<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1997
REGISTRATION NOS. 33-37103
811-6180
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 9 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 11 [X]
(CHECK APPROPRIATE BOX OR BOXES)
---------------------
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
P.O. BOX 9011
PRINCETON, NEW JERSEY 08536-9011
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
JOEL H. GOLDBERG, ESQ. MERRILL LYNCH ASSET MANAGEMENT, L.P.
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP P.O. BOX 9011
919 THIRD AVENUE, NEW YORK, NEW YORK 10022 PRINCETON, NEW JERSEY 08543-9011
</TABLE>
---------------------
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
[X] Immediately upon filing pursuant to paragraph (b) of Rule 485, or
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
---------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
================================================================================
<TABLE>
<CAPTION>
AMOUNTS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES SHARES BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE* REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock (par value
$0.10 per share)............... 10,117,560 $14.91 $329,998.12 $100
===========================================================================================================
</TABLE>
*(1) The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during Registrant's
previous fiscal year was 11,222,001 shares.
(3) 1,126,573 of the shares described in (2) above have been used for reduction
pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act
of 1940 in previous filings during Registrant's current fiscal year.
(4) 10,095,428 of the shares redeemed during Registrant's previous fiscal year
are being used for the reduction of the registration fee in this amendment
to the Registration Statement.
---------------------
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT
PREVIOUSLY ELECTED TO REGISTER AN INDEFINITE NUMBER OF SHARES OF ITS COMMON
STOCK, PAR VALUE $0.10 PER SHARE. A RULE 24F-2 NOTICE WAS LAST FILED ON JANUARY
16, 1997.
================================================================================
<PAGE> 2
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
POST-EFFECTIVE AMENDMENT NO. 9 ON FORM N-1A
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(A) UNDER THE SECURITIES ACT OF 1933)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION IN PROSPECTUS
- ----------------------------------------------------- --------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Fee Table
Item 3. Condensed Financial Information....... Financial Highlights
Item 4. General Description of Registrant..... Cover Page; Special and Risk
Considerations; Investment Objective
and Policies; Additional Information
Item 5. Management of the Fund................ Fee Table; Management of the Fund;
Inside Back Cover Page
Item
5A. Management's Discussion of Fund
Performance......................... Not Applicable
Item 6. Capital Stock and Other Securities.... Cover Page; Merrill Lynch Select
PricingSMSystem; Additional
Information
Item 7. Purchase Securities Being Offered..... Merrill Lynch Select PricingSM System;
Fee Table; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or Repurchase.............. Fee Table; Redemption of Shares
Item 9. Legal Proceedings..................... Not Applicable
PART B
Item
10. Cover Page............................ Cover Page
Item
11. Table of Contents..................... Back Cover Page
Item
12. General Information and History....... Not Applicable
Item
13. Investment Objectives and Policies.... Investment Objective and Policies
Item
14. Management of the Fund................ Management of the Fund
Item
15. Control Persons and Principal Holders
of Securities....................... Not Applicable
Item
16. Investment Advisory and Other
Services............................ Management of the Fund; Purchase of
Shares; General Information
Item
17. Brokerage Allocation.................. Portfolio Transactions and Brokerage
Item
18. Capital Stock and Other Securities.... General Information -- Description of
Shares
Item
19. Purchase, Redemption and Pricing of
Securities Being Offered............ Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item
20. Tax Status............................ Taxes
Item
21. Underwriters.......................... Purchase of Shares
Item
22. Calculations of Performance Data...... Performance Data
Item
23. Financial Statements.................. Financial Statements
PART C
</TABLE>
Information required to be included is set forth under the appropriate
Item, so numbered, in Part C to this Post-Effective Amendment to the
Registration Statement.
<PAGE> 3
PROSPECTUS
MARCH 25, 1997
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Global Utility Fund, Inc. (the "Fund") is a diversified
mutual fund seeking both capital appreciation and current income through
investment of at least 65% of its total assets in equity and debt securities
issued by domestic and foreign companies that 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." For more information on
the Fund's investment objective and policies, please see "Investment Objective
and Policies" on page 11.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares, and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081, (609)
282-2800, and other securities dealers that have entered into selected dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100 and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated March 25, 1997 (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> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows.
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
------------ ------------------------------------- ------------------ --------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price).................. 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments.................... None None None None
Deferred Sales Charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower).............. None(d) 4.0% during the first year, 1.0% for one None(d)
decreasing 1.0% annually year(f)
thereafter to 0.0% after the
fourth year(e)
Exchange Fee....................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(g)........ 0.60% 0.60% 0.60% 0.60%
12b-1 Fees(h):
Account Maintenance Fees......... None 0.25% 0.25% 0.25%
Distribution Fees................ None 0.50% 0.55% None
(Class B shares convert to Class D
shares automatically after
approximately
ten years and cease being subject to
distribution fees)
Other Expenses
Custodial Fees..................... 0.03% 0.03% 0.03% 0.03%
Shareholder Servicing Fees(i)...... 0.12% 0.14% 0.14% 0.10%
Other.............................. 0.09% 0.09% 0.09% 0.09%
------ --- --- ----
Total Other Expenses......... 0.24% 0.26% 0.26% 0.22%
------ --- --- ----
TOTAL FUND OPERATING EXPENSES........ 0.84% 1.61% 1.66% 1.07%
====== === === ====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 26 and "Shareholder
Services -- Fee-Based Programs" -- page 37.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 28.
