<PAGE>
PROSPECTUS
- ----------
MARCH 29, 1994
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
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."
----------------
The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus a sales charge
which, at the election of the purchaser, may be imposed (i) at the time of
purchase (the "Class A shares"), or (ii) on a deferred basis (the "Class B
shares"). Class A shares are subject to an initial sales charge of up to 6.5%.
The deferred sales charges to which the Class B shares are subject shall
consist of a contingent deferred sales charge which may be imposed on
redemptions made within four years of purchase and an ongoing account
maintenance fee and distribution fee. Class A shares pay no ongoing fees;
Class B shares pay ongoing fees at an annual rate of 0.75% of the Fund's
average daily net assets attributable to the Class B shares, comprised of a
0.25% account maintenance fee for account maintenance services and a 0.50% fee
for distribution services. These alternatives permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and
other circumstances. Investors should understand that the purpose and function
of the deferred sales charges with respect to the Class B shares are the same
as those of the initial sales charge with respect to the Class A shares.
Investors should also understand that over time the deferred sales charges
related to Class B shares may exceed the initial sales charge with respect to
Class A shares. See "Alternative Sales Arrangements" on page 3.
Each Class A and Class B share represents identical interests in the
investment portfolio of the Fund and has the same rights, except that Class B
shares bear the expenses of the account maintenance fee and the distribution
fee and certain other costs resulting from the deferred sales charge
arrangement, which will cause Class B shares to have a higher expense ratio
and to pay lower dividends than those related to Class A shares, and that
Class B shares have exclusive voting rights with respect to the account
maintenance fee and the distribution fee. The two classes also have different
exchange privileges.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), 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 $250 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 March 29, 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 Class A shares and Class B shares follows.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE ALTERNATIVE
--------------- -----------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Pur-
chases (as a percentage of offering
price)............................... 6.50%(a) None
Sales Charge Imposed on Dividend Rein-
vestments............................ None None
Deferred Sales Charge (as a percentage None 4.0% during the
of original purchase price or first year,
redemption proceeds, whichever is decreasing 1.0%
lower)............................... annually to 0.0%
after the fourth
year(b)
Exchange Fee.......................... None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS) FOR
THE YEAR ENDED NOVEMBER 30, 1993:
Management Fees (c)................... 0.60% 0.60%
Rule 12b-1 Fees....................... None 0.75%(d)
Other Expenses
Custodian Fees...................... 0.02% 0.02%
Shareholder Servicing Costs (e)..... 0.07% 0.09%
Other............................... 0.13% 0.13%
------- --------
Total Other Expenses.............. 0.22% 0.24%
------- --------
Total Fund Operating Expenses....... 0.82% 1.59%
======= ========
</TABLE>
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(a) Reduced for purchases of $10,000 and over, decreasing to 0.75% for
purchases of $1,000,000 and over. Certain purchasers of Class A shares
investing $1,000,000 or more may, in lieu of a front-end sales load, be
assessed a deferred sales charge on redemptions within the first year of
such investment. See "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares"-page 25.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"-page 27.
(c) See "Management of the Fund--Management and Advisory Arrangements"-page
22.
(d) Includes both the 0.25% account maintenance fee and the 0.50% distribution
fee. See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares--Distribution Plan"-page 28.
(e) See "Management of the Fund--Transfer Agency Services"-page 23.
<TABLE>
<CAPTION>
CUMULATIVE
EXPENSES PAID
FOR THE PERIOD OF
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
An investor would pay the following expenses
on a $1,000 investment including, for Class A
shares, the maximum $65 front-end sales
charge and assuming (1) an operating expense
ratio of 0.82% for Class A shares and 1.59%
for Class B shares, (2) a 5% annual return
throughout the periods and (3) redemption at
the end of the period:
Class A.................................... $72.83 $89.48 $107.55 $159.76
Class B.................................... $56.17 $70.19 $ 86.56 $188.92
An investor would pay the following expenses
on the same $1,000 investment assuming no
redemption at the end of the period:
Class A.................................... $72.83 $89.48 $107.55 $159.76
Class B.................................... $16.17 $50.19 $ 86.56 $188.92
</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 regulations. The Example should
not be considered a representation of past or future expenses or annual rate
of return, and actual expenses or annual rate of return may be more or less
than those assumed for purposes of the Example. Class B shareholders who own
their shares for an extended period of time may pay more in account
maintenance and 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. 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."
2
<PAGE>
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "initial
sales charge alternative"), or (ii) on a deferred basis (the "deferred sales
charge alternative").
Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Although Class A shares incur a sales charge when they
are purchased, they enjoy the benefit of not being subject to any ongoing
account maintenance fee or distribution fee or, with the exception of certain
purchases for which initial sales charges may be waived, any sales charge when
they are redeemed. Certain purchases of Class A shares qualify for reduced
initial sales charges. See "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares."
Class B Shares. An investor who elects the deferred sales charge alternative
acquires Class B shares. Class B shares do not incur a sales charge when they
are purchased, but they are subject to ongoing account maintenance and
distribution fees and a sales charge if they are redeemed within four years of
purchase. Class B shares provide the benefit of permitting all of the
investor's dollars to work from the time the investment is made. The ongoing
account maintenance and distribution fees paid by Class B shares will cause
such shares to have a higher expense ratio and to pay lower dividends than
those related to Class A shares. Payment of the distribution fee is subject to
certain limitations set forth under "Purchase of Shares--Deferred Sales Charge
Alternative--Class B Shares."
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. See "Purchase of Shares--Initial Sales Charge Alternative--
Class A Shares." Moreover, shares acquired under the initial sales charge
alternative would not be subject to ongoing account maintenance and
distribution fees. However, because initial sales charges are deducted at the
time of purchase, such investors would not have all of their funds invested
initially. Investors not qualifying for reduced initial sales charges who
expect to maintain their investment for an extended period of time might also
elect the initial sales charge alternative because over time the accumulated
continuing account maintenance and distribution fees may exceed the initial
sales charge. Again, however, such investors must weigh this consideration
against the fact that not all of their funds will be invested initially.
Furthermore, the ongoing account maintenance and distribution fees will be
offset to the extent any return is realized on the additional funds initially
invested under the deferred sales charge alternative. However, there can be no
assurance as to the return, if any, which will be realized on such additional
funds. Certain other investors might determine it to be more advantageous to
have all their funds invested initially, although remaining subject to
continued account maintenance and distribution fees and, for a four-year period
of time, a contingent deferred sales charge.
The distribution expenses incurred by the Distributor and dealers (primarily
Merrill Lynch) in connection with the sale of the shares will be paid, in the
case of the Class A shares, from the proceeds of the initial sales charge and,
in the case of the Class B shares, from the proceeds of the ongoing
distribution fee and, if applicable, the contingent deferred sales charge
incurred on redemption within four years of purchase. Expenses incurred by the
Distributor and dealers (primarily Merrill Lynch) in connection with account
maintenance activities with respect to Class B shares will be paid from the
proceeds of the account maintenance fee. Sales personnel may receive different
compensation for selling Class A or Class B shares. Investors should understand
that the purpose and function of the deferred sales charges with respect to the
Class B shares are the same as those of the initial sales charge with respect
to the Class A shares. The account
3
<PAGE>
maintenance fees to which Class B shareholders are subject will be used to
compensate consultants and other personnel for providing personal services to
shareholders and to pay administration costs related to maintenance of
shareholder accounts.
Dividends paid by the Fund with respect to Class A and Class B 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 the
account maintenance and distribution fees and any incremental transfer agency
costs relating to Class B shares will be borne exclusively by that class. See
"Additional Information--Determination of Net Asset Value." Class A and Class B
shareholders of the Fund each have an exchange privilege for Class A and Class
B shares, respectively, with certain other mutual funds sponsored by Merrill
Lynch. Class A and Class B shareholders of the Fund also may exchange their
shares for shares of certain money market funds sponsored by Merrill Lynch. See
"Shareholder Services--Exchange Privilege."
The Directors of the Fund have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis,
the Directors of the Fund, pursuant to their fiduciary duties under the
Investment Company Act of 1940 and state laws, will seek to assure that no such
conflict arises.
THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE
METHOD OF PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF
THE PURCHASE, THE LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES
AND OTHER CIRCUMSTANCES. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR
PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES
CHARGE AND NOT BE SUBJECT TO ONGOING CHARGES, OR TO HAVE THE ENTIRE
PURCHASE PRICE INVESTED IN THE FUND WITH THE INVESTMENT THEREAFTER BEING
SUBJECT TO ONGOING CHARGES. TO ASSIST INVESTORS IN MAKING THIS
DETERMINATION, THE FEE TABLE ON PAGE 2 SETS FORTH THE CHARGES APPLICABLE
TO EACH CLASS OF SHARES AND A DISCUSSION OF FACTORS RELEVANT TO MAKING
SUCH DETERMINATION IS SET FORTH UNDER "PURCHASE OF SHARES--ALTERNATIVE
SALES ARRANGEMENTS" ON PAGE 24.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche, independent auditors. Financial statements for the year ended November
30, 1993 and the independent auditors' report thereon, are included in the
Statement of Additional Information.
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION
PROVIDED IN THE FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------ ------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR ENDED DEC. 28, FOR THE YEAR ENDED DEC. 28,
NOV. 30, 1990+ TO NOV. 30, 1990+ TO
-------------------- NOV. 30, -------------------- NOV. 30,
1993 1992 1991 1993 1992 1991
--------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value,
beginning of period.... $ 11.23 $ 10.67 $ 10.00 $ 11.20 $ 10.65 $ 10.00
--------- --------- ------- --------- --------- -------
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
RETURN:**
Based on net asset value
per share.............. 21.80% 10.05% 10.83%/++/ 20.86% 9.20% 10.05%/++/
========= ========= ======= ========= ========= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
distribution fees...... .82% 1.01% 1.28%* .84% 1.02% 1.29%*
========= ========= ======= ========= ========= =======
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 DATA:
Net assets, end of
period (in thousands).. $ 81,718 $ 29,772 $20,579 $ 596,455 $ 200,396 $90,966
========= ========= ======= ========= ========= =======
Portfolio turnover...... 8.92% 30.91% 20.51% 8.92% 30.91% 20.51%
========= ========= ======= ========= ========= =======
</TABLE>
- --------
* 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.
