; (ii) approval of an investment advisory agreement;
(iii) approval of a distribution agreement; and (iv) ratification of selection
of independent accountants. Also, the by-laws of the Fund require that a
special meeting of stockholders be held upon the written request of at least
10% of the outstanding shares of the Fund entitled to vote at such meeting.
Voting rights for Directors are not cumulative. Shares issued are fully paid
and non-assessable and have no preemptive rights. Redemption and conversion
rights are discussed elsewhere herein and in the Prospectus. Each share is
entitled to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities. Stock certificates are issued by the
transfer agent only on specific request. Certificates for fractional shares
are not issued in any case.
The Manager provided the initial capital for the Fund by purchasing 5,000
shares of each class of stock for an aggregate of $100,000. Such shares were
acquired for investment and can only be disposed of by redemption. The
organizational expenses of the Fund will be paid by the Fund and amortized
over a period not exceeding five years. The proceeds realized by the Manager
upon redemption of any of such shares will be reduced by the proportionate
amount of the unamortized organizational expenses which the number of shares
redeemed bears to the number of shares initially purchased.
48
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A and Class B shares of the Fund, based on
the value of the Fund's net assets and number of shares outstanding as of May
31, 1994, is calculated as set forth below. Information is not provided for
Class C or Class D shares since no Class C or Class D shares were publicly
offered prior to the date of this Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B
<S> <C> <C>
Net Assets........................................ $73,713,378 $576,548,612
Number of Shares Outstanding...................... 5,820,579 45,697,537
Net Asset Value Per Share (net assets divided by
number of shares outstanding)................... $12.66 $12.62
Sales Charge (for Class A shares: 4.0% of
offering price
(4.19% of net asset value per share))........... $ 0.53 --
Offering Price.................................... $13.19 $12.62
</TABLE>
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540,
have been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the Fund's shareholders in
years when an annual meeting of shareholders is held. In addition, employment
of such auditors may be terminated without any penalty by vote of a majority
of the outstanding shares of the Fund at a meeting called for the purpose of
terminating such employment. The independent auditors are responsible for
auditing the annual financial statements of the Fund.
CUSTODIAN
The Chase Manhattan Bank, N.A., acts as the Custodian of the Fund's
assets. Under its contract with the Fund, the Custodian is authorized to
establish separate accounts in foreign currencies and to cause foreign
securities owned by the Fund to be held in its offices outside the United
States and with certain foreign banks and securities depositories. The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's 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.
49
<PAGE>
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, 919 Third Avenue, New York, New
York 10022, is counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends November 30 of each year. The Fund sends
to its shareholders at least quarterly 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 Securities and
Exchange Commission, Washington, D.C., under the Securities Act of 1933 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 September 30, 1994.
50
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ('MOODY'S') CORPORATE RATINGS
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
'gilt edge.' Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds which are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
</TABLE>
NOTE: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
51
<PAGE>
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term 'commercial paper' as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representations as to whether such commercial paper is by any other
definition 'commercial paper' or is exempt from registration under the
Securities Act of 1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following
characteristics:
-- Leading market positions in well established industries
-- High rates of return on funds employed
-- Conservative capitalization structures 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 related supporting institutions) have a strong
capacity for repayment of short-term promissory 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, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
52
<PAGE>
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and
bonds, a variation of the bond rating symbols is being used in the quality
ranking of preferred stocks. The symbols, presented below, are designed to
avoid comparison with bond quality in absolute terms. It should always be
borne in mind that preferred stocks occupy a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<S> <C>
aaa An issue which is rated 'aaa' is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue which is rated 'aa' is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
a preferred stock. While risks are judged to be somewhat greater than in the
'aaa' and 'aa' classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated 'baa' is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
ba An issue which is rated 'ba' is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue which is rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca An issue which is rated 'ca' is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payment.
c This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
</TABLE>
NOTE: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from 'aa' through 'b' in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
53
<PAGE>
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S ('STANDARD & POOR'S')
CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt 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 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, or for other reasons.
The ratings are based, in varying degrees, on the following
considerations: (1) likelihood of default-capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation; (2) nature of and provisions of
the obligation; and (3) protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher-rated
categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher-rated categories.
DEBT rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and
repay principal. BB indicates the least degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payment.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
</TABLE>
54
<PAGE>
<TABLE>
<S> <C>
B Debt rated B has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB or BB-rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayments of principal. In the event
of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B-rating.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed
but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
</TABLE>
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
PROVISIONAL RATINGS: The letter 'p' indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood or risk of default upon failure of such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L The letter 'L' indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit collateral is
insured by the Federal Savings & Loan Insurance Corp. or the Federal Deposit
Insurance Corp. and interest is adequately collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
Debt Obligations of Issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ('AAA', 'AA', 'A', 'BBB', commonly known as 'investment grade'
ratings) are generally regarded as eligible for bank investment. In addition,
the
55
<PAGE>
laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks,
trust companies, insurance companies and fiduciaries generally.
DESCRIPTION OF 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 having an original maturity of no
more than 365 days. Ratings are graded into four categories, ranging from 'A'
for the highest quality obligations to 'D' for the lowest. The four categories
are as follows:
<TABLE>
<S> <C>
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated 'A-1'.
A-3 Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
B Issues rated 'B' are regarded as having only adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is expected to
be in default upon maturity.
</TABLE>
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not
be higher than the bond rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment-capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation.
56
<PAGE>
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangements affecting creditors' rights.
<TABLE>
<S> <C>
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
AA A preferred stock issue rated 'AA' also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA.'
A An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB An issue rated 'BBB' is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the 'A'
category.
BB Preferred stock rated 'BB', 'B', and 'CCC' are regarded, on balance, as
B predominantly speculative with respect to the issuer's capacity to pay
CCC preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest degree of speculation. While such issues
will likely have some quality and protection characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC The rating 'CC' is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated 'C' is a non-paying issue.
D A preferred stock rated 'D' is a non-paying issue with the issuer in
default on debt instruments.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
</TABLE>
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from 'AA' to 'CCC' may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell
a security, inasmuch as market price is not considered in arriving at the
rating. Preferred stock ratings are wholly unrelated to Standard & Poor's
earnings and dividend rankings for common stocks.