(c) Reduced for purchases of $25,000 and over and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A or Class D purchases of $1,000,000 or
more may not be subject to an initial sales charge. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares" -- page 26.
(d) Class A and Class D shares may not be subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with redemptions to fund participation in
certain fee-based programs. See "Shareholder Services -- Fee-Based
Programs" -- page 37.
(e) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs" -- page 37.
(f) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs. See "Shareholder Services -- Fee-Based
Programs" -- page 37.
(g) See "Management of the Fund -- Management and Advisory Arrangements" -- page
22.
(h) See "Purchase of Shares -- Distribution Plans" -- page 31.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 23.
2
<PAGE> 5
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE
PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $40.00 initial sales
charge (Class A and Class D shares only) and assuming
(1) the Total Fund Operating Expenses for each class
set forth on page 2, (2) a 5% annual return throughout
the periods and (3) redemption at the end of the
period:
Class A............................................. $ 48 $66 $85 $140
Class B............................................. $ 56 $71 $88 $191
Class C............................................. $ 27 $52 $90 $197
Class D............................................. $ 50 $73 $97 $165
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A............................................. $ 48 $66 $85 $140
Class B............................................. $ 16 $51 $88 $191
Class C............................................. $ 17 $52 $90 $197
Class D............................................. $ 50 $73 $97 $165
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly.
The example set forth above assumes reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by Securities
and Exchange Commission (the "Commission") regulations. THE EXAMPLE SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who
own their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charge permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD"). Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Fund's transfer agent are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM" or the
"Manager") or an affiliate of MLAM, Fund Asset Management, L.P. ("FAM"). Funds
advised by MLAM or FAM that utilize the Merrill Lynch Select Pricing(SM) System
are referred to herein as "MLAM-advised mutual funds."
3
<PAGE> 6
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on the Class D shares, will be imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund for
each class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Each class has different exchange privileges.
See "Shareholder Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares."
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 4.00% initial sales No No No
charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.50% B shares convert to
years, at a rate of 4.0% D shares automatically
during the first year, after approximately
decreasing 1.0% annually to ten years(5)
0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.55% No
- -------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales 0.25% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but,
instead may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC
may be waived in connection with certain fee-based programs. A .75% sales
charge for 401(k) purchases over $100,000,000 will apply. See "Class A" and
"Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(footnotes continued on next page)
4
<PAGE> 7
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an eight
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors who currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Other eligible investors include certain
retirement plans and participants in certain fee-based programs. In
addition, Class A shares will be offered at net asset value to
directors and employees of Merrill Lynch & Co., Inc. ("ML & Co.") and
its subsidiaries (the term "subsidiaries," when used herein with
respect to ML & Co., includes MLAM, FAM and certain other entities
directly or indirectly wholly-owned and controlled by ML & Co.) and to
members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge is 4.00%, which is reduced for purchases of
$25,000 and over and waived for purchases by certain retirement plans
and participants in connection with certain fee-based programs.
Purchases of $1,000,000 or more may not be subject to an initial sales
charge but if the initial sales charge is waived such purchases may be
subject to a CDSC of 1.0% if the shares are redeemed within one year
after purchase. Such CDSC may be waived in connection with redemptions
to fund participation in certain fee-based programs. Sales charges
also are reduced under a right of accumulation that takes into account
the investor's holdings of all classes of all MLAM-advised mutual
funds. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.50% of the Fund's average net
assets attributable to the Class B shares, and a CDSC if they are
redeemed within four years of purchase. Such CDSC may be modified in
connection with redemptions to fund participation in certain fee-based
programs. Approximately ten years after issuance, Class B shares will
convert automatically to Class D shares of the Fund, which are subject
to an account maintenance fee of 0.25% but no distribution fee; Class
B shares of certain other MLAM-advised mutual funds into which
exchanges may be made convert to Class D shares automatically after
approximately eight years. If Class B shares of the Fund are exchanged
for Class B shares of another MLAM-advised mutual fund, the conversion
period applicable to the Class B shares acquired in the exchange will
apply, as will the Class D account maintenance fee of the acquired
fund upon the conversion, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares to Class D shares
will occur at least once a month on the basis of the relative net
asset values of the shares of the two classes on the conversion date,
without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also
will convert automatically to Class D shares. The conversion period
for dividend reinvestment shares, and the conversion and holding
periods for certain retirement plans, were modified as described under
"Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B
and Class C Shares -- Conversion of Class B Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.55% of the Fund's average net
assets attributable to the Class C shares. Class C shares are also
subject to a 1% CDSC if they are redeemed within one year of purchase.
Such CDSC may be waived in connection with
5
<PAGE> 8
certain fee-based programs. Although Class C shares are subject to a
CDSC for only one year (as compared to four years for Class B), Class
C shares have no conversion feature and, accordingly, an investor who
purchases Class C shares will be subject to higher distribution fees
that will be imposed on Class C shares for an indefinite period
subject to annual approval by the Fund's Board of Directors and
regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to the Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchases may be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with redemptions to fund participation in certain fee-based
programs. The schedule of initial sales charges and reductions for
Class D shares is the same as the schedule for Class A shares, except
that there is no waiver for purchases in connection with certain
fee-based programs. Class D shares will also be issued upon conversion
of Class B shares as described above under "Class B." See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee imposed
on Class D shares. Investors qualifying for significantly reduced initial sales
charges may find the initial sales charge alternative particularly attractive
because similar sales charge reductions are not available with respect to the
deferred sales charges imposed in connection with purchases of Class B or Class
C shares. Investors not qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors who previously purchased Class A shares
may no longer be eligible to purchase Class A shares of other MLAM-advised
mutual funds, those previously purchased Class A shares, together with Class B,
Class C and Class D share holdings, will count toward a right of accumulation
which may qualify the investor for reduced initial sales charges on new initial
sales charge purchases. In addition, the ongoing Class B and Class C account
maintenance and distribution fees will cause Class B and Class C shares to have
higher expense ratios, pay lower dividends and have lower total returns than the
initial sales charge shares. The ongoing Class D account maintenance fees will
cause Class D shares to have a higher expense ratio, pay lower dividends and
have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares
6
<PAGE> 9
of the Fund after a conversion period of approximately ten years, and thereafter
investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forego the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred
Sales Charges."