5
<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 trading volume,
resulting in a lack of liquidity and increased volatility in price for such
securities, as
6
<PAGE>
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 to hold Fund assets.
Therefore, the Fund or the Fund's custodian may need to seek an exemptive order
from the Securities and Exchange Commission prior to investing in such Eastern
European countries. There is no assurance that the Securities and Exchange
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.
7
<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. 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 Corporation
("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.
8
<PAGE>
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
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conservation, the effects of a 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
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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 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
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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
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
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("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 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.
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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 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
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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.
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.
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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 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
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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 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 Securities and Exchange Commission (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
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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.
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.
18
<PAGE>
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 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 of 1940,
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 National Association of Securities Dealers, Inc., 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
19
<PAGE>
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 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 and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements and purchase and sale contracts may be entered into only
with a member bank of the Federal Reserve System or primary dealer in U.S.
Government securities. Under such agreements, the bank or primary dealer
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; whereas, in the case of purchase and
sale contracts, the prices take into account accrued interest. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement; the
Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but 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. A purchase and sale contract differs from a repurchase
agreement in that the contract arrangements stipulate that the securities are
owned by the Fund. In the event of a default under such a repurchase agreement
or under a purchase and sale contract, 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 or purchase and sale contracts 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 of 1940. 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
20
<PAGE>
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 of 1940 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 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.
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 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.
21
<PAGE>
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of five individuals, four of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act of 1940. 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
of 1940.
The Directors of the Fund are:
Arthur Zeikel*--President and Chief Investment Officer of the Manager and
Fund Asset Management, L.P. ("FAM"); President and Director of Princeton
Services, Inc. since 1993; Executive Vice President of Merrill Lynch & Co.,
Inc., and Executive Vice President of Merrill Lynch since 1990 and Senior Vice
President thereof from 1985 to 1990; Director of Merrill Lynch Funds
Distributor, Inc.
Ronald W. Forbes--Professor of Finance, School of Business, State University
of New York at Albany.
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.
- --------
* Interested person, as defined in the Investment Company Act of 1940, of the
Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey
(mailing address: 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 a Delaware limited partnership and is owned
and controlled by Merrill Lynch & Co., Inc. ("ML & Co."), the parent of Merrill
Lynch. The Manager or its affiliate, FAM, acts as the manager for more than 90
other registered investment companies. The Manager also offers portfolio
management and portfolio analysis services to individuals and institutions. As
of February 28, 1994, the Manager and FAM had a total of approximately $164.4
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Manager.
ML & Co., Merrill Lynch Investment Management, Inc. and Princeton Services,
Inc. may be deemed "controlling persons" of the Manager as defined under the
Investment Company Act of 1940 because of their power to exercise a controlling
influence over its management policies.
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.
22
<PAGE>
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.
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 $7.00 per Class A shareholder account and $9.00 per Class B 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.
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.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), a subsidiary of
the Manager and an affiliate of Merrill Lynch, acts as the distributor of
Class A and Class B 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 that for retirement plans, the minimum
initial purchase is $250 and the minimum subsequent purchase is $1. Different
minimums may apply through the Merrill Lynch Blueprint SM Program. See
"Purchase of Shares--Reduced Initial Sales Charges--Class A Shares--Merrill
Lynch Blueprint SM Program" in the Statement of Additional Information.
23
<PAGE>
The Fund is offering its shares at a public offering price equal to the next
determined net asset value per share plus sales charges which, at the option of
the purchaser, may be imposed either at the time of purchase (the "initial
sales charge alternative") or on a deferred basis (the "deferred sales charge
alternative"), 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 order 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 determined as of 4:15 P.M., New York time, on the day the order is placed
with the Distributor, provided the order is received by the Distributor prior
to 4:30 P.M., New York time, on that day. If the purchase orders are not
received by the Distributor prior to 4:30 P.M., New York time, such orders
shall be deemed received on the next business day. Any order may be rejected by
the Distributor or the Fund. The Fund or the Distributor may suspend the
continuous offering of the Fund's shares to the general public at any time in
response to conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. 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 two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent an interest in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B shares bear the expenses of the account maintenance fee and distribution fee
and any expenses (including incremental transfer agency costs) resulting from
the deferred sales charge arrangement, and have exclusive voting rights with
respect to the Rule 12b-1 distribution plan pursuant to which the account
maintenance and distribution fees are paid. The two classes also have different
exchange privileges. See "Shareholder Services--Exchange Privilege." The net
income attributable to Class B shares and the dividends payable on Class B
shares will be reduced by the amount of the account maintenance and
distribution fees and incremental expenses associated with such account
maintenance and distribution fees; accordingly, the net asset value of the
Class B shares will be reduced by such amount to the extent the Fund has
undistributed net income. Sales personnel may receive different compensation
for selling Class A or Class B shares. Investors are advised that only Class A
shares may be available for purchase through securities dealers, other than
Merrill Lynch, which are eligible to sell shares.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the Fund permit an investor to choose
the method of purchasing shares that is most beneficial given the amount of his
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR
PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES
CHARGE AND NOT BE SUBJECT TO ONGOING CHARGES, AS DISCUSSED BELOW, OR TO HAVE
THE ENTIRE INITIAL PURCHASE PRICE INVESTED IN THE FUND WITH THE INVESTMENT
THEREAFTER BEING SUBJECT TO ONGOING ACCOUNT MAINTENANCE AND DISTRIBUTION FEES.
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Shares acquired under the initial sales
charge alternative would
24
<PAGE>
not be subject to an ongoing account maintenance fee and distribution fee as
described below. However, because initial sales charges are deducted at the
time of purchase, such investors would not have all their funds invested
initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the
deferred sales charge alternative. Another factor that may be applicable under
certain circumstances is that the payment of the Class B distribution fee and
contingent deferred sales charge is subject to certain limits as set forth
under "Deferred Sales Charge Alternative--Class B Shares."
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continued
account maintenance and distribution fees and, for a four-year period of time,
a contingent deferred sales charge as described below. For example, an investor
subject to the Class A 6.50% initial sales charge will have to hold his
investment at least 8 2/3 years for the aggregate 0.25% account maintenance fee
and the 0.50% distribution fee of the Class B shares to exceed the initial
sales charge of the Class A shares. This example does not take into account the
time value of money which further reduces the impact of the account maintenance
and distribution fees on the investment, fluctuations in the net asset value,
the effect of the return on the investment over this period of time or the
effect of any limits that may be imposed upon payment of the distribution fee
and the contingent deferred sales charge.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A 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 CHARGE AS DISCOUNT TO
SALES CHARGE PERCENTAGE* OF THE SELECTED DEALERS
AMOUNT AS PERCENTAGE OF NET AMOUNT AS PERCENTAGE OF
OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE
----------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
Less than $10,000....... 6.50% 6.95% 6.25%
$10,000 but less than
$25,000................ 6.00 6.38 5.75
$25,000 but less than
$50,000................ 5.00 5.26 4.75
$50,000 but less than
$100,000............... 4.00 4.17 3.75
$100,000 but less than
$250,000............... 3.00 3.09 2.75
$250,000 but less than
$1,000,000............. 2.00 2.04 1.80
$1,000,000 and over**... .75 .76 .65
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** Initial sales charges may be waived for shareholders purchasing $1 million
or more in a single transaction (other than an employer sponsored retirement or
savings plan, such as a tax qualified retirement plan under Section 401 of the
Internal Revenue Code of 1986, as amended (the "Code"), a deferred compensation
plan under Section 403(b) and Section 457 of the Code, other deferred
compensation arrangements, 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"), or a
25
<PAGE>
purchase by a TMASM Managed Trust, of Class A shares of the Fund. In addition,
purchases of Class A shares of the Fund made in connection with a single
investment of $1 million or more under the Mutual Fund Adviser Program will not
be subject to an initial sales charge. Purchases described in this paragraph
will be subject to a contingent deferred sales charge if the shares are
redeemed within one year after purchase at the following rates:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT OF PURCHASE
------------------ -------------------------
<S> <C>
$1 million up to $2.5 million...................... 1.00%
Over $2.5 million up to $3.5 million............... .60%
Over $3.5 million up to $5 million................. .40%
Over $5 million.................................... .25%
</TABLE>
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 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.
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Directors of the Fund, to directors or trustees of
certain other Merrill Lynch-sponsored investment companies, 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, to directors of ML & Co. and to employees of ML & Co. and
its subsidiaries. Class A shares are offered with reduced sales charges and, in
certain circumstances, at net asset value to participants in the Merrill Lynch
BlueprintSM Program. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value plus a reduced sales charge. A transaction of $1,000,000 or
more by a TMASM Managed Trust to purchase Class A shares of the Fund will not
be subject to an initial sales charge. Class A shares are offered at a net
asset value to certain Employer Sponsored Retirement or Savings Plans (as
defined above), provided such plans meet the required minimum number of
eligible employees or required amount of assets advised by the Manager or any
of its affiliates. Also, Class A shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies. Class
A shares of the Fund are also offered at net asset value to shareholders of
certain closed-end funds advised by the Manager or FAM who wish to reinvest the
net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund, provided certain conditions are met. No initial sales
charges are imposed upon Class A shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
Class A shares of the Fund are also 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,
provided certain conditions are met.