The ratings are based on current information furnished to Standard &
Poor's by the issuer, and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
57
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MERRILL LYNCH GLOBAL UTILITY FUND, INC.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Global Utility Fund,
Inc. as of November 30, 1993, the related statements of operations for the
year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for the two-year
period then ended and the period December 28, 1990 (commencement of
operations) to November 30, 1991. 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 November 30, 1993 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
Global Utility Fund, Inc. as of November 30, 1993, 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
December 31, 1993
58
<PAGE>
Merrill Global Utility Fund, Inc., November 30, 1993
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US Dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Argentina Telecommunications 132,479 ++++Telecom Argentina Stet S.A. (ADR)++ $ 4,726,664 $ 6,193,393 0.9%
123,213 ++++Telefonica de Argentina S.A. (ADR)++ 4,464,581 6,653,502 1.0
Total Common Stocks in Argentina 9,191,245 12,846,895 1.9
Australia Utilities--Gas 2,267,000 Australian Gas & Light Co., Ltd. 5,711,381 6,952,152 1.0
Total Common Stocks in Australia 5,711,381 6,952,152 1.0
Austria Utilities--Gas 32,150 Energie Versorgung Niederoesterreich
AG (EVN) 2,718,269 3,852,246 0.6
Total Common Stocks in Austria 2,718,269 3,852,246 0.6
Canada Telecommunications 127,200 BCE, Inc. (ADR)++ 4,678,103 4,356,600 0.6
Utilities--Electric 425,600 Nova Scotia Power Co. 4,007,620 4,140,078 0.6
Utilities--Gas 552,700 Transcanada Pipeline Co. Ltd. (ADR)++ 8,288,749 8,221,413 1.2
Total Common Stocks in Canada 16,974,472 16,718,091 2.4
Chile Telecommunications 80,700 Compania de Telefonos de Chile,
S.A. (ADR)++ 5,531,550 6,778,800 1.0
Utilities--Electric 176,600 ++++Distribuidora Chilectra Metropolitana,
S.A. (ADR)++ 4,708,327 5,496,675 0.8
12,000 Enersis S.A. (ADR)++ 216,000 235,500 0.0
----------- ------------ ----
4,924,327 5,732,175 0.8
Total Common Stocks in Chile 10,455,877 12,510,975 1.8
France Utilities--Water 20,928 Compagnie Generale des Eaux
(Bonus Rights) (1) 0 729,403 0.1
20,928 Compagnie Generale des Eaux (Ord.) 8,793,918 9,191,602 1.4
Total Common Stocks in France 8,793,918 9,921,005 1.5
Hong Kong Telecommunications 7,644,000 Hong Kong Telecommunications PLC 12,600,067 14,546,806 2.1
Utilities--Electric 2,461,200 China Light & Power Co., Ltd. 12,282,332 14,497,327 2.1
1,552,000 Hong Kong Electric Holdings, Ltd. 3,897,526 5,243,990 0.8
----------- ------------ ----
16,179,858 19,741,317 2.9
Utilities--Gas 2,068,000 The Hong Kong & China Gas Co. Ltd. 4,350,783 5,140,216 0.8
Total Common Stocks in Hong Kong 33,130,708 39,428,339 5.8
Italy Telecommunications 1,675,800 Italgas Torino 4,845,444 4,434,787 0.7
2,924,700 Societa Finanziara Telefonica
S.p.A. (STET) 5,439,622 4,828,837 0.7
5,351,250 Societa Italiana Esercizio Telecom
S.p.A. (SIP) 7,584,134 9,649,795 1.4
Total Common Stocks in Italy 17,869,200 18,913,419 2.8
Malaysia Telecommunications 1,344,000 Telekom Malaysia BHD 9,184,414 10,090,642 1.5
Total Common Stocks in Malaysia 9,184,414 10,090,642 1.5
Mexico Telecommunications 134,900 Telefonos de Mexico S.A. de C.V. (ADR)++ 7,053,717 7,520,675 1.1
Total Common Stocks in Mexico 7,053,717 7,520,675 1.1
New Zealand Telecommunications 209,300 Telecom Corporation of
New Zealand Ltd. (ADR)++ 7,213,264 8,947,575 1.3
Total Common Stocks in New Zealand 7,213,264 8,947,575 1.3
Philippines Telecommunications 129,500 Philippine Long Distance
Telephone Co. (ADR)++ 5,250,051 7,899,500 1.2
</TABLE>
59
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total Common Stocks in the Philippines 5,250,051 7,899,500 1.2
Spain Telecommunications 512,300 Telefonica de Espana S.A. 5,828,343 6,109,633 0.9
Utilities--Electric 147,800 Empresa Nacional de Electricidad,
S.A. (ADR)++ 4,797,399 6,687,950 1.0
1,062,500 Iberdrola I S.A. 6,796,570 6,886,225 1.0
----------- ------------ ----
11,593,969 13,574,175 2.0
Total Common Stocks in Spain 17,422,312 19,683,808 2.9
Thailand Telecommunications 15,000 ++++TelecomAsia Corporation Public Co.,
Ltd. PLC (ADR)++ 328,050 328,050 0.0
Total Common Stocks in Thailand 328,050 328,050 0.0
United Kingdom Telecommunications 1,330,860 British Telecommunications PLC (Part Pay) 3,557,997 4,346,063 0.6
800,000 British Telecommunications PLC (Ord.) 5,573,765 5,580,408 0.8
Total Common Stocks in the United Kingdom 9,131,762 9,926,471 1.4
United States Telecommunications 111,200 American Telephone & Telegraph Co. 6,407,214 6,074,300 0.9
110,400 Ameritech Corp. 8,274,518 8,445,600 1.2
151,700 Bell Atlantic Corp. 8,027,948 9,102,000 1.3
163,400 BellSouth Corp. 9,162,908 9,334,225 1.4
257,700 GTE Corp. 9,016,758 9,567,113 1.4
205,700 NYNEX Corp. 8,342,529 8,767,962 1.3
175,100 Pacific Telesis Group 7,853,346 9,936,925 1.5
216,900 Southwestern Bell Corp. 7,422,726 9,218,250 1.4
319,900 US West, Inc. 14,757,846 14,955,325 2.2
----------- ------------ ----
79,265,793 85,401,700 12.6
Utilities--Electric 326,000 Allegheny Power System, Inc. 8,652,910 8,516,750 1.3
220,200 Boston Edison Co. 5,789,754 6,330,750 0.9
210,000 Central & SouthWest Corp. 5,840,299 6,247,500 0.9
231,200 Consolidated Edison Co. of New York 7,260,774 7,196,100 1.1
146,900 Detroit Edison Co. 4,899,043 4,737,525 0.7
110,250 Dominion Resources, Inc. 4,427,302 4,878,562 0.7
190,000 Duke Power Co. 8,095,413 7,980,000 1.2
267,500 Entergy Corp. 8,646,550 9,864,062 1.5
414,800 General Public Utilities Corp. 11,683,837 12,340,300 1.8
339,100 Houston Industries, Inc. 15,787,663 15,386,662 2.3
338,600 Long Island Lighting Co. 8,537,882 8,041,750 1.2
259,800 NIPSCO Industries, Inc. 6,905,271 8,248,650 1.2
235,000 New York State Electric & Gas Corp. 8,459,615 7,079,375 1.0
196,700 Northeast Utilities Co. 5,253,338 4,597,862 0.7
385,600 PSI Resources, Inc. 9,257,252 9,929,200 1.5
342,000 PacifiCorp 6,846,153 6,498,000 1.0
164,800 Pennsylvania Power & Light Co. 4,428,338 4,429,000 0.7
440,000 Philadelphia Electric Co. 12,186,735 12,320,000 1.8
100,400 Public Service Co. of Colorado 3,003,442 2,999,450 0.4
186,300 Rochester Gas & Electric Corp. 4,775,302 4,890,375 0.7
300,000 SCEcorp 6,765,509 6,112,500 0.9
202,100 Southern Co. 6,989,691 8,740,825 1.3
188,300 Texas Utilities Co. 7,596,591 8,049,825 1.2
203,300 Western Resources Co. 6,442,514 6,886,788 1.0
----------- ----------- ----
178,531,178 182,301,811 27.0
</TABLE>
60
<PAGE>
Merrill Global Utility Fund, Inc., November 30, 1993
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US Dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United States Utilities--Gas 130,000 The Brooklyn Union Gas Co. $ 3,371,550 $ 3,412,500 0.5%
(concluded) 240,000 The Coastal Corp. 6,414,080 6,450,000 1.0
144,600 Consolidated Natural Gas Co. 6,463,720 6,669,675 1.0
236,300 El Paso Natural Gas Co. 8,352,615 8,565,875 1.3
399,100 Enron Corp. 8,119,749 12,421,988 1.8
258,300 NICOR Inc. 5,661,173 7,103,250 1.0
115,000 New Jersey Resources Corp. 3,262,177 2,975,625 0.4
250,000 Questar Corp. 6,792,478 8,218,750 1.2
338,300 Sonat, Inc. 7,262,851 10,445,012 1.5
116,300 Washington Gas Light Co. 4,016,691 4,753,762 0.7
365,000 Williams Co., Inc. 6,931,607 9,900,625 1.5
----------- ------------ ----
66,648,691 80,917,062 11.9
Total Common Stocks in the United States 324,445,662 348,620,573 51.5