7
<PAGE> 10
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the fiscal year ended
November 30, 1996 and the independent auditors' report thereon are included in
the Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's most recent annual report to
shareholders, which may be obtained, without charge, by calling or by writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
FOR THE
PERIOD
DEC. 28,
FOR THE YEAR 1990+
ENDED NOV. 30, TO
--------------------------------------------------- NOV. 30,
1996++ 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................... $ 13.52 $ 12.08 $ 13.22 $ 11.23 $ 10.67 $ 10.00
------- ------- ------- ------- ------- -------
Investment income -- net............. .50 .51 .94 .40 .47 .49
Realized and unrealized gain (loss)
on investments and foreign currency
transactions -- net................ 1.84 1.42 (1.57) 2.01 .57 .56
------- ------- ------- ------- ------- -------
Total from investment operations...... 2.34 1.93 (.63) 2.41 1.04 1.05
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income -- net............. (.53) (.49) (.47) (.41) (.48) (.38)
Realized gain on
investments -- net................. (.24) -- (.04) (.01) -- --
------- ------- ------- ------- ------- -------
Total dividends and distributions..... (.77) (.49) (.51) (.42) (.48) (.38)
------- ------- ------- ------- ------- -------
Net asset value, end of period........ $ 15.09 $ 13.52 $ 12.08 $ 13.22 $ 11.23 $ 10.67
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share... 17.94% 16.34% (4.89)% 21.80% 10.05% 10.83% #
======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses............................. .84% .91% .86% .82% 1.01% 1.28% *
======= ======= ======= ======= ======= =======
Investment income -- net............. 3.51% 3.73% 3.58% 3.57% 4.47% 5.57% *
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) ..................... $40,055 $44,775 $56,659 $81,718 $29,772 $20,579
======= ======= ======= ======= ======= =======
Portfolio turnover................... 5.03% 2.92% 17.02% 8.92% 30.91% 20.51%
======= ======= ======= ======= ======= =======
Average Commission rate paid##....... $ .0328 -- -- -- -- --
======= ======= ======= ======= ======= =======
<CAPTION> CLASS B
-------------------------------------------------------------------
FOR THE
PERIOD
DEC. 28,
FOR THE YEAR 1990+
ENDED NOV. 30, TO
-------------------------------------------------------- NOV. 30,
1996++ 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................... $ 13.47 $ 12.04 $ 13.17 $ 11.20 $ 10.65 $ 10.00
-------- -------- -------- -------- -------- -------
Investment income -- net............. .39 .38 .74 .33 .39 .40
Realized and unrealized gain (loss)
on investments and foreign currency
transactions -- net................ 1.84 1.44 (1.46) 1.98 .57 .58
-------- -------- -------- -------- -------- -------
Total from investment operations...... 2.23 1.82 (.72) 2.31 .96 .98
-------- -------- -------- -------- -------- -------
Less dividends and distributions:
Investment income -- net............. (.41) (.39) (.37) (.33) (.41) (.33)
Realized gain on
investments -- net................. (.24) -- (.04) (.01) -- --
-------- -------- -------- -------- -------- -------
Total dividends and distributions..... (.65) (.39) (.41) (.34) (.41) (.33)
-------- -------- -------- -------- -------- -------
Net asset value, end of period........ $ 15.05 $ 13.47 $ 12.04 $ 13.17 $ 11.20 $ 10.65
======== ======== ======== ======== ======== =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share... 17.07% 15.38% (5.60)% 20.86% 9.20% 10.05% #
======== ======== ======== ======== ======== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses............................. 1.61% 1.68% 1.63% 1.59% 1.77% 2.04% *
======== ======== ======== ======== ======== =======
Investment income -- net............. 2.74% 2.95% 2.82% 2.81% 3.65% 4.78% *
======== ======== ======== ======== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)...................... $335,487 $381,098 $459,185 $596,455 $200,396 $90,966
======== ======== ======== ======== ======== =======
Portfolio turnover................... 5.03% 2.92% 17.02% 8.92% 30.91% 20.51%
======== ======== ======== ======== ======== =======
Average Commission rate paid##....... $ .0328 -- -- -- -- --
======== ======== ======== ======== ======== =======
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted in U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
8
<PAGE> 11
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD
NOVEMBER 30, OCTOBER 21, 1994+
--------------------------- TO NOVEMBER 30,
1996++ 1995 1994
------ ------------------ ---------------------
<S> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $13.46 $12.05 $ 12.34
------ ------ ------
Investment income -- net........................ .38 .39 .01
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net........................... 1.84 1.43 (.30)
------ ------ ------
Total from investment operations................. 2.22 1.82 (.29)
------ ------ ------
Less dividends and distributions:
Investment income -- net........................ (.41) (.41) --
Realized gain on investments -- net............. (.24) -- --
------ ------ ------
Total dividends and distributions................ (.65) (.41) --
------ ------ ------
Net asset value, end of period................... $15.03 $13.46 $ 12.05
====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.............. 17.03% 15.38% (2.35)%#
====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................ 1.66% 1.73% 1.60%*
====== ====== ======
Investment income -- net........................ 2.65% 2.85% 3.01%*
====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........ $3,325 $2,072 $ 445
====== ====== ======
Portfolio turnover.............................. 5.03% 2.92% 17.02%
====== ====== ======
Average Commission rate paid##.................. $.0328 -- --
====== ====== ======
<CAPTION>
CLASS D
-----------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD
NOVEMBER 30, OCTOBER 21, 1994+
------------------ TO NOVEMBER 30,
1996++ 1995 1994
------ ------ -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $13.55 $12.09 $ 12.37
------ ------ -------
Investment income -- net........................ .50 .52 .02
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net........................... 1.79 1.40 (.30)
------ ------ -------
Total from investment operations................. 2.29 1.92 (.28)
------ ------ -------
Less dividends and distributions:
Investment income -- net........................ (.50) (.46) --
Realized gain on investments -- net............. (.24) -- --
------ ------ -------
Total dividends and distributions................ (.74) (.46) --