Class A shares are offered at net asset value, with a waiver of the front-end
sales charge, to participants in the Merrill Lynch Blueprint Program 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 to custodian
rollover assets from Eligible
26
<PAGE>
Retirement Plans (see definition below) whose Trustee and/or Plan Sponsor
offers the Merrill Lynch Directed IRA Rollover Program. Eligible Retirement
Plans include: (a) plans qualified under Section 401(k) of the Code, with a
salary reduction feature offering a menu of investments to plan participants,
provided such plan initially has 1,000 or more employees eligible to
participate in the plan (employees eligible to participate in retirement plans
of the same sponsoring employer or its affiliates may be aggregated); or (b)
tax qualified retirement plans within the meaning of Section 401(a) of the Code
or deferred compensation plans within the meaning of Section 403(b) of the
Code, provided the plan (i) initially invested $5 million or more in existing
plan assets in portfolios, mutual funds or trusts advised by MLAM or its
subsidiaries or (ii) has accumulated $5 million or more in existing plan assets
invested in mutual funds advised by MLAM or its subsidiaries, which charge a
front-end sales charge or contingent deferred sales charge (assets of
retirement plans with the same sponsor or an affiliated sponsor may be
aggregated).
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employer Sponsored Retirement or
Savings Plans, is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being 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 shares at the time of purchase from its own funds. The proceeds
of the contingent deferred sales charge and the ongoing distribution fee
discussed below are used to defray Merrill Lynch's expenses, including
compensating its financial consultants. The proceeds from the account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities.
Proceeds from the contingent deferred sales charge 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 shares, such as the payment of compensation to financial consultants
for selling Class B shares from its own funds. Payments of the distribution fee
by the Fund to the Distributor under the distribution plan described below also
may be used in whole or in part by the Distributor for this purpose. The
combination of the contingent deferred sales charge and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of purchase. 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 contingent deferred sales charge schedule if such schedule is higher
than the deferred sales charge schedule relating to the Class B shares acquired
as a result of the exchange.
Contingent Deferred Sales Charge. Class B shares which are redeemed within
four years of purchase may be subject to a contingent deferred sales charge 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
current market value or the cost of the shares being redeemed. Accordingly, no
contingent deferred sales charge will be imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
27
<PAGE>
The following table sets forth the rates of the contingent deferred sales
charge:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------ -------------------
<S> <C>
0-1.................................. 4.0%
1-2.................................. 3.0%
2-3.................................. 2.0%
3-4.................................. 1.0%
4 and thereafter..................... None
</TABLE>
In determining whether a contingent deferred sales charge 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 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 charge because of dividend reinvestment. With
respect to the remaining 40 shares, the charge 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 contingent deferred sales charge is waived on redemptions of shares in
connection with certain post-retirement withdrawals from an IRA or other
retirement plan or following the death or disability (as defined in the
Internal Revenue Code) of a shareholder. The contingent deferred sales charge
is waived on redemptions of shares in connection with certain group plans
placing orders through the Merrill Lynch Blueprint SM Program and on
redemption of shares by certain eligible 401(a) and eligible 401(k) plans. The
contingent deferred sales charge is also waived for any Class B shares which
are purchased by an eligible 401(k) or eligible 401(a) plan and are rolled
over into a Merrill Lynch or Merrill Lynch Trust Company custodied Individual
Retirement Account and held in such account at the time of redemption.
Additional information concerning the waiver of the contingent deferred sales
charge is set forth in the Statement of Additional Information.
Distribution Plan. Pursuant to a distribution plan adopted by the Fund
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"Distribution Plan"), 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 sub-
agreement with the Distributor, Merrill Lynch provides account maintenance and
distribution services to the Fund with respect to Class B shares. The ongoing
account maintenance fee compensates the Distributor and Merrill Lynch for
providing account maintenance services to Class B shareholders. Account
maintenance fees will be used to compensate financial consultants and other
personnel for providing personal service to shareholders and to pay
administrative costs related to the maintenance of the shareholder
28
<PAGE>
accounts. The ongoing distribution fee compensates the Distributor and Merrill
Lynch for providing shareholder and distribution services and bearing certain
distribution-related expenses of the Fund, including payments to financial
consultants for selling Class B shares of the Fund. 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 payable and the services provided under
the Prior Plan are identical to the aggregate fee rate payable and the services
provided under the 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 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 Distribution Plan is designed to permit
an investor to purchase Class B shares through dealers without the assessment
of a front-end sales load and at the same time permit the dealer to compensate
its financial consultants in connection with the sale of the Class B shares. In
this regard, the purpose and function of the ongoing account maintenance and
distribution fees and the contingent deferred sales charge are the same as
those of the initial sales charge with respect to the Class A shares of the
Fund in that the deferred sales charges provide for the financing of the
distribution of the Fund's Class B shares.
The payments under the Distribution Plan are based upon a percentage of
average daily net assets regardless of the amount of expenses incurred and,
accordingly, distribution-related revenues 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 Distribution Plan. 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 distribution fees, the contingent deferred sales charges 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 contingent
deferred sales charges 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).
As of November 30, 1993, direct cash expenses for the period since commencement
of operations exceeded direct cash revenues by $2,597,731 (0.44% of net assets
at that date).
The Fund has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch in connection with the Class B
shares, and there is no assurance that the Board of Directors of the Fund will
approve the continuance of the Distribution Plan from year to year. However,
the Distributor intends to seek annual continuation of the Distribution Plan.
In their review of the Distribution Plan, the Directors will not be asked to
take into consideration expenses incurred in connection with the distribution
of Class A shares or of shares of other funds for which the Distributor acts as
distributor. The distribution fee and the contingent deferred sales charge in
the case of Class B shares will not be used to subsidize the sale of Class A
shares.
29
<PAGE>
LIMITATIONS ON THE PAYMENT OF 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 Fund's distribution fee and the
contingent deferred sales charge, but not the account maintenance fee. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and contingent deferred sales charges payable by the
Fund to (1) 6.25% of eligible gross sales of Class B shares (defined to
exclude shares issued pursuant to dividend reinvestment and exchanges) plus
(2) interest on the unpaid balance 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 contingent deferred sales charge). 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") 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 and any contingent deferred sales charges 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 November 30,
1993 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 operations) to November 30, 1993.
DATA CALCULATED AS OF NOVEMBER 30, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ----------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule As
Adopted................ $522,227 $32,639 $2,106 $34,745 $3,687 $31,058 $2,982
Under Distributor's
Voluntary Waiver....... $522,227 $32,639 $2,611 $35,250 $3,687 $31,563 $2,982
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since December 28, 1990
(commencement of operations) 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 contingent deferred sales charge payments, distribution fee
payments and accruals.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any contingent deferred sales
charge 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.
30
<PAGE>
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional 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 contingent deferred sales charge
which may be applicable to Class B shares, 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 Operations Department, 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 Operations
Department, 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 also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the close of business on the
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 contingent
deferred sales charge in the case of Class B shares).
31
<PAGE>
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 directly through the Fund's 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 SHARES
Shareholders who have redeemed their Class A shares have a one-time privilege
to reinstate their accounts by purchasing Class A shares 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
shareholder only the first time such shareholder makes a redemption.
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, 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 monthly statements
from the Transfer Agent showing any reinvestments of dividends and capital
gains distributions and any other activity in the account since the preceding
statement. Shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and 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 may
also 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
shares from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the Class A shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A 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 shares. Shareholders
interested in transferring their Class B 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.
Shareholders considering transferring a tax-deferred retirement account such as
an individual retirement account from Merrill Lynch
32
<PAGE>
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 contingent deferred sales charge) 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 the Fund each have an exchange privilege
with certain other mutual funds sponsored by Merrill Lynch. 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 Securities and Exchange Commission. Class A
shareholders of the Fund may exchange their shares ("outstanding Class A
shares") on the basis of relative net asset value per Class A share, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the outstanding Class A shares and the sales charge payable at the time
of the exchange on the new Class A shares. The Fund's exchange privilege is
modified with respect to purchases of Class A shares under the Merrill Lynch
Mutual Fund Adviser Program. First, the initial allocation of assets is made
under the program. Then, any subsequent exchange under the program of Class A
shares of a fund for Class A 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 fund and the sales charge
payable on the shares of the Fund being acquired in the exchange under this
program.
Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the outstanding Class B shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's contingent
deferred sales charge schedule relating to the new Class B shares if such
schedule is higher than the contingent deferred sales charge schedule of the
fund into which the exchange has been made. In addition, Class B shares of the
Fund acquired through use of the exchange privilege will continue to be subject
to the contingent deferred sales charge schedule relating to the Class B shares
of the fund from which the exchange has been made if such schedule is higher
than the Fund's contingent deferred sales charge schedule. For purposes of
computing the contingent deferred sales charge that may be payable upon a
disposition of the new Class B shares, the period of time that the outstanding
Class B shares were held will count toward satisfaction of the holding period
of the new Class B shares. Class A and Class B shareholders of the Fund may
also exchange their shares for shares of certain money market funds, but in the
case of an exchange from Class B shares the period of time that shares are held
in a money market fund will not count toward satisfaction of the holding period
requirement for purposes of reducing the contingent deferred sales charge.
Exercise of the exchange privilege is treated as a sale for Federal income tax
purposes. The exchange privilege is available only in states where the exchange
legally may be made. For further information, see "Shareholder Services--
Exchange Privilege" in the Statement of Additional Information.
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.
No contingent deferred
33
<PAGE>
sales charge will be imposed upon redemption of shares issued as a result of
the automatic reinvestment of dividends or capital gains distributions.
Systematic Withdrawal and Automatic Investment Plans. A Class A shareholder
may elect to receive systematic withdrawal checks 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 shareholder whose shares are held within
a CMA/R/, CBA/R/ 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. Regular additions
of both Class A and Class B 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/R/ accounts may arrange to have periodic
investments made in the Fund in their CMA account or in certain related
accounts in amounts of $250 or more through the CMA Automated Investment
Program. The Automated Investment Program is not available to shareholders
whose shares are held in a brokerage account with Merrill Lynch (other than a
CMA/R/ account).