Total Investments in Common Stocks 484,874,302 534,160,416 78.7
<CAPTION>
Face
Amount Fixed-Income Securities
<S> <C> <C> <C> <C> <C> <C>
Australia Miscellaneous US$ 7,960,000 Telstra Corp., Ltd., 6.50% due 7/31/2003 8,115,578 7,971,940 1.2
Total Fixed-Income Securities in Australia 8,115,578 7,971,940 1.2
Canada Utilities--Electric 2,000,000 Hydro-Quebec, 9.23% due 12/04/2000 2,038,540 2,327,282 0.3
Total Fixed-Income Securities in Canada 2,038,540 2,327,282 0.3
Japan Telecommunications 4,000,000 Nippon Telegraph & Telephone Corp., 9.50%
due 7/27/1998 4,244,380 4,578,884 0.7
Total Fixed-Income Securities in Japan 4,244,380 4,578,884 0.7
Korea Telecommunications 2,500,000 Korea Telecom, 7.40% due 12/01/1999 2,499,500 2,593,768 0.4
Utilities--Electric 6,000,000 Korea Electric Power Corp., 6.38%
due 12/01/2003 5,913,060 5,838,378 0.9
Total Fixed-Income Securities in Korea 8,412,560 8,432,146 1.3
United States Telecommunications 4,000,000 Rochester Telephone Corp., 9.50%
due 6/01/2000 4,111,200 4,712,520 0.7
Utilities--Electric 4,000,000 Consumer Power Co., 8.875% due 11/15/1999 4,190,000 4,502,784 0.7
4,000,000 Niagara Mohawk Power Corp., 9.50%
due 6/01/2000 4,197,640 4,700,960 0.7
----------- ------------ ----
8,387,640 9,203,744 1.4
Total Fixed-Income Securities in the
United States 12,498,840 13,916,264 2.1
Total Investments in Fixed-Income
Securities 35,309,898 37,226,516 5.6
Short-Term Securities
United States Commercial 25,000,000 Cooper Industries, Inc., 3.05%
Paper* due 12/07/1993 24,987,292 24,987,292 3.7
20,000,000 Daimler Benz AG, 3.07% due 12/15/1993 19,976,122 19,976,122 2.9
30,000,000 PHH Corp., 3.08% due 12/16/1993 29,961,500 29,961,500 4.4
</TABLE>
61
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
22,100,000 Preferred Receivables Funding Corp., 3.10%
due 12/22/1993 22,060,036 22,060,036 3.3
----------- ------------ ----
96,984,950 96,984,950 14.3
Repurchase
Agreement**
25,262,000 Carroll McEntee & McGinley Inc.,
purchased on 11/30/1993 to yield
3.20% to 12/01/1993 25,262,000 25,262,000 3.7
Total Investments in Short-Term
Securities 122,246,950 122,246,950 18.0
Total Investments $642,431,150 693,633,882 102.3
============
Liabilities in Excess of Other Assets (15,461,628) (2.3)
------------ -----
Net Assets $678,172,254 100.0%
============ =====
<FN>
*Commercial Paper is traded on a discount basis; the interest rates
shown are the discount rates paid at the time of purchase by the Fund.
**Repurchase Agreements are fully collateralized by US Government
or Agency Obligations.
(1)The rights may be exercised until 12/20/1993.
++American Depositary Receipt (ADR).
++++Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $18,672,000, representing 2.8%
of net assets.
Acquisition Value
Issue Date Cost (Note 1a)
Distribuidora Chilectra $ 4,708,327 $ 5,496,675
Metropolitana, S.A. (ADR) 2/12/92
Telecom Argentina Stet S.A. (ADR) 3/23/92 4,726,664 6,193,393
TelecomAsia Corporation Public
Co., Ltd. PLC (ADR) 11/15/93 328,050 328,050
Telefonica de Argentina S.A. (ADR) 12/17/91 4,464,581 6,653,502
Total $14,227,622 $18,671,620
=========== ============
</TABLE>
See Notes to Financial Statements.
62
<PAGE>
Merrill Global Utility Fund, Inc., November 30, 1993
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of November 30, 1993
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$642,431,150) (Note 1a) $ 693,633,882
Cash 85,947
Receivables:
Capital shares sold $ 3,950,744
Dividends 2,423,076
Interest 674,535 7,048,355
-----------
Deferred organization expenses (Note 1f) 43,526
Prepaid registration fees and other assets (Note 1f) 40,218
--------------
Total assets 700,851,928
--------------
Liabilities: Payables:
Securities purchased 20,375,446
Capital shares redeemed 1,304,378
Distributor (Note 2) 390,450
Investment adviser (Note 2) 355,527 22,425,801
-----------
Accrued expenses and other liabilities 253,873
--------------
Total liabilities 22,679,674
--------------
Net Assets: Net assets $ 678,172,254
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized $ 618,096
Consist of: Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 4,528,532
Paid-in capital in excess of par 616,869,380
Undistributed investment income--net 3,052,683
Undistributed realized capital gains on investments and foreign currency transactions--net 1,900,387
Unrealized appreciation on investments and foreign currency transactions--net 51,203,176
--------------
Net assets $ 678,172,254
==============
Net Asset Class A--Based on net assets of $81,717,754 and 6,180,960 shares outstanding $ 13.22
Value: ==============
Class B--Based on net assets of $596,454,500 and 45,285,324 shares outstanding $ 13.17
==============
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended November 30, 1993
<S> <C> <C> <C>
Investment Dividends (net of $333,875 foreign withholding tax) $ 13,141,884
Income Interest and discount earned 4,046,159
(Notes 1d & 1e): --------------
Total income 17,188,043
--------------
Expenses: Distribution fees--Class B (Note 2) $ 2,574,752
Investment advisory fees (Note 2) 2,346,433
Transfer agent fees--Class B (Note 2) 306,683
Registration fees (Note 1f) 195,864
</TABLE>
63
<PAGE>
<TABLE>
<S> <C> <C> <C>
Printing and shareholder reports 103,861
Accounting services (Note 2) 81,576
Custodian fees 79,514
Professional fees 64,219
Transfer agent fees--Class A (Note 2) 34,960
Directors' fees and expenses 31,371
Amortization of organization expenses (Note 1f) 20,892
Other 11,547
------------
Total expenses 5,851,672
--------------
Investment income--net 11,336,371
--------------
Realized & Realized gain from:
Unrealized Investments--net 4,662,953
Gain on Foreign currency transactions 53,369 4,716,322
Investments and ------------
Foreign Currency Change in unrealized appreciation on:
Transactions-- Investments--net 37,511,259
Net (Notes 1b, Foreign currency transactions 6,895 37,518,154
1e & 3): ------------ --------------
Net realized and unrealized gain on investments and foreign currency
transactions 42,234,476
--------------
Net Increase in Net Assets Resulting from Operations $ 53,570,847
==============
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION> For the Year Ended November 30,
Increase (Decrease) in Net Assets: 1993 1992
<S> <C> <C> <C>
Operations: Investment income--net $ 11,336,371 $ 5,967,216
Realized gain (loss) on investments and foreign currency
transactions--net 4,716,322 (1,675,682)
Change in unrealized appreciation on investments and foreign
currency transactions--net 37,518,154 7,399,602
------------ ------------
Net increase in net assets resulting from operations 53,570,847 11,691,136
------------ ------------
Dividends & Investment income--net:
Distributions Class A (1,417,410) (991,785)
to Shareholders Class B (8,066,873) (4,581,932)
(Note 1g): Realized gain on investments--net:
Class A (33,059) --
Class B (223,915) --
------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders (9,741,257) (5,573,717)
------------ ------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 404,174,719 112,505,457
(Note 4): ------------ ------------
Net Assets: Total increase in net assets 448,004,309 118,622,876
Beginning of year 230,167,945 111,545,069
------------ ------------
End of year* $678,172,254 $230,167,945
============ ============
*Undistributed investment income--net $ 3,052,683 $ 1,200,595
============ ============
</TABLE>
See Notes to Financial Statements.