------ ------ -------
Net asset value, end of period................... $15.10 $13.55 $ 12.09
====== ====== =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.............. 17.45% 16.21% (2.26)%#
====== ====== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................ 1.07% 1.15% 1.08%*
====== ====== =======
Investment income -- net........................ 3.30% 3.36% 3.25%*
====== ====== =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........ $4,365 $1,516 $ 239
====== ====== =======
Portfolio turnover.............................. 5.03% 2.92% 17.02%
====== ====== =======
Average Commission rate paid##.................. $.0328 -- --
====== ====== =======
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted in U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
9
<PAGE> 12
RISKS AND SPECIAL CONSIDERATIONS
International Investing. 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 investments, including fluctuations in foreign exchange
rates, future foreign political and economic developments, different legal
systems and the existence or possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions applicable to such
investments. Securities prices in different countries are subject to different
economic, financial, political and social factors. Since the Fund may invest
heavily 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. The rate of exchange between the dollar and other
currencies is determined by forces of supply and demand in 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. Also, many of the
securities held by the Fund will not be registered with the Securities and
Exchange Commission nor will the issuers thereof be subject to the reporting
requirements of such agency.
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 to which United States entities are subject. As
a result, traditional investment measurements such as price earnings ratios, as
used in the United States, may not be applicable in certain capital markets.
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 capital markets, while growing in volume, typically 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. Brokerage commissions, custodial services, and
other costs relating to investment in foreign capital markets are generally more
expensive than in the United States. 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. Further,
satisfactory custodial services for investment securities may not be available
in some countries, which may result in the Fund incurring additional costs and
delays in transporting and custodying such securities outside such countries.
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
10
<PAGE> 13
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. Brokerage
commissions and other 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, brokers and issuers in foreign countries than there is in the
United States.
The Fund has made, and may continue to make, substantial investments in the
utility securities of issuers in Latin America, the Far East, and other lesser
developed capital markets. The risks of investment in foreign securities
described above tend to be particularly significant when investing in lesser
developed capital markets.
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.
Some countries prohibit or impose substantial restrictions on investment in
their capital markets, particularly their equity markets, by foreign entities
such as the Fund. As illustrations, certain countries require governmental
approval prior to investment by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
by foreign persons to only a specific class of securities of a company which may
have less advantageous terms than securities of the company available for
purchase by nationals.
Hedging Strategies. 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 equity and debt 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. Options and futures transactions in foreign markets are also subject
to the risk factors associated with foreign investments generally, as discussed
above. 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."
Other. 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.
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.
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
11
<PAGE> 14
without a vote of a majority of the Fund's outstanding voting securities, as
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act"). There can be no assurance that the Fund's investment objective
will be achieved. The Fund may employ a variety of instruments and techniques to
enhance income and to hedge against market and currency risk, as described in
the Appendix to this Prospectus.
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. 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."
The Fund will invest in common stocks (including preferred or debt
securities convertible into common stocks), preferred stocks and debt
securities. The relative weightings among common stocks, debt securities and
preferred stocks will vary from time to time based upon the Manager's judgment
of the extent to which investments in each category will contribute to meeting
the Fund's investment objective. Fixed income securities in which the Fund will
invest generally will be limited to those rated investment grade, that is, rated
in one of the four highest rating categories by Standard & Poor's Ratings Group
("S&P") or Moody's Investors Service, Inc. ("Moody's"), or deemed to be of
equivalent quality (i.e., securities rated at least BBB by S&P or Baa by
Moody's) in the judgment of the Manager. Securities rated Baa by Moody's are
described by it as having speculative characteristics and, according to S&P,
fixed income securities rated BBB normally exhibit adequate protection
parameters, although adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal.
The Fund's commercial paper investments at the time of purchase will be rated
"A-1" or "A-2" by S&P or "Prime-1" or "Prime-2" by Moody's or, if not rated,
will be of comparable quality as determined by the Directors of the Fund. The
Fund may also invest up to 5% of its total assets at the time of purchase in
fixed income securities having a minimum rating no lower than Caa by Moody's or
CCC by S&P. The Fund may, but need not, dispose of any security if it is
subsequently downgraded. For a description of ratings of debt securities, see
the Appendix to the Statement of Additional Information.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in United States securities
because the expenses of the Fund, such as custodial and brokerage costs, are
higher.