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 $250
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 and Class B 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 the maximum initial sales charge in the case of Class A shares and
the contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares. Dividends paid by the Fund with respect to Class A and Class B
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 distribution charges and any incremental transfer agency costs relating to
Class B shares will be borne exclusively by that class. The Fund will include
performance data for both Class A and Class B 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
34
<PAGE>
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 reduced sales charges in the case of Class A shares or waiver of
the contingent deferred sales charge in the case of Class B shares (such as
investors in certain retirement plans), performance data may take into account
the reduced, and not the maximum, sales charge or may not take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or waiver of the contingent deferred
sales charge, 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.
The Fund's annual report contains additional performance information and is
available upon request, without charge.
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 Class B shares will be lower than the per share dividends and
distributions on Class A shares as a result of the account maintenance,
distribution and higher transfer agency fees applicable to the Class B shares.
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
35
<PAGE>
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.
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 per share is determined once daily as of 4:15 P.M., New York
time, on each day during which the New York Stock Exchange is open for trading.
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 the account maintenance and
distribution fee payable to the Distributor, are accrued daily. The per share
net asset value of the Class B 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 transfer agency fees
applicable with respect to the Class B shares. It is expected, however, that
the per share net asset value of the two 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 between the
classes.
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
36
<PAGE>
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.
TAXES
The Fund intends to continue to elect 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. 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 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 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."
37
<PAGE>
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.
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 reportable dividends, capital gains distributions 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 he is not
otherwise subject to backup withholding.
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.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on September 26, 1990. It has an
authorized capital of 200,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A and Class B Common Stock,
each of which consists of 100,000,000 shares. Both Class A and Class B Common
Stock represent an interest in the same assets of the Fund and are identical in
all respects except that the Class B shares bear certain expenses related to
the account maintenance and distribution of such
38
<PAGE>
shares and have exclusive voting rights with respect to matters relating to
such account maintenance and distribution expenditures. See "Purchase of
Shares." The Fund has received an order from the Commission permitting the
issuance and sale of two 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. The creation of additional classes would
require an additional order from the Commission. There is no assurance that
such an additional order would be issued.
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 of 1940 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, expenses related to the
account maintenance and distribution of the shares of a class will be borne
solely by such class. Shares issued are fully-paid and non-assessable by the
Fund.
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.
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: Document Evaluation Unit
P.O. Box 45209
Jacksonville, Florida 32232-5290
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.
39
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
40
<PAGE>
MERRILL LYNCH GLOBAL UTILITY FUND, INC.--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
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 ......... Class A shares or
......... Class B shares (choose one) of Merrill Lynch Global Utility Fund,
Inc. and establish an Investment Account as described in the Prospectus.
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) (Subsequent
investments $50 or more). 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:
1. ................................. 4. .................................
2. ................................. 5. .................................
3. ................................. 6. .................................
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with
respect to dividends and distributions are elected:
Distribution Options
Elect [_] reinvest Elect [_] reinvest
dividends capital gains
One[_] pay dividends One[_] pay capital
in cash gains in cash
If no election is made, dividends and capital gains will be reinvested
------------------
automatically at net asset value without a sales charge.
- -------------
(Please Print) [_][_][_][_][_][_][_][_][_]
Name ................................................... Social Security
First Name Initial Last Name No. or Taxpayer
Identification
Name of Co-Owner (if any) .............................. No.
First Name Initial Last Name
Address ................................................ ......., 19..
Date
...................................................
(Zip Code)
.....................
Occupation................. Name and Address of Employer .....................
.....................
.....................
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I
am not subject to backup withholding (as discussed under "Additional
Information--Taxes" in the Prospectus) 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.
SIGNATURE OF OWNER ............ SIGNATURE OF CO-OWNER (IF ANY) ..........
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- -------------------------------------------------------------------------------
2. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
...... 19. . . . . .
DATE OF INITIAL PURCHASE
Gentlemen:
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 the Merrill Lynch
Funds Distributor, Inc. acts as a distributor over the next 13-month period
which will equal or exceed:
[_] $10,000 [_] $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 Fund prospectus.
I agree to the terms and conditions of the 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.
By .................................. .....................................
Signature of Owner Signature
(If registered in joint names, both
must sign)
In making purchases under this letter,the following are the related accounts
on which reduced offering prices are to apply:
(1) Name ............................ (2) Name ............................
41
<PAGE>
MERRILL LYNCH GLOBAL UTILITY FUND, INC.--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS
IN THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of shares in Merrill Lynch Global Utility Fund, Inc., at cost or
current offering price.
Begin systematic withdrawal on ......., 19.. .
Withdrawals to be made either (check one)
[_] Monthly [_] Quarterly.
Quarterly withdrawals are made on the 24th day of
March, June, September and December.
Specify withdrawal amount (check one): [_] $....... or [_] .......% of the
current value of Class A shares in the account
Specify withdrawal method: [_] check or [_] direct deposit to bank account
(CHECK ONE AND COMPLETE PART (A) OR (B) BELOW):
(B) I HEREBY AUTHORIZE PAYMENT BY
(A) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT and
CHECK (if necessary) debit entries and
adjustments for any credit entries
made in error to my account
Draw checks payable
(check one) Specify type of account (check one):
[_] as indicated in item 1. [_] checking [_]savings
[_] to the order of ............. I agree that this authorization will
remain in effect until I provide
written notification to Financial
Data Services, Inc. amending or
terminating this service.
Mail to (check one)
[_] the address indicated in
item 1.
[_] Name (Please Print) ......... Name on your Account ................
Bank ................................
Bank #.............. Account # ......
Address ...........................
Bank Address ........................
Signature of Owner ................ Signature of Depositor ... Date .....
Signature of Depositor (if joint
Signature of Co-Owner (if any) .... account) ............................
Note: If Automatic Direct Deposit is
elected, your blank, unsigned check
marked "VOID" or a deposit slip from
your savings account should
accompany this Application.
- -------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account described below
each month to purchase ....... Class A shares or ....... Class B shares
(choose one) of Merrill Lynch Global Utility Fund, Inc., subject to the terms
set forth below.
AUTHORIZATION TO HONOR CHECKS OR ACH
FINANCIAL DATA SERVICES, INC. DEBITS DRAWN BY FINANCIAL DATA
SERVICES, INC.
You are hereby authorized to draw
checks or an ACH debit each month
on my bank account for investment To ..............................Bank
in Merrill Lynch Global Utility (Investor's Bank)
Fund, Inc., as described below: Bank Address ........................
Amount of each check or ACH City ..... State ..... Zip Code.....
debit $ .......................
Account No. ................. As a convenience to me, I hereby
request and authorize you to pay and
Please date and invest charge to my account checks or ACH
checks or draw ACH debits on debits drawn on my account by and
the 20th of each month payable to Financial Data Services,
beginning ................... Inc., Transfer Agency Mutual Fund
Operations, Jacksonville, Florida
(Month) 32232-5289. I agree that your rights
or as soon thereafter as possible. in respect to each such check or
debit shall be the same as if it
I agree that you are preparing were a check drawn on you and signed
these checks or drawing these personally by me. This authority is
debits voluntarily at my request to remain in effect until revoked by
and that you shall not be liable me in writing. Until you receive
for any loss arising from any such notice, you shall be fully
delay in preparing or failure to protected in honoring any such check
prepare any such check or debit. or debit. I further agree that if
If I change banks or desire to any such check or debit be
terminate or suspend this program, dishonored, whether with or without
I agree to notify you promptly in cause and whether intentionally or
writing. inadvertently, you shall be under no
I further agree that if a check liability.
or debit is not honored upon
presentation, Financial Data
Services, Inc. is authorized to
discontinue immediately the .......... .......................
Automatic Investment Plan and to Date Signature of Depositor
liquidate sufficient shares held .......... .......................
in my account to offset the Bank Signature of Depositor
purchase made with the returned Account (If joint account,
check or dishonored debit. Number both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN
........ IS ELECTED, YOUR BLANK, UNSIGNED
........ ...................... CHECK MARKED "VOID" SHOULD ACCOMPANY
Date Signature of Depositor THIS APPLICATION.
......................
Signature of Depositor
(If joint account, both
must sign)
- -------------------------------------------------------------------------------
We hereby authorize Merrill Lynch
5. FOR DEALER ONLY Funds Distributor, Inc. to act as
Branch Office, Address, Stamp 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
This form when completed should be By ..................................
mailed to: Authorized Signature of Dealer
Merrill Lynch Global Utility Fund, [_][_][_] [_][_][_][_]
Inc. c/o Financial Data Services, ..........
Inc. Transfer Agency Operations Branch-Code F/C No. F/C Last
Department P.O. Box 45290, Name
Jacksonville, Florida 32232-5290
[_][_][_] [_][_][_][_][_]
Dealer's Customer A/C No.
42
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN
The Chase Manhattan Bank, N.A.