64
<PAGE>
Merrill Global Utility Fund, Inc., November 30, 1993
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Class A Class B
For the For the
Period Period
The following per share data and ratios have been For the Dec. 28 For the Dec. 28
derived from information provided in the Year Ended 1990++ to Year Ended 1990++ to
financial statements. November 30, Nov. 30, November 30, Nov. 30,
1993 1992 1991 1993 1992 1991
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.23 $ 10.67 $ 10.00 $ 11.20 $ 10.65 $ 10.00
Operating ------- ------- ------- -------- -------- -------
Performance: Investment income--net .40 .47 .49 .33 .39 .40
Realized and unrealized gain on investments and
foreign currency transactions--net++++ 2.01 .57 .56 1.98 .57 .58
------- ------- ------- -------- -------- -------
Total from investment operations 2.41 1.04 1.05 2.31 .96 .98
Less dividends and distributions: ------- ------- ------- -------- -------- -------
Investment income--net (.41) (.48) (.38) (.33) (.41) (.33)
Realized gain on investments--net (.01) -- -- (.01) -- --
------- ------- ------- -------- -------- -------
Total dividends and distributions (.42) (.48) (.38) (.34) (.41) (.33)
------- ------- ------- -------- -------- -------
Net asset value, end of period $ 13.22 $ 11.23 $ 10.67 $ 13.17 $ 11.20 $ 10.65
======= ======= ======= ======== ======== =======
Total Investment Based on net asset value per share 21.80% 10.05% 10.83%+++ 20.86% 9.20% 10.05%+++
Return:** ======= ======= ======= ======== ======== =======
Ratios to Average Expenses, excluding distribution fees .82% 1.01% 1.28%* .84% 1.02% 1.29%*
Net Assets: ======= ======= ======= ======== ======== =======
Expenses .82% 1.01% 1.28%* 1.59% 1.77% 2.04%*
======= ======= ======= ======== ======== =======
Investment income--net 3.57% 4.47% 5.57%* 2.81% 3.65% 4.78%*
======= ======= ======= ======== ======== =======
Supplemental Net assets, end of period (in thousands) $81,718 $29,772 $20,579 $596,455 $200,396 $90,966
Data: ======= ======= ======= ======== ======== =======
Portfolio turnover 8.92% 30.91% 20.51% 8.92% 30.91% 20.51%
======= ======= ======= ======== ======== =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Foreign currency transaction amounts have been reclassified to conform to the 1993 presentation.
+++Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
65
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global Utility Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund offers both Class A and Class B
Shares. Class A Shares are sold with a front-end sales charge. Class B
Shares may be subject to a contingent deferred sales charge. Both classes
of shares have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except that Class B Shares bear certain
expenses related to the distribution of such shares and have exclusive
voting rights with respect to matters relating to such distribution
expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of Securities--Securities traded in the over-the-
counter market are valued at the last available bid price or yield
equivalents obtained from one or more dealers in the over-the-counter
market prior to the time of valuation. Portfolio securities which are
traded on stock exchanges are valued at the last sale price on the
principal market 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.
Options written are valued based upon the last asked price in the
case of exchange-traded options or, in the case of options traded in
the over-the-counter market, at the average of the last asked price as
obtained from one or more dealers. Options purchased by the Fund are
valued at their last bid price in the case of exchange-traded options or,
in the case of options traded in the over-the-counter market, at the
average of the last bid price as obtained from two or more dealers. Other
investments, including futures contracts and related options, are stated
at market value.
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 Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund.
Short-term securities are valued at amortized cost, which approxi-
mates market value.
(b) 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 (realize or valuing (unrealized) such transactions
expressed in foreign currencies into US dollars. Realized and unrealized
gains or losses from investments include the effects of foreign exchange
rates on investments.
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.
66
<PAGE>
(c) Options--When the Fund sells 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 market 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 received or paid (or gain or loss to the extent the cost of
the closing transaction is less than or exceeds the premiums paid or
received).
Written and purchased options are non-income producing
investments.
(d) 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 be imposed on interest, dividends and capital gains at various
rates.
(e) 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. Dividend income is recorded on the ex-dividend date,
except that if the ex-dividend date has passed, certain dividends from
foreign securities are recorded as soon as the Fund is informed of the
ex-dividend date. Realized gains and losses on security transactions are
determined on the identified cost basis.
(f) Deferred Organization Expenses and Prepaid Registration Fees--
Deferred organization expenses are charged to expense over a five-year
period. Prepaid registration fees are charged to expense as the related
shares are issued.
(g) Dividends and Distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
(h) Reclassification--Certain 1992 amounts have been reclassified
to conform to the 1993 presentation.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management ("MLAM"). MLAM is the name under which
Merrill Lynch Investment Management, Inc. ("MLIM") does business. MLIM
is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. The
Fund has also entered into a Distribution Agreement with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary
of MLIM.
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 operation of the Fund. For
67
<PAGE>
Merrill Global Utility Fund, Inc., November 30, 1993
NOTES TO FINANCIAL STATEMENTS (concluded)
such services, the Fund pays a monthly fee of 0.60%, on an annual basis, of the
average daily value of the Fund's net assets. The most restrictive annual
expense limitation requires that the Investment Adviser reimburse the Fund to
the extent the Fund's expenses (excluding interest, taxes, distribution fees,
brokerage fees and commissions, and extraordinary items) exceed 2.5% of the
Fund's first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of the average daily net assets in
excess thereof. MLAM's obligation to reimburse the Fund is limited to the amount
of the advisory fee. No fee payment will be made to the Investment Adviser
during any fiscal year which will cause such expenses to exceed the most
restrictive expense limitation applicable at the time of such payment.
Effective January 1, 1994, the investment advisory business of MLAM
reorganized from a corporation to a limited partnership. The general
partner of MLAM is Princeton Services, Inc., an indirect wholly-owned
subsidiary of Merrill Lynch & Co.
The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940 pursuant to which MLFD
receives a fee from the Fund at the end of each month at the annual rate
of 0.75% of the average daily net assets of the Class B Shares of the Fund.
This fee is to compensate the Distributor for the services it provides and
the expenses borne by the Distributor under the Distribution Agreement. As
authorized by the Plan, the Distributor has entered into an agreement with
Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") which provides for
the compensation of MLPF&S for providing distribution-related services to
the Fund. For the year ended November 30, 1993, MLFD earned $2,574,752
under the Plan, all of which was paid to MLPF&S pursuant to the agreement.
For the year ended November 30, 1993, MLFD earned underwriting discounts
of $89,960, and MLPF&S earned dealer concessions of $1,420,365 on sales of
Class A Shares. MLPF&S also received contingent deferred sales charges of
$537,201 relating to Class B Share transactions and $99,827 in commissions
on the execution of portfolio security transactions for the Fund during the
period.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of Merrill
Lynch & Co., Inc., 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 MLIM, MLPF&S, FDS, MLFD, and/or Merrill Lynch & Co., Inc.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended November 30, 1993 were $355,323,536 and $29,824,441,
respectively.
Net realized and unrealized gains (losses) as of November 30, 1993
were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $ 4,662,955 $ 51,202,732
Short-term investments (2) --
Foreign currency transactions 53,369 444
------------ ------------
Total $ 4,716,322 $ 51,203,176
============ ============
As of November 30, 1993, net unrealized appreciation for Federal income
tax purposes aggregated $51,202,732, of which $57,866,566 related to
appreciated securities and $6,663,834 related to depreciated securities.
At November 30, 1993, the aggregate cost of investments for Federal income
tax purposes was $642,431,150.
4. Capital Stock Transactions:
Net increase in net assets derived from capital share transactions was
$404,174,719 and $112,505,457 for the years ended November 30, 1993 and
November 30, 1992, respectively.