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
12
<PAGE> 15
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. For certain periods, the total return of utility companies' securities
has underperformed that of industrial companies' securities. There can be no
assurance that positive relative returns on utility securities will occur in the
future. The Manager believes that the average dividend yields of common stocks
issued by foreign utility companies have also historically exceeded those of
foreign industrial companies' common stocks. To meet its objective of capital
appreciation, the Fund may invest in foreign utility companies which pay lower
than average dividends, but have a greater potential for capital appreciation.
The utility companies in which the Fund will invest include companies which
are, in the opinion of the Manager, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute electricity,
telecommunications, gas or water.
Risks that are intrinsic to the utility industries include difficulty in
obtaining an adequate return on invested capital, difficulty in financing large
construction programs during an inflationary period, restrictions on operations
and increased cost and delays attributable to environmental considerations and
regulation, difficulty in raising capital in adequate amounts on reasonable
terms in periods of high inflation and unsettled capital markets, technological
innovations which may render existing plants, equipment or products obsolete,
the potential impact of natural or man-made disasters, increased costs and
reduced availability of certain types of fuel, occasionally reduced availability
and high costs of natural gas for resale, the effects of energy conservation,
the effects of a 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
13
<PAGE> 16
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 may cause more pollution than those used in the United
States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States.
The Fund's investment policies are designed to enable it to capitalize on
evolving investment opportunities throughout the world. For example, the rapid
growth of certain foreign economies will necessitate expansion of capacity in
the utility industries in those countries. Although many foreign utility
companies currently are government-owned, thereby limiting current investment
opportunities for the Fund, the Manager believes that, in order to attract
significant capital for growth, foreign governments are likely to seek global
14
<PAGE> 17
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. 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 the past, 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 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 declined, many utilities refinanced
high cost debt and in doing so improved their fixed charges coverage.
Regulators, however, lowered allowed rates of return as interest rates declined
and thereby caused the benefits of the rate declines to be shared wholly or in
part with customers.
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, at that time, 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. Subsequent to that time, these rating
agencies have noted that, as a whole, electric utility companies have been
taking positive steps to reduce costs through operational efficiencies, limits
on capital expenditures and the use of excess cash flow to reduce debt.
Nevertheless, both agencies indicate that the changes occurring in the industry
present pressures on credit quality from the uncertainties that exist or are
increasing.
Currently, certain states have enacted or are considering deregulation
proposals. The introduction of competition into the industry as a result of
deregulation may result in lower revenue, lower credit ratings, increased
default risk, and lower electric utility security prices. Such increased
competition may also cause long-term contracts, which electric utilities
previously entered into to buy power, to become "stranded assets" which have no
economic value. Any loss associated with such contracts must be absorbed by
ratepayers and investors. In addition, in anticipation of increasing
competition, some electric utilities have acquired electric
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<PAGE> 18
utilities overseas to diversify, enhance earnings and gain experience in
operating in a deregulated environment. In some instances, such acquisitions
have involved significant borrowings which have burdened the acquirer's balance
sheet. There is no assurance that current deregulation proposals will be
adopted. However, deregulation in any form could significantly impact the
electric utilities industry.
Telecommunications. The telecommunications industry today includes both
traditional telephone companies, with a history of broad market coverage and
highly regulated businesses, and cable companies, which began as small, lightly
regulated businesses focused on limited markets. Today these two historically
different businesses are converging in an industry which is trending toward
larger, competitive, national and international markets with an emphasis on
deregulation. Companies that distribute telephone services and provide access to
the telephone networks still comprise the greatest portion of this segment, but
non-regulated activities such as cellular telephone services, paging, data
processing, equipment retailing, computer software and hardware services are
becoming increasingly significant components as well. The presence of
unregulated companies in this industry and the entry of traditional telephone
companies into unregulated or less regulated businesses provide significant
investment opportunities with companies which may increase their earnings at
faster rates than had been allowed in traditional regulated businesses. Still,
increasing competition, technological innovations and other structural changes
could adversely affect the profitability of such utilities and the growth rate
of their dividends. Given mergers, certain marketing tests currently underway
and legislation and enforcement changes, 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 to
both residential, corporate and governmental customers.
In February 1996, the Telecommunications Act of 1996 became law. The Act
will eventually remove regulatory restrictions on entry that have prevented
local and long-distance telephone companies and cable television companies from
competing against one another. The Act will also remove most cable rate controls
and allow broadcasters to own more radio and television stations.
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, even for electricity generation.
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.
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<PAGE> 19
There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur or
that risk factors other than those noted above will not develop in the future.
INVESTMENT OUTSIDE THE UTILITY INDUSTRIES
The Fund is permitted to invest up to 35% of its assets in securities of
issuers that are outside the utility industries. Such investments may include
common stocks, debt securities or preferred stocks and will be selected to meet
the Fund's investment objective of both capital appreciation and current income.
These securities may be issued by either U.S. or non-U.S. companies. Some of
these issuers may be in industries related to utility industries and, therefore,
may be subject to similar risks. Securities that are issued by foreign companies
or are denominated in foreign currencies are subject to the risks outlined
above. See "Special and Risk Considerations."