1 Chase Manhattan Plaza
New York, New York 10005
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Operations Department
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche
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 REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE STATEMENT OF
ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPEC-
TUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEENAUTHORIZED BY THE FUND, THE MANAGER, OR THE DIS-
TRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE ANOFFERING IN ANY STATE IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Alternative Sales Arrangements............................................. 3
Financial Highlights....................................................... 5
Special and Risk Considerations............................................ 6
Investment Objective and Policies.......................................... 8
Management of the Fund..................................................... 22
Purchase of Shares......................................................... 23
Alternative Sales Arrangements............................................ 24
Initial Sales Charge Alternative--
Class A Shares.......................................................... 25
Deferred Sales Charge Alternative--Class B Shares......................... 27
Limitations on the Payment of Sales Charges............................... 30
Redemption of Shares....................................................... 31
Redemption................................................................ 31
Repurchase................................................................ 31
Reinstatement Privilege--Class A Shares................................... 32
Shareholder Services....................................................... 32
Performance Data........................................................... 34
Additional Information..................................................... 35
Dividends and Distributions............................................... 35
Determination of Net Asset Value.......................................... 36
Taxes..................................................................... 37
Organization of the Fund.................................................. 38
Shareholder Inquiries..................................................... 39
Shareholder Reports....................................................... 39
Authorization Form......................................................... 41
</TABLE>
Code #11281
PROSPECTUS
(ART)
- --------------------------------------------------------------------------------
MERRILL LYNCH
GLOBAL UTILITY
FUND, INC.
March 29, 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.
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.
The Fund offers two classes of shares which may be purchased at a price equal
to the next determined net asset value per share, plus a sales charge which, at
the election of the purchaser, may be imposed (i) at the time of purchase (the
"Class A shares"), or (ii) on a deferred basis (the "Class B shares"). These
alternatives permit an investor to choose the method of purchasing shares that
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other circumstances. Investors should
understand that the purpose and function of the deferred sales charges with
respect to the Class B shares are the same as those of the initial sales charge
with respect to the Class A shares. Each Class A share and Class B share
represents identical interests in the investment portfolio of the Fund and has
the same rights, except that Class B shares bear the expenses of the account
maintenance fee and the distribution fee and certain other costs resulting from
the deferred sales charge arrangement and have exclusive voting rights with
respect to the distribution fee. The two classes also have different exchange
privileges.
----------------
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 March 29,
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 MARCH 29, 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. 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.
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.
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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
limiting the Fund's risk of loss through a decline in the market value of the
security until the put
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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 of
1940 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 of 1940 prohibits an open-end investment company
such as the Fund from issuing a "senior security" other than a borrowing from a
bank.
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The staff of the Commission has in the past indicated that a futures contract
may be a "senior security" under the Investment Company Act of 1940.
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 United States dollars of an investment in a yen denominated security.
In such
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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.
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
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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 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.
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Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements and purchase and sale contracts may be entered into only
with a member bank of the Federal Reserve System or primary dealer in United
States Government securities. Under such agreements, the bank or primary dealer
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; whereas, in the case of
purchase and sale contracts, the prices take into account accrued interest.
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;
the Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but constitute only collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return the rate of return to the Fund 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 on purchase and
sale contracts maturing in more than seven days. While the substance of
purchase and sale contracts is similar to repurchase agreements, because of the
different treatment with respect to accrued interest and additional collateral,
management believes that purchase and sale contracts are not repurchase
agreements as such term is understood in the banking and brokerage community.
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.
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
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& Poor's Corporation ("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."
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 of 1940 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:
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
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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.
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.
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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.
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.
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<PAGE>
Portfolio securities of the Fund generally may not be purchased from, sold or
loaned to the Manager or its affiliates or any of their directors, officers or
employees, acting as principal, unless pursuant to a rule or exemptive order
under the Investment Company Act of 1940.
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 of 1940 involving only usual and customary
commissions or transactions pursuant to an exemptive order under the Investment
Company Act of 1940. 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.
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 Box
9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel--President and Director(1)(2)--President of the Manager since
1977 and Chief Investment Officer thereof since 1976; President and Chief
Investment Officer of Fund Asset Management, L.P. ("FAM") 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, and Associate
Professor prior thereto. Member, Task Force on Municipal Securities Markets,
Twentieth Century Fund.
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.
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<PAGE>
Richard R. West--Director(2)--New York University Leonard N. Stern School, 44
West Fourth Street, Suite 11-160,, New York, New York 10012-1126. Professor of
Finance, and Dean from 1984 to 1993, of New York University Leonard N. Stern
School of Business Administration; Professor of Finance at the Amos Tuck School
of Business Administration from 1976 to 1984 and Dean from 1976 to 1983;
Director of Bowne & Co., Inc., Director of Vornado, Inc. (real estate 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.
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 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 1940, 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 the date of this Statement of Additional Information, the officers and
Directors of the Fund as a group (11 persons) owned an aggregate of less than
1/4 of 1% of the outstanding shares of Common Stock of Merrill Lynch & Co.,
Inc.
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., 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. ML
& Co., Merrill Lynch Investment Management, Inc. and Princeton Services may be
deemed "controlling persons" of the Manager as defined under the Investment
Company Act of 1940 because of their power to exercise a controlling influence
over its management policies.
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<PAGE>
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.
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 shares of the
Fund. Certain expenses in connection with the distribution of Class B shares
will be financed by the Fund pursuant to the Distribution Plan in compliance
with Rule 12b-1 under the Investment Company Act of 1940. See "Purchase of
Shares--Deferred Sales Charge Alternative--Class B Shares."
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<PAGE>
Duration and Termination. Unless earlier terminated as described below, 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 1940) 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.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects except that Class
B shares bear the expenses of the deferred sales arrangements and any expenses
(including incremental transfer agency costs) resulting from such sales
arrangements, and have exclusive voting rights with respect to the Rule 12b-1
distribution plan pursuant to which the account maintenance and distribution
fees are paid. The two classes also have different exchange privileges. See
"Shareholder Services--Exchange Privilege."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of Class A and Class B
shares of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of the Class A and Class B 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 ALTERNATIVE--CLASS A SHARES
The Fund commenced the public offering of its Class A shares on December 28,
1990. 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.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A 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
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<PAGE>
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 of 1940, 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 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--CLASS A SHARES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Class
A shares of the Fund at the offering price applicable to the total of (a) the
dollar amount 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 the Class A shares and Class B shares of the Fund and of any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor. 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.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $10,000 or more of the Class A shares of the Fund or any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor made within a thirteen-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 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 shares of the Fund and of other investment companies with an initial
sales charge or a deferred sales charge for which the Distributor acts as the
distributor 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 $10,000), 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 shares purchased at the
reduced rate and the sales charge applicable to the shares actually purchased
through the Letter. Class A shares equal to at least five percent of the
intended amount will be held in escrow during the thirteen-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
16
<PAGE>
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 Merrill Lynch
Government Fund, Merrill Lynch Treasury Fund, Merrill Lynch Institutional Fund,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund,
Merrill Lynch U.S.A. Government Reserves or Merrill Lynch U.S. Treasury Money
Fund into the Fund that creates a sales charge will count toward completing a
new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint/SM/ Program. Class A shares of the Fund are offered to
participants in the Merrill Lynch Blueprint/SM/ Program ("Blueprint"). Blueprint
is directed to small investors, group IRAs and participants in certain affinity
groups such as credit unions and trade associations. Investors placing orders
to purchase Class A shares of the Fund through Blueprint will acquire the Class
A shares at net asset value plus a sales charge calculated in accordance with
the Blueprint sales charge schedule (i.e., up to $300 at 5.5%, $300.01 up to
$5,000 at 4.5% plus $3, and $5,000.01 or more at the standard sales charge
rates disclosed in the Prospectus). In addition, Class A 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 shares through
Blueprint. Services, including the exchange privilege, available to Class A
investors through Blueprint, however, may differ from those available to other
investors in Class A shares. Orders for purchases and redemptions of Class A
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 shares are offered at net asset value, with a waiver of the front-end
sales charge, 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 to custodian rollover assets from Eligible
Retirement Plans (see definition below) whose Trustee and/or Plan Sponsor
offers the Merrill Lynch Directed IRA Rollover Program. Eligible Retirement
Plans include: (a) plans qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code") with a salary reduction feature offering
a menu of investments to plan participants, provided such plan initially has
1,000 or more employees eligible to participate in the plan (employees eligible
to participate in retirement plans of the same sponsoring employer or its
affiliates may be aggregated); or (b) tax qualified retirement plans within the
meaning of Section 401(a) of the Code or deferred compensation plans within the
meaning of Section 403(b) of the Code, provided the plan (i) initially invested
$5 million or more in existing plan assets in portfolios, mutual funds or
trusts advised by MLAM or its subsidiaries or (ii) has accumulated $5 million
or more in existing plan assets invested in mutual funds advised by MLAM or its
subsidiaries, which charge a front-end sales charge or contingent deferred
sales charge (assets of retirement plans with the same sponsor or an affiliated
sponsor may be aggregated). Additional information concerning purchases from
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 08980-0441.
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<PAGE>
Employer Sponsored Retirement and Savings Plans. Class A 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 Sections 403(b) and 457 of the Code, other
deferred compensation arrangements, 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 $5 million or more in existing plan
assets initially invested in portfolios, mutual funds or trusts advised by the
Manager either directly or through an affiliate. Class A shares may also be
offered at net asset value to Employer Sponsored Retirement or Savings Plans,
provided the plan has accumulated $5 million or more in existing plan assets
invested in mutual funds advised by the Manager charging a front-end sales
charge or contingent deferred sales charge. Assets of Employer Sponsored
Retirement or Savings Plans sponsored by the same sponsor or an affiliated
sponsor may be aggregated. The Class A share reduced load breakpoints also
apply to these aggregated assets. Class A shares may be offered at net asset
value to multiple plans sponsored by the same sponsor or an affiliated sponsor
provided that the addition of one or more of the multiple plans results in
aggregate assets of $5 million or more invested in portfolios, mutual funds or
trusts advised by the Manager either directly or through an affiliate.