Transactions in capital shares for Class A and Class B shares were
as follows:
Class A Shares for the Year Ended Dollar
November 30, 1993 Shares Amount
Shares sold 4,349,217 $ 56,997,490
Shares issued to shareholders in
reinvestment of dividends and
distributions 85,983 1,081,152
--------- ------------
Total issued 4,435,200 58,078,642
Shares redeemed (905,090) (11,584,655)
--------- ------------
Net increase 3,530,110 $ 46,493,987
========= ============
Class A Shares for the Year Ended Dollar
November 30, 1992 Shares Amount
Shares sold 1,310,420 $ 14,652,320
Shares issued to shareholders in
reinvestment of dividends 67,282 724,651
--------- ------------
Total issued 1,377,702 15,376,971
Shares redeemed (655,555) (7,180,713)
--------- ------------
Net increase 722,147 $ 8,196,258
========= ============
Class B Shares for the Year Ended Dollar
November 30, 1993 Shares Amount
Shares sold 30,702,352 $399,813,619
Shares issued to shareholders in
reinvestment of dividends and
distributions 501,195 6,292,835
---------- ------------
Total issued 31,203,547 406,106,454
Shares redeemed (3,809,433) (48,425,722)
---------- ------------
Net increase 27,394,114 $357,680,732
========== ============
Class B Shares for the Year Ended Dollar
November 30, 1992 Shares Amount
Shares sold 11,092,786 $123,538,723
Shares issued to shareholders in
reinvestment of dividends 291,061 3,142,568
---------- ------------
Total issued 11,383,847 126,681,291
Shares redeemed (2,034,872) (22,372,092)
---------- ------------
Net increase 9,348,975 $104,309,199
========== ============
5. Subsequent Event:
On December 15, 1993, the Fund's Board of Directors declared an ordinary
income dividend of $0.124013 per Class A Share and a $0.099074 per Class B
Share, and a capital gains distribution of $0.026921 per Class A and Class B
Share, payable on December 23, 1993, to shareholders of record as of
December 15, 1993.
68
<PAGE>
THE FOLLOWING SEMI-ANNUAL FINANCIAL STATEMENTS FOR THE FUND FOR THE
PERIOD ENDED MAY 31, 1994 ARE UNAUDITED.
These unaudited interim financial statements reflect all adjustments which
are, in the opinion of management, necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a normal recurring
nature.
69
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Shares Value Percent of
Industries Held Common Stocks & Warrants Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
COUNTRY
Argentina
Telecommunications 138,479 Telecom Argentina Stet S.A. (ADR)++ (1) $ 5,075,039 $ 9,001,135 1.4%
128,513 Telefonica de Argentina S.A. (ADR)++ (1) 4,824,906 9,269,000 1.4
------------ ------------ ------
9,899,945 18,270,135 2.8
Utilities--Electric 6,600 Central Costanera S.A. (ADR)++ (1) 158,400 245,850 0.0
</TABLE>
70
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total Common Stocks in Argentina 10,058,345 18,515,985 2.8
Australia
Utilities--Gas 2,479,584 Australian Gas & Light Co., Ltd. 6,364,362 7,577,976 1.2
Total Common Stocks in Australia 6,364,362 7,577,976 1.2
Austria
Utilities--Gas 34,850 Energie Versorgung Niederoesterreich AG (EVN) 3,050,014 3,855,809 0.6
Total Common Stocks in Austria 3,050,014 3,855,809 0.6
Canada
Energy 400,000 Westcoast Energy Inc. 6,901,727 6,950,000 1.1
Telecommunications 321,700 BC Telecom, Inc. 6,009,937 5,952,031 0.9
Utilities--Electric 458,600 Nova Scotia Power Co. 4,322,473 3,849,260 0.6
Utilities--Gas 573,700 Transcanada Pipeline Co. Ltd. (ADR)++ 8,602,384 7,458,100 1.1
Total Common Stocks in Canada 25,836,521 24,209,391 3.7
Chile
Telecommunications 84,300 Compania de Telefonos de Chile S.A. (ADR)++ 5,871,894 7,671,300 1.2
Utilities--Electric 186,000 Distribuidora Chilectra Metropolitana S.A. (ADR)++ (1) 5,031,451 8,067,750 1.2
28,000 Enersis S.A. (ADR)++ 544,224 644,000 0.1
------------ ------------ ------
5,575,675 8,711,750 1.3
Total Common Stocks in Chile 11,447,569 16,383,050 2.5
Denmark
Telecommunications 331,000 Tele Danmark A/S (ADR)++ 7,787,106 8,275,000 1.3
Total Common Stocks in Denmark 7,787,106 8,275,000 1.3
France
Utilities--Water 26,922 Compagnie Generale des Eaux 11,509,640 11,954,172 1.8
40,000 Lyonnaise des Eaux-Dumez 3,989,365 4,058,280 0.6
------------ ------------ ------
15,499,005 16,012,452 2.4
Total Common Stocks in France 15,499,005 16,012,452 2.4
Germany
Utilities--Gas 20,000 VEBA AG 6,526,985 6,155,718 0.9
Total Common Stocks in Germany 6,526,985 6,155,718 0.9
Hong Kong
Telecommunications 7,644,000 Hong Kong Telecommunications, Ltd. PLC 12,600,067 15,138,593 2.3
Utilities--Electric 4,061,200 China Light & Power Co., Ltd. 23,403,683 22,604,569 3.5
1,552,000 Hong Kong Electric Holdings, Ltd. 3,897,526 4,861,614 0.7
------------ ------------ ------
27,301,209 27,466,183 4.2
Utilities--Gas 2,626,800 The Hong Kong & China Gas Co., Ltd. 4,674,416 5,542,274 0.9
218,900 The Hong Kong & China Gas Co., Ltd. (Warrants)(b)(2) 0 125,381 0.0
------------ ------------ ------
4,674,416 5,667,655 0.9
Total Common Stocks & Warrants in Hong Kong 44,575,692 48,272,431 7.4
India
Utilities--Electric 49,500 CESC Ltd. (Units) 2,640,330 2,450,250 0.4
Total Common Stocks in India 2,640,330 2,450,250 0.4
</TABLE>
71
<PAGE>
Merrill Global Utility Fund, Inc., May 31, 1994
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Shares Value Percent of
Industries Held Common Stocks & Warrants Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
COUNTRY
Italy
Telecommunications 1,786,300 Italgas Torino $ 5,169,953 $ 5,827,088 0.9%
3,091,700 Societa Finanziaria Telefonica S.p.A. (STET) 5,780,442 8,686,297 1.3
5,505,250 Societa Italiana Esercizio Telecom S.p.A. (SIP) 7,916,167 14,879,054 2.3
------------ ------------ ------
18,866,562 29,392,439 4.5
Total Common Stocks in Italy 18,866,562 29,392,439 4.5
Malaysia
Telecommunications 1,385,000 Telekom Malaysia BHD 9,502,659 10,202,380 1.6
Total Common Stocks in Malaysia 9,502,659 10,202,380 1.6
Mexico
Telecommunications 140,000 Telefonos de Mexico, S.A. de C.V. (ADR)++ 7,377,170 8,697,500 1.3
Total Common Stocks in Mexico 7,377,170 8,697,500 1.3
New Zealand
Telecommunications 216,500 Telecom Corporation of New Zealand Ltd. (ADR)++ 7,525,095 10,094,313 1.6
Total Common Stocks in New Zealand 7,525,095 10,094,313 1.6
Philippines
Telecommunications 134,100 Philippine Long Distance Telephone Co. (ADR)++ 5,583,592 9,487,575 1.5
Total Common Stocks in the Philippines 5,583,592 9,487,575 1.5
Spain
Telecommunications 537,300 Telefonica de Espana S.A. 6,164,064 7,293,486 1.1
Utilities--Electric 154,800 Empresa Nacional de Electricidad S.A. (ADR)++ 5,123,952 7,372,350 1.1
92,000 Hidrocantabrico S.A. 3,107,921 2,904,906 0.4