The Fund is also permitted to invest in securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities ("U.S. Government
Securities"). Such investments may be backed by the "full faith and credit" of
the United States, including U.S. Treasury bills, notes and bonds as well as
certain agency securities and mortgage-backed securities issued by the
Government National Mortgage Association ("GNMA"). The guarantees on these
securities do not extend to the securities' yield or value or to the yield or
value of the Fund's shares. Other investments in agency securities are not
necessarily backed by the "full faith and credit" of the 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 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.
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<PAGE> 20
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Strategies Involving Options, Futures and Foreign Exchange
Transactions. The Fund may use certain derivative instruments, including
options and futures and may purchase and sell foreign exchange. Transactions
involving such instruments expose the Fund to certain risks. The Fund's use of
these instruments and the associated risks are described in detail in the
Appendix attached to this Prospectus.
Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain of
such exchanges. See "Special and Risk Considerations" above. Where possible, the
Fund will deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. Such dealers usually are acting as principal for their own
account. On occasion, securities may be purchased directly from the issuer. Such
portfolio securities are generally traded on a net basis and do not normally
involve either brokerage commissions or transfer taxes. Securities firms may
receive brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options. The Fund has no obligation to
deal with any broker in the execution of transactions in portfolio securities.
Under the Investment Company Act, persons affiliated with the Fund, including
Merrill Lynch, are prohibited from dealing with the Fund as a principal in the
purchase and sale of securities unless a permissive order allowing such
transactions is obtained from the Commission. Affiliated persons of the Fund may
serve as its broker in transactions conducted on an exchange and in over-
the-counter transactions conducted on an agency basis. In addition, consistent
with the NASD Conduct Rules, 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 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 that 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
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
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<PAGE> 21
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 15% of its total 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 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.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price in a specified
currency, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during such
period although it may be affected by currency fluctuations. In the case of
repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligation. Such agreements usually
cover short periods, such as under one week. Repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with disposition of the collateral. In the event of a
default under such a repurchase agreement, instead of the contractual fixed
rate, the rate of return to the Fund shall be dependent upon intervening
fluctuations of the market value of such security and the accrued interest on
the security. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform. The Fund may not invest more
than 15% of its total assets in repurchase agreements maturing in more than
seven days.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the United States
Government. Such collateral will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. During
the period of such a loan, the Fund receives the income on the loaned securities
and either
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<PAGE> 22
receives the income on the collateral or other compensation, i.e., negotiated
loan premium or fee, for entering into the loan and thereby increases its yield.
In the event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of the collateral falls below the market value of the
borrowed securities.
Illiquid Securities. The Fund may invest up to 15% of its total assets in
illiquid securities. Pursuant to that restriction the Fund may not invest in
securities which cannot be readily resold because of legal or contractual
restrictions or which cannot otherwise be marketed, redeemed, put to the issuer
or a third party, or which do not mature within seven days, or which the Board
of Directors has not determined to be liquid, if, regarding all such securities,
more than 15% of its total assets, taken at market value, would be invested in
such securities. Although not a fundamental policy, the Fund will include OTC
options and the securities underlying such options (to the extent provided under
"Portfolio Strategies Involving Options and Futures -- Restrictions on OTC
Options", above) in calculating the amount of its total assets subject to the
limitation on illiquid securities. 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.
The Fund may purchase, without regard to the above limitation, securities
that are not registered under the Securities Act of 1933, as amended (the
"Securities Act") but that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the Securities Act, provided that the Fund's Board
of Directors, or the Manager pursuant to guidelines adopted by the Board,
continuously determines, based on the trading markets for the specific Rule 144A
security, that it is liquid. The Board of Directors retains oversight and is
ultimately responsible for the determinations. The Board of Directors monitors
the Fund's investments in these securities, focusing on such factors, among
others, as valuation, liquidity and availability of information. This investment
practice could have the effect of increasing the level of illiquidity in the
Fund to the extent that qualified institutional buyers become for a time
uninterested in purchasing these securities.
Investment Restrictions. The Fund's investment activities are subject to
further restrictions that are described in the Statement of Additional
Information. Investment restrictions and policies which are fundamental policies
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (a) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(b) more than 50% of the outstanding shares). Among the Fund's more significant
investment policies, the Fund may not make any investment inconsistent with the
Fund's classification as a diversified company under the Investment Company Act.
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 restrict the issuance of senior securities and limit bank
borrowings. 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").
Non-fundamental policies of the Fund (which may be changed by vote of the
Board of Directors) include policies that (i) prohibit investment in the
securities of other investment companies except to the extent
permitted by applicable law, (ii) limit investment in securities which cannot be
readily resold because of legal or contractual restrictions, or which cannot
otherwise be marketed, redeemed or put to the issuer or a third party, if at the
time of the acquisition more than 15% of its total assets would be invested in
such securities and (iii) prohibit the Fund from borrowing money, except from
banks for extraordinary purposes or to meet
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<PAGE> 23
redemptions in amounts of up to 10% of its total assets. Securities purchased in
accordance with Rule 144A under the Securities Act and determined to be liquid
by the Board of Directors are not subject to the 15% limitation set forth in
clause (ii). Although not a fundamental policy, 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.
In addition, although not a fundamental policy, the Fund will include over-
the-counter ("OTC") options and the securities underlying such options (to the
extent provided under "Additional Risk Factors of OTC Transactions; Limitations
on the Use of OTC Strategic Instruments" in the Appendix to this Prospectus) in
calculating the amount of its total assets subject to the limitation set forth
in clause (ii) above. However, as discussed in the Appendix, the Fund may treat
the securities it uses as cover for written OTC options as liquid, and
therefore, such securities will be excluded from this restriction, provided the
Fund 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, 1996 and 1995, the portfolio
turnover rates for the Fund were 5.03% and 2.92%, respectively.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL* -- President of the Manager and its affiliate, Fund Asset
Management, L.P. ("FAM"); President and Director of Princeton Services, Inc.