Employer Sponsored Retirement or Savings Plans are also offered Class A shares
at net asset value, provided such plan initially has 1,000 or more employees
eligible to participate in the plan. 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 at net asset value has the option of
purchasing Class A shares at the sales charge schedule disclosed in the
Prospectus, or if the Employer Sponsored Retirement or Savings Plan is a
qualified retirement plan and meets the specified requirements, then it may
purchase Class B shares with a waiver of the contingent deferred sales charge
upon redemption. 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, directors and
trustees of certain other Merrill Lynch-sponsored investment companies,
directors of ML & Co., employees of ML & Co. and its subsidiaries, 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 A 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 purchase Class A shares of
the Fund with proceeds from a redemption of shares of a mutual fund that was
sponsored by the financial consultant's previous firm and imposed a sales
charge either
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<PAGE>
at the time of purchase or on a deferred basis. Second, such redemption must
have been made within 60 days prior to the investment in the Fund, and the
proceeds from the redemption must have been maintained in the interim in cash
or a money market fund.
Class A shares of the Fund are also 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 A shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund
imposed a sales charge either at the time of purchase or on a deferred basis.
Second, such purchase of Class A shares must be made within 90 days after
notice.
Closed-End Fund Option. Class A shares of the Fund and certain other mutual
funds advised by the Manager or FAM (the "Eligible Class A shares") are
offered at net asset value to shareholders of certain closed-end funds advised
by the Manager or FAM who 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. 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 shares. Second, the closed-end
fund shares must have either 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. (formerly known as Merrill Lynch
Prime 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 A shares may be reduced to the net asset value per Class A 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.
TMA /SM/ Managed Trusts. Class A shares are also offered to TMA /SM/ Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value plus a reduced sales charge of .75% of the
offering price, which is .76% of the net amount invested.
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DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Distribution Plan. Reference is made to "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares--Distribution Plan" in the Prospectus for
certain information with respect to the Distribution Plan of the Fund (the
"Distribution Plan").
The payment of the distribution fee and account maintenance fee is subject to
the provisions of Rule 12b-1 under the Investment Company Act of 1940. Among
other things, the Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and distribution fees paid to the Distributor. In
their consideration of the 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 Class B shareholders. The 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 of 1940 (the "Independent
Directors"), shall be committed to the discretion of the Independent Directors
then in office. In approving the Distribution Plan in accordance with Rule 12b-
1, the Independent Directors concluded that there is reasonable likelihood that
the Distribution Plan will benefit the Fund and its Class B shareholders. The
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 Class B voting securities of the Fund. The
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without Class B shareholder approval, 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 the Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Fund preserve copies of the
Distribution Plan and any report made pursuant to such plan for a period of not
less than six years from the date of the 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 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.
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 Securities and Exchange 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.
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CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Alternative Sale
Arrangements--Deferred Sales Charge Alternative--Class B Shares," while Class
B shares redeemed within four years of purchase are subject to a contingent
deferred sales charge under most circumstances, the charge is waived on
redemptions of Class B shares in connection with certain post-retirement
withdrawals from an Individual Retirement Account ("IRA") or other retirement
plan or 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 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
contingent deferred sales charges 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 the Merrill Lynch Blueprint /SM/ Program ("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 contingent deferred sales charge 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
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. Any Employer Sponsored
Retirement or Savings Plan which does not meet the above-described
qualifications to purchase Class A shares at net asset value has the option of
purchasing Class A shares at the sales charge schedule disclosed in the
Prospectus, or if the Employer Sponsored Retirement or Savings Plan meets the
following requirements, then it may purchase Class B shares with a waiver of
the contingent deferred sales charge upon redemption. The contingent deferred
sales charge is waived for any Eligible 401(k) Plan redeeming Class B shares.
The contingent deferred sales charge is also waived for redemptions from
401(a) plans qualified under the Code, provided however, such plan has the
same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing MLAM or FAM-advised mutual fund Class B shares ("Eligible 401(a)
Plan"). The contingent deferred sales charge is waived for any Class B 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 minimum initial and
subsequent purchase requirements are waived in connection with all the above-
referenced Retirement Plans.
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<PAGE>
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.
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 of 1940,
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
22
<PAGE>
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 recently
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 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. on each day the New York Stock Exchange is open
for trading. 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 afternoon 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, are accrued daily. The per share net asset value of the
Class B shares generally will be lower than the per share net asset value of
the Class A shares reflecting the daily expense accruals of the distribution
and transfer agency fees applicable with respect to the Class B shares. It is
expected, however, that the per share net asset value of the two 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 between the classes.
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<PAGE>
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 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 quarterly statements from the Transfer
Agent showing any reinvestments of dividends and capital gains distributions
and any other activity in the account since the preceding statement.
Shareholders also will receive separate confirmations for each purchase or sale
transaction other than reinvestment of dividends and capital gains
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 shares from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the Class A
shares are to be transferred will not take delivery of shares of the Company, a
shareholder either must redeem the Class A 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
shares. Shareholders interested in transferring their Class B 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.
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<PAGE>
AUTOMATIC INVESTMENT PLAN
A shareholder may make additions to the Investment Account at any time by
purchasing Class A or Class B 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 can also be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks of
$50 or more to charge the regular bank account of the shareholder on a regular
basis to provide systematic additions to the Investment Account of such
shareholder. For investors who buy shares of the Fund through Merrill Lynch
Blueprint /SM/ Program, no minimum charge to the investors bank account is
required. Investors who maintain CMA (R) accounts may arrange to have periodic
investments made in the Fund, in the CMA (R) accounts or in certain related
accounts in amounts of $100 or more through the CMA Automatic 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 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 SHARES
A Class A shareholder may elect to make 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 shares of the Fund having a value, based on cost or
the current offering price, of $5,000 or more, and monthly withdrawals for
shareholders with Class A shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A 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 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 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 shares in the Investment Account are reinvested automatically in
Fund Class A shares. A shareholder's Systematic Withdrawal Plan may be
terminated at any time, without charge or penalty, by the shareholder, the
Fund, the 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
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<PAGE>
investment may be reduced correspondingly. Purchases of additional Class A
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 shares of the Fund from investors
who maintain a Systematic Withdrawal Plan unless such purchase is equal to at
least one year's scheduled withdrawals or $1,200, whichever is greater.
Periodic investments may not be made into an Investment Account in which the
shareholder has elected to make systematic withdrawals.
A Class A shareholder whose shares are held within a CMA (R), CBA (R) 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 $250 (except that the minimum initial
purchase through the Merrill Lynch Blueprint /SM/ Program 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 the Fund may exchange their Class A or Class B shares of the
Fund for shares of the same class of Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Arizona
Limited Maturity Municipal Bond Fund, Merrill Lynch Arizona Municipal Bond
Fund, Merrill Lynch Balanced Fund for Investment and Retirement, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Insured Municipal Bond Fund,
Merrill Lynch California Limited Maturity Municipal Bond Fund, Merrill Lynch
California Municipal Bond Fund, Merrill Lynch Capital Fund, Inc., Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Developing Capital Markets
Fund, Inc., Merrill Lynch Colorado Municipal Bond Fund, Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Federal Securities Trust,
Merrill Lynch Florida Limited Maturity Municipal Bond Fund, Merrill Lynch
Florida Municipal Bond Fund, Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Fundamental
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Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc. (residents of
Arizona must meet investor suitability standards), Merrill Lynch Global
Resources Trust (formerly Merrill Lynch Natural Resources Trust), Merrill Lynch
Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc.
(residents of Wisconsin must meet investor suitability standards), Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Maryland Municipal Bond Fund, Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Municipal Bond Fund,
Merrill Lynch Michigan Limited Maturity Municipal Bond Fund, Merrill Lynch
Michigan Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Municipal Intermediate
Term Fund, Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund,
Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch New York Limited
Maturity Municipal Bond Fund, Merrill Lynch New York Municipal Bond Fund,
Merrill Lynch North Carolina Municipal Bond Fund, Merrill Lynch Ohio Municipal
Bond Fund, Merrill Lynch Oregon Municipal Bond Fund, Merrill Lynch Pacific
Fund, Inc., Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund,
Merrill Lynch Pennsylvania Municipal Bond Fund, Merrill Lynch Phoenix Fund,
Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special
Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch Texas Municipal Bond Fund, Merrill Lynch
Utility Income Fund, Inc. and Merrill Lynch World Income Fund, Inc. on the
basis described below. In addition, Class A shareholders of the Fund may
exchange their Class A shares for shares of Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch U.S. Treasury Money Fund and Merrill Lynch Ready Assets
Trust (or Merrill Lynch Retirement Reserves Money Fund if the exchange occurs
within certain retirement plans) (together the "Class A money market funds"),
and Class B shareholders of the Fund may exchange their Class B shares for
shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund
(together the "Class B money market funds") on the basis described below. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor. The exchange
privilege available to participants in the Merrill Lynch Blueprint SM Program
may be different from that available to other investors.
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on the
basis of relative net asset value per Class A share, plus an amount equal to
the difference, if any, between the sales charge previously paid on the
outstanding Class A shares and the sales charge payable at the time of the
exchange on the new Class A shares. With respect to outstanding Class A 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 shares in the initial purchase and any subsequent exchange. Class
A shares issued pursuant to dividend reinvestment are sold on a no-load basis
in each of the funds offering Class A shares. For purposes of the exchange
privilege, dividend reinvestment Class A shares shall be exchanged into the
Class A shares of the other funds or into shares of the Class A money market
funds without a sales charge.
The Fund's exchange privilege is modified with respect to purchases of Class
A shares under the Merrill Lynch Mutual Fund Adviser Program. First, the
initial allocation of assets is made under the program. Then, any subsequent
exchange under the program of Class A shares of a fund for Class A 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
27
<PAGE>
fund and the sales charge payable on the shares of the Fund being acquired in
the exchange under this program.