808,500 Iberdrola I S.A. 4,998,320 5,946,695 0.9
------------ ------------ ------
13,230,193 16,223,951 2.4
Total Common Stocks in Spain 19,394,257 23,517,437 3.5
Thailand
Telecommunications 44,200 Jasmine International Public Co., Ltd. 611,419 611,419 0.1
15,000 TelecomAsia Corporation Public Co., Ltd. LC (ADR)++ (1) 328,050 562,500 0.1
Total Common Stocks in Thailand 939,469 1,173,919 0.2
United Kingdom
Telecommunications 845,000 British Telecommunications PLC (Ord.) 5,900,759 4,633,720 0.7
1,426,860 British Telecommunications PLC (Part Pay) 6,877,400 5,263,042 0.8
60,000 Vodafone Group PLC (ADR)++ 5,355,931 4,822,500 0.7
------------ ------------ ------
18,134,090 14,719,262 2.2
Utilities--Electric 445,000 Powergen PLC (Ord.) 3,253,482 3,047,360 0.5
Total Common Stocks in the United Kingdom 21,387,572 17,766,622 2.7
United States
Telecommunications 175,100 Airtouch Communications, Inc. 3,298,013 4,268,063 0.7
111,200 American Telephone & Telegraph Co. 6,407,214 6,060,400 0.9
220,800 Ameritech Corp. 8,274,518 8,638,800 1.3
151,700 Bell Atlantic Corp. 8,027,948 8,096,988 1.2
163,400 BellSouth Corp. 9,162,908 9,722,300 1.5
257,700 GTE Corp. 9,016,758 7,956,488 1.2
208,000 MCI Communications Corp. 5,645,600 4,992,000 0.8
</TABLE>
72
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
205,700 NYNEX Corp. 8,342,529 7,765,175 1.2
175,100 Pacific Telesis Group 4,555,333 5,318,662 0.8
216,900 Southwestern Bell Corp. 7,422,726 8,920,012 1.4
319,900 US West, Inc. 14,757,846 12,835,987 2.0
------------ ------------ ------
84,911,393 84,574,875 13.0
Utilities--Electric 117,000 AES China Generating Co., Ltd. 1,872,000 1,433,250 0.2
326,000 Allegheny Power System, Inc. 8,652,910 6,927,500 1.1
220,200 Boston Edison Co. 5,789,754 6,083,025 0.9
210,000 Central & SouthWest Corp. 5,840,299 4,620,000 0.7
231,200 Consolidated Edison Co. of New York 7,260,774 6,386,900 1.0
146,900 Detroit Edison Co. 4,899,043 3,782,675 0.6
110,250 Dominion Resources, Inc. 4,427,302 4,354,875 0.7
265,000 Duke Power Co. 10,851,663 9,540,000 1.5
267,500 Entergy Corp. 8,646,550 7,724,062 1.2
414,800 General Public Utilities Corp. 11,683,837 11,873,650 1.8
339,100 Houston Industries, Inc. 15,787,663 10,935,975 1.7
338,600 Long Island Lighting Co. 8,537,882 6,814,325 1.0
259,800 NIPSCO Industries, Inc. 6,905,271 7,988,850 1.2
235,000 New York State Electric & Gas Corp. 8,459,615 5,904,375 0.9
196,700 Northeast Utilities Co. 5,253,338 4,474,925 0.7
440,000 PECO Energy Co. (a) 12,186,735 11,990,000 1.8
385,600 PSI Resources, Inc. 9,257,252 8,483,200 1.3
342,000 PacifiCorp 6,846,153 6,027,750 0.9
164,800 Pennsylvania Power & Light Co. 4,428,338 3,646,200 0.6
200,000 Public Service Co. of Colorado 6,071,450 5,200,000 0.8
186,300 Rochester Gas & Electric Corp. 4,775,302 4,215,037 0.7
300,000 SCEcorp 6,765,509 4,200,000 0.6
404,200 Southern Co. 6,989,691 7,477,700 1.2
188,300 Texas Utilities Co. 7,596,591 6,213,900 1.0
203,300 Western Resources Co. 6,442,514 5,692,400 0.9
------------ ------------ ------
186,227,436 161,990,574 25.0
Utilities--Gas 130,000 Brooklyn Union Gas Co. 3,371,550 3,055,000 0.5
240,000 The Coastal Corp. 6,414,080 6,780,000 1.0
116,300 El Paso Natural Gas Co. 4,496,795 3,896,050 0.6
399,100 Enron Corp. 8,119,749 12,172,550 1.9
258,300 NICOR Inc. 5,661,173 6,941,812 1.1
31,000 National Fuel Gas Company 945,500 941,625 0.1
115,000 New Jersey Resources Corp. 3,262,177 2,760,000 0.4
250,000 Questar Corp. 6,792,478 8,000,000 1.2
338,300 Sonat, Inc. 7,262,851 9,641,550 1.5
116,300 Washington Gas Light Co. 4,016,691 4,419,400 0.7
365,000 Williams Co., Inc. 6,931,607 10,265,625 1.6
------------ ------------ ------
57,274,651 68,873,612 10.6
Total Common Stocks in the United States 328,413,480 315,439,061 48.6
Total Investments in Common Stocks & Warrants 552,775,785 577,479,308 88.7
</TABLE>
73
<PAGE>
Merrill Global Utility Fund, Inc., May 31, 1994
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
Face Value Percent of
Industries Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
COUNTRY
Australia
Telecommunications US$ 7,960,000 Telstra Corp., Ltd., 6.50% due 7/31/2003 (1) $ 8,115,578 $ 7,262,505 1.1%
Total Fixed-Income Securities in Australia 8,115,578 7,262,505 1.1
Canada
Utilities--Electric 2,000,000 Hydro-Quebec, 9.23% due 12/04/2000 2,038,540 2,172,960 0.3
Total Fixed-Income Securities in Canada 2,038,540 2,172,960 0.3
Japan
Telecommunications 4,000,000 Nippon Telegraph & Telephone Corp., 9.50%
due 7/27/1998 4,244,380 4,344,240 0.7
Total Fixed-Income Securities in Japan 4,244,380 4,344,240 0.7
Korea
Telecommunications 2,500,000 Korea Telecom, 7.40% due 12/01/1999 2,499,500 2,458,000 0.4
Utilities--Electric 6,000,000 Korea Electric Power Corp., 6.375% due 12/01/2003 5,913,060 5,205,540 0.8
Total Fixed-Income Securities in Korea 8,412,560 7,663,540 1.2
United States
Telecommunications 4,000,000 Rochester Telephone Corp., 9.25% due 6/01/2000 4,111,200 4,360,600 0.7
Utilities--Electric 4,000,000 Consumer Power Co., 8.875% due 11/15/1999 4,190,000 4,154,920 0.6
4,000,000 Niagara Mohawk Power Corp., 9.50% due 6/01/2000 4,197,640 4,297,880 0.7
------------ ------------ ------
8,387,640 8,452,800 1.3
Total Fixed-Income Securities in the United States 12,498,840 12,813,400 2.0
Total Investments in Fixed-Income Securities 35,309,898 34,256,645 5.3
Short-Term Securities
United States
Commercial Paper* 39,000,000 Matterhorn Capital Corp., 3.82% due 6/01/1994 39,000,000 39,000,000 6.0
Repurchase 962,000 Swiss Bank Corp., purchased on 5/31/1994 to yield
Agreement** 4.20% to 6/01/1994 962,000 962,000 0.2
Total Investments in Short-Term Securities 39,962,000 39,962,000 6.2
Total Investments $628,047,683 651,697,953 100.2
============
Liabilities in Excess of Other Assets (1,435,963) (0.2)
------------ ------
Net Assets $650,261,990 100.0%
============ ======
<FN>
*Commercial Paper is traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
**Repurchase Agreements are fully collateralized by US Government or Agency Obligations.
++American Depositary Receipts (ADR).
(a)Formerly Philadelphia Electric Co.
(b)Warrants entitle the Fund to purchase a predetermined number of shares
of Common Stock. The purchase price and number of shares are subject
to adjustment under certain conditions until the expiration date.
(1)Restricted security pursuant to Rule 144A. The value of the Fund's investment in
restricted securities was approximately $34,409,000, representing 5.3% of net assets.
(2)Non-income producing security.
</TABLE>
See Notes to Financial Statements.