("Princeton Services"); Executive Vice President of ML & Co.; and Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor").
RONALD W. FORBES -- Professor of Finance, School of Business, State
University of New York at Albany.
CYNTHIA A. MONTGOMERY -- Professor of Competition and Strategy, Harvard
Business School.
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<PAGE> 24
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, Boston University; Founder and
current Director of the Boston University Center for the Advancement of Ethics
and Character.
RICHARD R. WEST -- Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey
(mailing address: P.O. Box 9011, Princeton, New Jersey 08543-9011) acts as the
manager for the Fund and provides the Fund with management and investment
advisory services. The Manager is owned and controlled by ML & Co., a financial
services holding company and the parent of Merrill Lynch. The Manager or an
affiliate of the Manager, FAM, acts as the investment adviser for more than 130
registered investment companies. The Manager also offers portfolio management
and portfolio analysis services to individual and institutional accounts. As of
February 28, 1997, the Manager and FAM had a total of $248.2 billion in
investment company and other portfolio assets under management, including
accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Board of Directors of the Fund,
the Manager is responsible for the actual management of the Fund's portfolio.
The responsibility for making decisions to buy, sell or hold a particular
security rests with the Manager, subject to review by the Board of Directors.
Walter D. Rogers is the portfolio manager for the Fund. Mr. Rogers is a
Vice President of the Manager and has been employed by the Manager in this
capacity since 1987. For the past five years, Mr. Rogers has acted as portfolio
manager of one or more other registered investment companies sponsored by the
Manager, and continues to act in such capacity.
The Manager is obligated to perform certain administrative and management
services for the Fund and is obligated to provide all of the office space,
facilities, equipment and personnel necessary to perform its duties under the
Management Agreement.
The Fund pays the Manager a monthly fee at the annual rate of 0.60% of the
average daily net assets of the Fund. In addition, the Management Agreement
obligates the Fund to pay certain expenses incurred in its operations including,
among other things, the investment advisory fee, legal and audit fees,
registration fees, unaffiliated Directors' fees and expenses, custodian and
transfer agency fees, accounting costs, the costs of issuing and redeeming
shares and certain of the costs of printing proxies, shareholder reports,
prospectuses and statements of additional information. For the fiscal year ended
November 30, 1996, the fee paid by the Fund to the Manager was $2,463,017 (based
upon average net assets of approximately $411.6 million). Accounting services
are provided to the Fund by the Manager, and the Fund reimburses the Manager for
its costs in connection with such services. For the fiscal year ended November
30, 1996, the Fund reimbursed the Manager $104,641 for accounting services. For
the fiscal year ended November 30, 1996, the ratio of total
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<PAGE> 25
expenses to average net assets was 0.84% for the Class A shares, 1.61% for the
Class B shares, 1.66% for Class C shares and 1.07% for Class D shares.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML&Co. and
an affiliate of the Manager pursuant to which the Manager pays MLAM U.K. a fee
for providing investment advisory services to the Manager with respect to the
Fund in an amount to be determined from time to time by the Manager and MLAM
U.K., but in no event in excess of the amount that the Manager actually receives
for providing services to the Fund pursuant to the Management Agreement.
TRANSFER AGENCY SERVICES
Merrill Lynch 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 up to $11.00 per Class A and Class D shareholder account and up to
$14.00 per Class B and Class C shareholder account and Transfer Agent is
entitled to reimbursement for out-of-pocket expenses incurred by it under the
Transfer Agency Agreement. For the fiscal year ended November 30, 1996, the
total fee paid by the Fund to the Transfer Agent was $557,723.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of the
Manager (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security which at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
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PURCHASE OF SHARES
The Distributor, an affiliate of both the Manager and Merrill Lynch, acts
as the distributor of shares of the Fund. Shares of the Fund may be purchased
from securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase is $1,000, and the minimum subsequent
purchase is $50, except that for retirement plans, the minimum initial purchase
is $100 and the minimum subsequent purchase is $1. Different minimums may apply
through the Merrill Lynch Blueprint(SM) Program.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
Pricing(SM) System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange ("NYSE") (generally 4:00 P.M., New York time), which includes
orders received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the NYSE on that day, provided the Distributor in
turn receives orders from the securities brokers prior to 30 minutes after the
close of business on the NYSE on that day. If the purchase orders are not
received prior to 30 minutes after the close of business on the NYSE, such
orders shall be deemed received on the next business day. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares of any
class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a sale of shares to such customers. Purchases directly through
the Fund's Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees. A discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(SM) System is set forth
under "Merrill Lynch Select Pricing(SM) System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, will be imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund for
each class of shares will be calculated in
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<PAGE> 27
the same manner at the same time and will differ only to the extent that account
maintenance and distribution fees and any incremental transfer agency costs
relating to a particular class are borne exclusively by that class. Class B,
Class C and Class D shares each have exclusive voting rights with respect to the
Rule 12b-1 distribution plan adopted with respect to such class pursuant to
which account maintenance and/or distribution fees are paid. See "Distribution
Plans" below. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 4.00% initial sales No No No
charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.50% B shares convert to
years, at a rate of 4.0% D shares automatically
during the first year, after approximately
decreasing 1.0% annually to ten years(5)
0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.55% No
- -------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales 0.25% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans in connection with certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but if the initial sales charge is
waived, may be subject to a 1.0% CDSC for one year. A .75% sales charge for
401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have an eight-year conversion period. If Class B shares of the Fund
are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs.