In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any
contingent deferred sales charge 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 contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge 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 contingent
deferred sales charge schedule if such schedule is higher than the deferred
sales charge 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 shares, the period of time that the
outstanding Class B shares were held will count toward satisfaction of the
holding period of the new Class B shares. For example, an investor may exchange
Class B shares of the Fund for those of Merrill Lynch Global Resources Trust
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 Merrill Lynch Global Resources Trust and receive cash. There will be
no contingent deferred sales load 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 Merrill Lynch Global Resources Trust 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 Class A shares and Class B shares from any of
the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that Class B shares are held
in a Class B money market fund will not count toward satisfaction of the
holding period requirement for purposes of reducing the contingent deferred
sales load. However, shares of a Class B money market fund which were acquired
as a result of an exchange for Class B shares of a fund may, in turn, be
exchanged back into Class B shares of any fund offering such shares, in which
event the holding period for Class B shares of the fund will be aggregated with
previous holding periods for purposes of reducing the contingent deferred sales
load. Thus, for example, an investor may exchange Class B shares of the Fund
for shares of Merrill Lynch 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 Merrill Lynch Institutional Fund for cash. At the time of this
redemption, the 2% contingent deferred sales load that would have been due had
the Class B shares of the Fund been redeemed for cash rather than exchanged for
shares of Merrill Lynch 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 continues to hold for an additional two and a half years,
any subsequent redemption will not incur a contingent deferred sales load.
The investment objectives of the other funds into which exchanges can be made
are as follows:
Merrill Lynch Adjustable
Rate Securities Fund, High current income consistent with a policy
Inc. ....................... 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.
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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 West-
ern Hemisphere (i.e., North and South Amer-
ica and the surrounding waters).
Merrill Lynch Arizona
Limited Maturity Municipal
Bond Fund...................
A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries 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 in-
termediate-term investment grade Arizona Mu-
nicipal Bonds.
Merrill Lynch Arizona
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu-
nicipal 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 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 stocks and
other types of securities, including fixed
income securities and convertible securi-
ties.
Merrill Lynch Basic Value
Fund, Inc. ................. Capital appreciation and, secondarily, income
by investing in securities, primarily equi-
ties, that are undervalued and therefore
represent basic investment value.
Merrill Lynch California
Insured Municipal Bond A portfolio of Merrill Lynch California Mu-
Fund........................ nicipal Series Trust, a series fund, whose
objective is as high a level of insured in-
come exempt from Federal and California in-
come taxes as is consistent with prudent in-
vestment management.
Merrill Lynch California
Limited Maturity Municipal
Bond Fund...................
A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries 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 invest-
ment management through investment in a
portfolio primarily of intermediate-term in-
vestment grade California Municipal Bonds.
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<PAGE>
Merrill Lynch California
Municipal Bond Fund......... A portfolio of Merrill Lynch California Mu-
nicipal Series Trust, a series fund whose
objective is as high a level of income ex-
empt from Federal and California income
taxes as is consistent with prudent invest-
ment management.
Merrill Lynch Capital Fund,
Inc. ....................... The highest total investment return consis-
tent with prudent risk through a fully man-
aged investment policy utilizing equity,
debt and convertible securities.
Merrill Lynch Colorado
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Colorado income taxes
as is consistent with prudent investment
management.
Merrill Lynch Corporate Bond
Fund, Inc. ................. Current income from three separate diversi-
fied portfolios of fixed income securities.
Merrill Lynch Developing
Capital Markets Fund, Long-term appreciation through investment in
Inc. ....................... securities, principally equities, of issuers
in countries having smaller capital markets.
Merrill Lynch Dragon Fund,
Inc. ....................... Capital appreciation primarily through in-
vestment in equity and debt securities of
companies domiciled in developing countries
located in Asia and Pacific Basin other than
Japan, Australia and New Zealand.
Merrill Lynch Eurofund....... Capital appreciation primarily through in-
vestment in equity securities of corpora-
tions domiciled in Europe.
Merrill Lynch Federal
Securities Trust............ High current return through investments in
U.S. Government and Government agency secu-
rities, including GNMA mortgage-backed cer-
tificates and other mortgage-backed Govern-
ment securities.
Merrill Lynch Florida
Limited Maturity Municipal
Bond Fund...................
A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is as high a
level of income exempt from Federal income
taxes as is consistent with prudent invest-
ment management while seeking to offer
shareholders the opportunity to own securi-
ties exempt from Florida intangible personal
property taxes through investment in a port-
folio primarily of intermediate-term invest-
ment grade Florida Municipal Bonds.
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<PAGE>
Merrill Lynch Florida
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal income taxes as is consis-
tent with prudent investment management
while seeking to offer shareholders the op-
portunity 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, pri-
marily 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 di-
versified 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 chang-
ing market and economic trends.
Merrill Lynch Global Bond
Fund for Investment and
Retirement..................
High total investment return from investment
in government and corporate bonds denomi-
nated in various currencies and multi-na-
tional 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 war-
rants or options.
Merrill Lynch Global
Holdings, Inc. (residents
of Arizona must meet
investor suitability The highest total investment return consis-
standards).................. tent with prudent risk through worldwide in-
vestment in an internationally diversified
portfolio of securities.
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Merrill Lynch Global
Resources Trust............. Long-term growth and protection of capital
from investment in securities of domestic
and foreign companies that possess substan-
tial natural resource assets.
Merrill Lynch Government
Fund........................ A portfolio of Merrill Lynch Funds for Insti-
tutions Series, a series fund, whose objec-
tive is to provide current income consistent
with liquidity and security of principal
from investment in securities issued or
guaranteed by the U.S. Government and its
agencies and in repurchase agreements se-
cured by such obligations.
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 under-
valued.
Merrill Lynch Healthcare
Fund, Inc. (residents of
Wisconsin must meet
investor suitability
standards) ................. Capital appreciation through worldwide in-
vestment in equity securities of companies
that derive or are expected to derive a sub-
stantial portion of their sales from prod-
ucts and services in healthcare.
Merrill Lynch Institutional
Fund........................ A portfolio of Merrill Lynch Funds for Insti-
tutions Series, a series fund, whose objec-
tive is to provide maximum current income
consistent with liquidity and the mainte-
nance of a high-quality portfolio of money
market securities.
Merrill Lynch Institutional
Tax-Exempt Fund............. A portfolio of Merrill Lynch Funds for Insti-
tutions Series, a series fund, whose objec-
tive is to provide current income exempt
from Federal income taxes, preservation of
capital and liquidity available from invest-
ing in a diversified portfolio of short-
term, high quality municipal bonds.
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 securi-
ties.
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<PAGE>
Merrill Lynch Maryland
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Maryland in-
come taxes as is consistent with prudent in-
vestment management.
Merrill Lynch Massachusetts
Limited Maturity Municipal
Bond Fund................... A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is as high a
level of income exempt from Federal and Mas-
sachusetts income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of in-
termediate-term investment grade Massachu-
setts Municipal Bonds.
Merrill Lynch Massachusetts
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide investors with as
high a level of income exempt from both Fed-
eral and Massachusetts income taxes as is
consistent with prudent investment manage-
ment.
Merrill Lynch Michigan
Limited Maturity Municipal
Bond Fund .................. A portfolio of Merrill Lynch Multi-State Lim-
ited Municipal Series Trust, a series fund,
whose objective is as high a level of income
exempt from Federal and Michigan income
taxes as is consistent with prudent invest-
ment management through investment in a
portfolio primarily of intermediate-term in-
vestment grade Michigan Municipal Bonds.
Merrill Lynch Michigan
Municipal Bond Fund ........ A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Michigan in-
come taxes as is consistent with prudent in-
vestment management.
Merrill Lynch Minnesota
Municipal Bond Fund ........ A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Minnesota income taxes
as is consistent with prudent investment
management.
Merrill Lynch Municipal Bond
Fund, Inc................... Tax-exempt income from three separate diver-
sified portfolios of municipal bonds.
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<PAGE>
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 in-
come 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 Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is as high a
level of income exempt from Federal and New
Jersey income taxes as is consistent with
prudent investment management through a
portfolio primarily of intermediate-term in-
vestment grade New Jersey Municipal Bonds.
Merrill Lynch New Jersey
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and New Jersey state in-
come taxes as is consistent with prudent in-
vestment management.
Merrill Lynch New York
Limited Maturity Municipal
Bond Fund................... A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is as high a
level of income exempt from Federal, New
York State and New York City income taxes as
is consistent with prudent investment man-
agement 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 Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt 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 Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and North Carolina income
taxes as is consistent with prudent invest-
ment management.
Merrill Lynch Ohio Municipal
Bond Fund................... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide investors with as
high a level of income exempt from both Fed-
eral and Ohio income taxes as is consistent
with prudent investment management.
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<PAGE>
Merrill Lynch Oregon
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide investors with as
high a level of income exempt from both Fed-
eral and Oregon income taxes as is consis-
tent 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, in-
cluding Japan, Australia, Hong Kong, Singa-
pore and the Philippines.
Merrill Lynch Pennsylvania
Limited Maturity Municipal
Bond Fund................... A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is to provide as
high a level of income exempt from Federal
and Pennsylvania income taxes as is consis-
tent with prudent investment management
through investment in a portfolio of inter-
mediate-term investment grade Pennsylvania
Municipal Bonds.
Merrill Lynch Pennsylvania
Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is as high a level of income ex-
empt from Federal and Pennsylvania state in-
come taxes as is consistent with prudent in-
vestment management.
Merrill Lynch Phoenix Fund,
Inc. ....................... Long-term growth of capital by investing in
equity and fixed income securities, includ-
ing tax-exempt securities, of issuers in
weak financial condition or experiencing
poor operating results believed to be under-
valued relative to the current or prospec-
tive condition of such issuer.
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 if the
exchange occurs within
certain retirement plans)... Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund,
whose objectives are current income, preser-
vation of capital and liquidity available
from investing in a diversified portfolio of
short-term money market securities.
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<PAGE>
Merrill Lynch Short-Term
Global Income Fund, Inc. .. As high a level of current income as is con-
sistent with prudent investment management
from a global portfolio of high quality debt
securities denominated in various currencies
and multi-currency units having remaining ma-
turities 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.