74
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of May 31, 1994
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$628,047,683)(Note 1a) $651,697,953
Cash 207,283
Receivables:
Dividends $ 2,173,456
Capital shares sold 1,952,686
Interest 866,060 4,992,202
------------
Deferred organizational expenses (Note 1f) 43,526
Prepaid registration fees and other assets (Note 1f) 35,134
------------
Total assets 656,976,098
------------
Liabilities: Payables:
Securities purchased 3,249,594
Capital shares redeemed 2,400,685
Distributor (Note 2) 382,681
Investment adviser (Note 2) 345,715 6,378,675
------------
Accrued expenses and other liabilities 335,433
------------
Total liabilities 6,714,108
------------
Net Assets: Net assets $650,261,990
============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 582,057
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 4,569,754
Paid-in capital in excess of par 619,338,281
Undistributed investment income--net 3,230,076
Accumulated realized capital losses on investments and foreign
currency transactions--net (1,114,299)
Unrealized appreciation on investments and foreign currency
transactions--net 23,656,121
------------
Net assets . $650,261,990
============
Net Asset Class A--Based on net assets of $73,713,378 and 5,820,579 shares outstanding $ 12.66
Value: ============
Class B--Based on net assets of $576,548,612 and 45,697,537 shares outstanding $ 12.62
============
</TABLE>
See Notes to Financial Statements.
75
<PAGE>
Merrill Global Utility Fund, Inc., May 31, 1994
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended May 31, 1994
<S> <C> <C> <C>
Investment Dividends (net of $328,600 foreign withholding tax) $ 11,877,867
Income Interest and discount earned 2,765,008
(Notes 1d & 1e): ------------
Total income 14,642,875
------------
Expenses: Distribution fees--Class B (Note 2) $ 2,280,730
Investment advisory fees (Note 2) 2,068,015
Transfer agent fees--Class B (Note 2) 287,917
Custodian fees 251,758
Printing and shareholder reports 82,638
Registration fees (Note 1f) 59,576
Accounting services (Note 2) 57,404
Professional fees 34,008
Transfer agent fees--Class A (Note 2) 31,605
Directors' fees and expenses 11,364
Amortization of organization expenses (Note 1f) 9,526
Other 9,776
------------
Total expenses 5,184,317
------------
Investment income--net 9,458,558
------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net (1,198,293)
(Loss) on Foreign currency transactions--net 30,665 (1,167,628)
Investments and ------------
Foreign Currency Change in unrealized appreciation on:
Transactions--Net Investments--net (27,552,434)
(Notes 1b, 1e & 3): Foreign currency transactions--net 5,407 (27,547,027)
------------ ------------
Net realized and unrealized loss on investments and foreign
currency transactions (28,714,655)
------------
Net Decrease in Net Assets Resulting from Operations $(19,256,097)
------------
</TABLE>
See Notes to Financial Statements.
76
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six For the Year
Months Ended Ended
Increase (Decrease) in Net Assets: May 31, 1994 Nov. 30, 1993
<S> <C> <C> <C>
Operations: Investment income--net $ 9,458,558 $ 11,336,371
Realized gain (loss) on investments and foreign currency
transactions--net (1,167,628) 4,716,322
Change in unrealized appreciation on investments and foreign currency
transactions--net (27,547,027) 37,518,154
------------ ------------
Net increase (decrease) in net assets resulting from operations (19,256,097) 53,570,847
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (1,362,335) (1,417,410)
Shareholders Class B (7,918,856) (8,066,873)
(Note 1g): Realized gain on investments--net:
Class A (219,759) (33,059)
Class B (1,627,301) (223,915)
------------ ------------
Net decrease in net assets resulting from dividends and distributions
to shareholders (11,128,251) (9,741,257)
------------ ------------
Capital Share Net increase in net assets derived from capital share transactions 2,474,084 404,174,719
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (27,910,264) 448,004,309
Beginning of period 678,172,254 230,167,945
------------ ------------
End of period* $650,261,990 $678,172,254
============ ============
<FN>
*Undistributed investment income--net $ 3,230,076 $ 3,052,709
============ ============
</TABLE>
See Notes to Financial Statements.
77
<PAGE>
Merrill Global Utility Fund, Inc., May 31, 1994
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Class A
For the For the
Six Period
The following per share data and ratios have been derived Months Dec. 28,
from information provided in the financial statements. Ended For the Year 1990++ to
May 31, Ended November 30, Nov. 30,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.22 $ 11.23 $ 10.67 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .23 .40 .47 .49
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net (.53) 2.01 .57 .56
-------- -------- -------- --------
Total from investment operations (.30) 2.41 1.04 1.05
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.22) (.41) (.48) (.38)
Realized gain on investments--net (.04) (.01) -- --
-------- -------- -------- --------
Total dividends and distributions (.26) (.42) (.48) (.38)
-------- -------- -------- --------
Net asset value, end of period $ 12.66 $ 13.22 $ 11.23 $ 10.67
======== ======== ======== ========
Total Investment Based on net asset value per share (2.32%)+++ 21.80% 10.05% 10.83%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses .83%* .82% 1.01% 1.28%*
Net Assets: ======== ======== ======== ========
Investment income--net 3.42%* 3.57% 4.47% 5.57%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 73,713 $ 81,718 $ 29,772 $ 20,579
Data: ======== ======== ======== ========
Portfolio turnover 2.61% 8.92% 30.91% 20.51%
======== ======== ======== ========
<CAPTION>
Class B
For the For the
Six Period
The following per share data and ratios have been derived Months Dec. 28,
from information provided in the financial statements. Ended For the Year 1990++ to
May 31, Ended November 30, Nov. 30,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.17 $ 11.20 $ 10.65 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .18 .33 .39 .40
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net (.52) 1.98 .57 .58
-------- -------- -------- --------
Total from investment operations (.34) 2.31 .96 .98
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.17) (.33) (.41) (.33)
Realized gain on investments--net (.04) (.01) -- --
-------- -------- -------- --------
</TABLE>
78
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total dividends and distributions (.21) (.34) (.41) (.33)
-------- -------- -------- --------
Net asset value, end of period $ 12.62 $ 13.17 $ 11.20 $ 10.65
======== ======== ======== ========
Total Investment Based on net asset value per share (2.63%)+++ 20.86% 9.20% 10.05%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, excluding distribution fees .84%* .84% 1.02% 1.29%*
Net Assets: ======== ======== ======== ========
Expenses 1.59%* 1.59% 1.77% 2.04%*
======== ======== ======== ========
Investment income--net 2.65%* 2.81% 3.65% 4.78%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $576,549 $596,455 $200,396 $ 90,966
Data: ======== ======== ======== ========
Portfolio turnover 2.61% 8.92% 30.91% 20.51%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
79
<PAGE>
Merrill Global Utility Fund, Inc., May 31, 1994
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global Utility Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund offers both Class A and
Class B Shares. Class A Shares are sold with a front-end sales
charge. Class B Shares may be subject to a contingent deferred sales
charge. Both classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B Shares bear certain expenses related to the
distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. The
following is a summary of significant accounting policies followed
by the Fund.
(a) Valuation of Securities--Securities traded in the over-the-
counter market are valued at the last available bid price or yield
equivalents obtained from one or more dealers in the over-the-
counter market prior to the time of valuation. Portfolio securities
which are traded on stock exchanges are valued at the last sale
price on the principal market 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.
Options written are valued based upon the last asked price in the
case of exchange-traded options or, in the case of options traded in
the over-the-counter market, at the average of the last asked price
as obtained from one or more dealers. Options purchased by the Fund
are valued at their last bid price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter
market, at the average of the last bid price as obtained from two or
more dealers. Other investments, including futures contracts and
related options, are stated at market value.
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 Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund.
Short-term securities are valued at amortized cost, which
approximates market value.
(b) 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.
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.
(c) Options--When the Fund sells 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 market 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
received or paid (or gain or loss to the extent the cost of the
closing transaction is less than or exceeds the premiums paid or
received).
Written and purchased options are non-income producing investments.
(d) 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
80
<PAGE>
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends and capital
gains at various rates.
(e) 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. Dividend income is
recorded on the ex-dividend date, except that if the ex-dividend
date has passed, certain dividends from foreign securities are
recorded as soon as the Fund is informed of the ex-dividend date.