Merrill Lynch Strategic
Dividend Fund.............. Long-term total return from investment in div-
idend paying common stocks which yield more
than Standard & Poor's 500 Composite Stock
Price Index.
Merrill Lynch Technology
Fund, Inc. ................ Capital appreciation through worldwide invest-
ment in equity securities of companies that
derive or are expected to derive a substan-
tial portion of their sales from products and
services in technology.
Merrill Lynch Texas
Municipal Bond Fund........ A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund whose ob-
jective is to provide investors with as high
a level of income exempt from Federal income
taxes as is consistent with prudent invest-
ment management by investing primarily in a
portfolio of long-term, investment grade ob-
ligations issued by the State of Texas, its
political subdivisions, agencies and instru-
mentalities.
Merrill Lynch Treasury A portfolio of Merrill Lynch Funds For Insti-
Fund....................... tutions Series, a series fund, whose objec-
tive 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 obliga-
tions.
Merrill Lynch U.S.A.
Government Reserves........ Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and repur-
chase 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 market-
able securities which are direct obligations
of the U.S Treasury.
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<PAGE>
Merrill Lynch Utility Income
Fund, Inc. ................. High current income through investment pri-
marily in equity and debt securities issued
by companies primarily engaged in the owner-
ship or operation of facilities used to gen-
erate, 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 denomi-
nated in various currencies, including mul-
tinational currencies.
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. In addition, a shareholder exchanging
shares of any of the funds may be subject to a backup withholding tax unless
such shareholder certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct and that he is not
otherwise subject to backup withholding. See "Dividends, Distributions and
Taxes" below.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange, or, if
the exchange does not involve a money market fund, the shareholder may write to
the Transfer Agent requesting that the exchange be effected. Such letter must
be signed exactly as the account is registered with signatures guaranteed by an
"eligible guarantor institution" as such term is defined in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. 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 Securities and Exchange Commission. The Fund
reserves the right to limit the number of times an investor may exercise the
exchange privilege. Certain funds may suspend the continuous offering of their
shares 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--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
37
<PAGE>
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 shares will be lower than the per share dividends and distributions on
Class A shares as a result of the distribution and transfer agency fees
applicable with respect to the Class B 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 and Class B shareholders
("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.
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 and Class B shareholders according to a method (which it
believes is consistent with the Securities and Exchange Commission exemptive
order permitting the issuance and sale of two classes of stock) that is based
upon the gross income that is allocable to the Class A and Class B 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.
38
<PAGE>
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on reportable dividends, capital gains distributions 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. For this purpose,
the Fund will allocate foreign taxes and foreign source income between the
Class A and Class B shareholders according to a method similar to that
described above for the allocation of dividends eligible for the dividends
received deduction.
Shareholders will not be entitled to a loss on the sale or disposition of
Class A or Class B shares of the Fund to the extent they acquire other Class A
or Class B shares within a 61-day period beginning 30 days before and ending 30
days after such sale or disposition.
If a shareholder exercises his 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 he can recognize on the exchange will be reduced (or the gain
increased) to the extent the charge paid to the Fund reduces any charge he
would have owed upon purchase of the shares of the New Fund in the absence of
the exchange privilege. Instead, such charge will be treated as an amount paid
for the New Fund shares.
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 write,
purchase or sell options or futures contracts. Unless the Fund is eligible to
make and makes a special election, such 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 option or futures contract
will be treated as sold for its fair market
39
<PAGE>
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.
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.
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. The Fund may request a
private letter ruling from the Internal Revenue Service on some or all of these
issues.
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.
40
<PAGE>
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 and Class B
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 shares and the contingent deferred sales charge that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B 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.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended November
30, 1993............... 13.88% $1,138.80 16.86% $1,168.60
December 28, 1990
(Inception) to November
30, 1993............... 11.88% $1,389.00 13.07% $1,432.40
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended November 30,
1993................... 21.80% $1,218.00 20.86% $1,208.60
Year Ended November 30,
1992................... 10.05% $1,100.50 9.20% $1,092.00
December 28, 1990
(Inception) to November
30, 1991............... 10.83% $1,108.30 10.05% $1,100.50
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
December 28, 1990
(Inception) to November
30, 1993............... 38.90% $1,389.00 43.24% $1,432.40
</TABLE>
41
<PAGE>
In order to reflect the reduced sales charges in the case of Class A shares
or the waiver of the contingent deferred sales charge in the case of Class B
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
contingent deferred sales charge 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.
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 200,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A and Class B Common Stock,
each of which consists of 100,000,000 shares. Both Class A and Class B Common
Stock represent an interest in the same assets of the Fund and are identical in
all respects except that the Class B shares bear certain expenses related to
the account maintenance and distribution of such shares and have exclusive
voting rights with respect to matters relating to such account maintenance and
distribution expenditures. The Fund has received an order from the Commission
permitting the issuance and sale of two 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. The creation of additional
classes would require an additional order from the Commission. There is no
assurance that such an additional order will be issued.
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
of 1940 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 or conversion rights. Redemption
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.
42
<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 as of November 30, 1993, is calculated as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- ------------
<S> <C> <C>
Net Assets......................................... $81,717,754 $596,454,500
=========== ============
Number of Shares Outstanding....................... 6,180,960 45,285,324
=========== ============
Net Asset Value Per Share (net assets divided by
number of shares outstanding)..................... $ 13.22 $ 13.17
Sales Charge (for Class A shares: 6.50% of offering
price (6.95% of net asset value per share))*...... $ 0.92 $ **
----------- ------------
Offering Price..................................... $ 14.14 $ 13.17
=========== ============
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial sales charge but may be subject
to a contingent deferred sales charge on redemption of shares within four
years of purchase. See "Purchase of Shares--Deferred Sales Charge
Alternative--Class B Shares" in the Prospectus.
INDEPENDENT AUDITORS
Deloitte & Touche, 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.
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, 919 Third Avenue, New York, New York
10022, is counsel for the Fund.
43
<PAGE>
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 Company has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act of 1940, 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 February 28, 1994.
44
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
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.
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.
45
<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.
46
<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:
aaa An issue which is rated "aaa" is considered to be a top-quality pre-
ferred 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 An issue which is rated "a" is considered to be an upper-medium grade
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, nei-
ther highly protected nor poorly secured. Earnings and asset protec-
tion 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 ele-
ments 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 even-
tual payment.
c This is the lowest rated class of preferred or preference stock. Is-
sues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
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.
47
<PAGE>
DESCRIPTION OF STANDARD & POOR'S CORPORATION'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.
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.
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.
48
<PAGE>
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.
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 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.
49
<PAGE>
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:
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.
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.
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.
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."
50
<PAGE>
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,
B as predominantly speculative with respect to the issuer's capacity to
CCC pay 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.
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.
51
<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
Princeton, New Jersey
December 31, 1993
52
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US Dollars)
<CAPTION>
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
Total Common Stocks in the Philippines 5,250,051 7,899,500 1.2
</TABLE>
53
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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>
54
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US Dollars)
<CAPTION>
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
<CAPTION>
Short-Term Securities
<S> <C> <C> <C> <C> <C> <C>
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>
55
<PAGE>
<TABLE>
<S> <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.
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
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
=========== ============
See Notes to Financial Statements.
</TABLE>
56
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
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
==============
STATEMENT OF OPERATIONS
<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>
57
<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
==============
STATEMENTS OF CHANGES IN NET ASSETS
<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
============ ============
See Notes to Financial Statements.
</TABLE>
58
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<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.
See Notes to Financial Statements.
</TABLE>
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
(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.
59
<PAGE>
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.
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
60
<PAGE>
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.
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
========== ============
61
<PAGE>
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
============ ============
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.
62
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63
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
IN THIS
STATEMENT
---------
<S> <C>
Investment Objective and
Policies................ 2
Portfolio Strategies In-
volving Options and
Futures................ 2
Other Investment
Policies and Practices. 7
Investment Restrictions. 9
Management of the Fund... 12
Directors and Officers.. 12
Management and Advisory
Arrangements........... 13
Purchase of Shares....... 15
Alternative Sales Ar-
rangements............. 15
Initial Sales Charge Al-
ternative--Class A
Shares................. 15
Reduced Initial Sales
Charges--Class A
Shares................. 16
Deferred Sales Charge
Alternative--Class B
Shares................. 20
Redemption of Shares..... 20
Contingent Deferred
Sales Charge--Class B
Shares................. 21
Portfolio Transactions
and Brokerage........... 22
Determination of Net As-
set Value............... 23
Shareholder Services..... 24
Investment Account...... 24
Automatic Investment
Plan................... 25
Automatic Reinvestment
of Dividends and Capi-
tal Gains
Distributions.......... 25
Systematic Withdrawal
Plans--Class A Shares.. 25
Retirement Plans........ 26
Exchange Privilege...... 26
Dividends, Distributions
and Taxes............... 37
Dividends and Distribu-
tions.................. 37
Taxes................... 38
Performance Data......... 41
General Information...... 42
Description of Shares... 42
Computation of Offering
Price
per Share.............. 43
Independent Auditors.... 43
Custodian............... 43
Transfer Agent.......... 43
Legal Counsel........... 43
Reports to Shareholders. 44
Additional Information.. 44
Appendix................. 45
Independent Auditors' Re-
port.................... 52
Financial Statements..... 53
</TABLE>
Code #11280
STATEMENT OF
ADDITIONAL INFORMATION
[ART]
- -------------------------------------------------------------------------------
MERRILL LYNCH
GLOBAL UTILITY
FUND, INC.
March 29, 1994
Distributor:
Merrill Lynch Funds
Distributor, Inc.
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<TABLE>
<CAPTION>
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS-REFERENCE
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<C> <S>
PROBC PICTURE OF UTILITIES SURROUNDING
SAIBC A GLOBE
</TABLE>