Realized gains and losses on security transactions are determined on
the identified cost basis.
(f) Deferred Organization Expenses and Prepaid Registration Fees--
Deferred organization expenses are charged to expense over a five-
year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(g) Dividends and Distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
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"). Effective January 1,
1994, the investment advisory business of MLAM was reorganized from
a corporation to a limited partnership. Both prior to and after the
reorganization, ultimate control of MLAM was vested with Merrill
Lynch & Co., Inc. ("ML & Co."). The general partner of MLAM is
Princeton Services, Inc., an indirect wholly-owned subsidiary of ML
& Co. The limited partners are ML & Co. and Merrill Lynch Investment
Management, Inc. ("MLIM"), which is also an indirect wholly-owned
subsidiary of ML & Co. The Fund has also entered into a Distribution
Agreement and a Distribution Plan with Merrill Lynch Funds Distri-
butor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary
of MLIM.
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 operation of the Fund. For such
services, the Fund pays a monthly fee of 0.60%, on an annual basis,
of the average daily value of the Fund's net assets. The most
restrictive annual expense limitation requires that the Investment
Adviser reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed 2.5% of the Fund's
first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of the average daily
net assets in excess thereof. MLAM's obligation to reimburse the
Fund is limited to the amount of the advisory fee. No fee payment
will be made to the Investment Adviser during any fiscal year which
will cause such expenses to exceed the most restrictive expense
limitation applicable at the time of such payment.
Pursuant to a distribution plan (the "Distribution Plan") adopted
by the Fund in accordance with Rule 12b-1 under the Investment Com-
pany Act of 1940, the Fund pays the Distributor an ongoing account
maintenance fee and distribution fee, which are accrued daily and
paid monthly at the annual rate of 0.25% and 0.50%, respectively,
of the average daily net assets of the Class B Shares of the Fund.
Pursuant to a subagreement with the Distributor, Merrill Lynch
provides account maintenance and distribution services to the Fund
with respect to Class B Shares. This fee is to compensate the
Distributor for the services it provides and the expenses borne by
the Distributor under the Distribution Agreement. As authorized by
the Plan, the Distributor has entered into an agreement with Merrill
Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), which provides for
the compensation of MLPF&S for providing distribution-related
services to the Fund. For the six months ended May 31, 1994, MLFD
earned $2,280,730 under the Plan, all of which was paid to MLPF&S
pursuant to the agreement.
81
<PAGE>
Merrill Global Utility Fund, Inc., May 31, 1994
NOTES TO FINANCIAL STATEMENTS (concluded)
For the six months ended May 31, 1994, MLFD earned underwriting
discounts of $16,858, and MLPF&S earned dealer concessions of
$283,874 on sales of Class A Shares. MLPF&S also received contin-
gent deferred sales charges of $567,791 relating to Class B
Share transactions and $16,044 in commissions on the execution
of portfolio security transactions for the Fund during the period.
During the period May 25, 1994 to May 31, 1994, the Fund paid
Merrill Lynch Security Pricing Service, an affiliate of MLPF&S, $585
for security price quotations to compute the Net Asset Value of the
Fund.
Financial Data Services, Inc. ("FDS"), 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 MLIM, MLPF&S, FDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended May 31, 1994 were $85,026,332 and
$15,926,570, respectively.
Net realized and unrealized gains (losses) as of May 31, 1994 were
as follows:
Realized
Gains Unrealized
(Losses) Gains
Long-term investments $(1,198,280) $23,650,270
Short-term investments (13) --
Foreign currency transactions 30,665 5,851
----------- -----------
Total $(1,167,628) $23,656,121
=========== ===========
As of May 31, 1994, net unrealized appreciation for Federal income
tax purposes aggregated $23,650,270, of which $63,422,050 related to
appreciated securities and $39,771,780 related to depreciated
securities. The aggregate cost of investments at May 31, 1994 for
Federal income tax purposes was $628,047,683.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $2,474,084 and $404,174,719 for the six months ended May 31,
1994 and the year ended November 30, 1993, respectively.
Transactions in capital shares for Class A and Class B Shares were
as follows:
Class A Shares for the Six Months Dollar
Ended May 31, 1994 Shares Amount
Shares sold 1,164,608 $ 15,436,072
Shares issued to shareholders in
reinvestment of dividends &
distributions to shareholders 94,663 1,224,287
------------ ------------
Total issued 1,259,271 16,660,359
Shares redeemed (1,619,653) (21,145,568)
------------ ------------
Net decrease (360,382) $ (4,485,209)
============ ============
Class A Shares for the Year Ended Dollar
November 30, 1993 Shares Amount
Shares sold 4,349,217 $ 56,997,490
Shares issued to shareholders in
reinvestment of dividends &
distributions to shareholders 85,983 1,081,152
------------ ------------
Total issued 4,435,200 58,078,642
Shares redeemed (905,090) (11,584,655)
------------ ------------
Net increase 3,530,110 $ 46,493,987
============ ============
Class B Shares for the Six Months Dollar
Ended May 31, 1994 Shares Amount
Shares sold 7,269,220 $ 96,031,158
Shares issued to shareholders in
reinvestment of dividends &
distributions to shareholders 594,022 7,672,819
------------ ------------
Total issued 7,863,242 103,703,977
Shares redeemed (7,451,029) (96,744,684)
------------ ------------
Net increase 412,213 $ 6,959,293
============ ============
Class B Shares for the Year Ended Dollar
November 30, 1993 Shares Amount
Shares sold 30,702,352 $399,813,619
Shares issued to shareholders in
reinvestment of dividends &
distributions to shareholders 501,195 6,292,835
------------ ------------
Total issued 31,203,547 406,106,454
Shares redeemed (3,809,433) (48,425,722)
------------ ------------
Net increase 27,394,114 $357,680,732
============ ============
5. Commitments:
At May 31, 1994, the Fund had entered into forward foreign exchange
contracts under which it agreed to purchase various currencies with
an approximate value of $3,250,000.
82
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Investment Objective and Policies................. 2
Portfolio Strategies Involving Options and
Futures....................................... 2
Other Investment Policies and Practices......... 7
Management of the Fund............................ 15
Directors and Officers.......................... 15
Management and Advisory Arrangements............ 16
Purchase of Shares................................ 18
Initial Sales Charge Alternatives--Class A and
Class D Shares................................ 18
Reduced Initial Sales Charges................... 19
Distribution Plans.............................. 23
Limitations on the Payment of Deferred Sales
Charges....................................... 23
Redemption of Shares.............................. 25
Deferred Sales Charge--Class B Shares........... 25
Portfolio Transactions and Brokerage.............. 26
Determination of Net Asset Value.................. 28
Shareholder Services.............................. 29
Investment Account.............................. 29
Automatic Investment Plans...................... 29
Automatic Reinvestment of Dividends and Capital
Gains Distributions........................... 30
Systematic Withdrawal Plans--Class A and Class
D Shares...................................... 30
Retirement Plans................................ 31
Exchange Privilege.............................. 31
Dividends, Distributions and Taxes................ 43
Dividends and Distributions..................... 43
Taxes........................................... 43
Tax Treatment of Options and Futures
Transactions.................................. 45
Performance Data.................................. 46
General Information............................... 48
Description of Shares........................... 48
Computation of Offering Price Per Share......... 49
Independent Auditors............................ 49
Custodian....................................... 49
Transfer Agent.................................. 49
Legal Counsel................................... 50
Reports to Shareholders......................... 50
Additional Information.......................... 50
Appendix.......................................... 51
Independent Auditors' Report...................... 58
Financial Statements (audited).................... 59
Financial Statements (unaudited).................. 69
</TABLE>
Code #11280-1094
[LOGO]
MERRILL LYNCH
GLOBAL UTILITY
FUND, INC.
[ART]
Statement of
Additional Information
October 21, 1994
Distributor:
Merrill Lynch Funds
Distributor, Inc.
<PAGE>
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.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
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