25
<PAGE> 28
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS DISCOUNT TO
SALES LOAD AS PERCENTAGE* SELECTED DEALERS
PERCENTAGE OF OF THE NET AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED THE OFFERING PRICE
- ---------------------------------------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
Less than $25,000............................. 4.00% 4.17% 3.75%
$25,000 but less than $50,000................. 3.75 3.90 3.50
$50,000 but less than $100,000................ 3.25 3.36 3.00
$100,000 but less than $250,000............... 2.50 2.56 2.25
$250,000 but less than $1,000,000............. 1.50 1.52 1.25
$1,000,000 and over**......................... 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases in connection with certain
investment programs. If the sales charge is waived in connection with a
purchase of $1,000,000 or more of the Fund, such purchases will be subject to
a CDSC of 1.0% if the shares are redeemed within one year after purchase. The
charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. A sales charge of 0.75%
will be charged on purchases of $1,000,000 or more of Class A or Class D
shares by certain Employer Sponsored Retirement or Savings Plans.
The Distributor may reallow discounts to such dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. During
the fiscal year ended November 30, 1996, the Fund sold 178,410 Class A shares
for aggregate net proceeds of $2,530,252. The gross sales charges for the sale
of Class A shares of the Fund for that year were $6,768, of which $610 and
$6,158 were received by the Distributor and Merrill Lynch, respectively. No
CDSCs were received with respect to Class A shares for which the initial sales
charge was waived during the fiscal year ended November 30, 1996. During the
fiscal year ended November 30, 1996, the Fund sold 1,906,770 Class D shares for
aggregate net proceeds of $26,889,122. The gross sales charges for the sale of
Class D shares of the Fund for that year were $17,277, of which $1,510 and
$15,767 were received by the Distributor and Merrill Lynch, respectively. For
the same year, no CDSCs were received with respect to Class D shares for which
the initial sales charge was waived.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account, including participants in the Merrill Lynch
BlueprintSM Program, are entitled to purchase additional Class A shares of the
Fund in that account. Certain Employer Sponsored Retirement or Savings Plans,
including eligible 401(k) plans, may purchase Class A shares at net asset value
provided such plans meet the required minimum number of eligible employees or
required amount of assets
26
<PAGE> 29
advised by MLAM or any of its affiliates. Class A shares are available at net
asset value to corporate warranty insurance reserve fund programs provided that
the program has $3 million or more initially invested in MLAM-advised mutual
funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee and certain purchases made in connection with certain fee-based
programs. In addition, Class A shares are offered at net asset value to ML & Co.
and its subsidiaries and their directors and employees and to members of the
Boards of MLAM-advised investment companies, including the Fund. Certain persons
who acquired shares of certain MLAM-advised closed-end funds in their initial
offerings who wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in shares of the Fund also may purchase Class A
shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met (for closed-end funds that commenced operations
prior to October 21, 1994). In addition, Class A shares of the Fund and certain
other MLAM-advised mutual funds are offered at net asset value to shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior Floating Rate Fund")
and, if certain conditions set forth in the Statement of Additional Information
are met, to shareholders of Merrill Lynch Municipal Strategy Fund, Inc.
("Municipal Strategy Fund") and Merrill Lynch High Income Municipal Bond Fund,
Inc. ("High Income Fund") who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted by
such funds in shares of the Fund and certain other MLAM-advised mutual funds.
Shareholders already owning Class A shares who wish to reinvest the net
proceeds from a tender of the High Income Fund or the Municipal Strategy Fund
may purchase Class A shares at net asset value rather than Class D shares
provided that (i) the shares to be purchased are held in the same account as the
Class A shares that the shareholder already owns, and (ii) all other
requirements pertaining to the reinvestment privilege are met.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Class A and Class D shares are offered at net asset value to Employee
Access AccountsSM available through qualified employers with 500 or more
eligible employees which provide employer-sponsored retirement and savings plans
that are eligible to purchase such shares at net asset value. Subject to certain
conditions, Class A and Class D shares are offered at net asset value to
shareholders of Municipal Strategy Fund and High Income Fund and Class A shares
are offered at net asset value to shareholders of Senior Floating Rate Fund who
wish to reinvest in shares of the Fund the net proceeds from a sale of certain
of their shares of common stock, pursuant to tender offers conducted by those
funds.
Class D shares may be offered at net asset value in connection with the
acquisition of assets of other investment companies. Class D shares also are
offered at net asset value, without sales charge, to an investor who has a
business relationship with a Merrill Lynch Financial Consultant, if certain
conditions set forth in the Statement of Additional Information are met.
27
<PAGE> 30
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately ten years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted to Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets as discussed below under
"Distribution Plans." In addition, Class B and Class C shares are subject to
distribution fees of 0.50% and 0.55%, respectively.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares from its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase.
Approximately ten years after issuance, Class B shares will convert
automatically to Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert to Class D
shares automatically after approximately eight years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges". The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities.
28
<PAGE> 31
Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services -- Exchange Privilege" will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ----------------------------------------------------------------------------- -----------------
<S> <C>
0-1.......................................................................... 4.00%
1-2.......................................................................... 3.00%
2-3.......................................................................... 2.00%
3-4.......................................................................... 1.00%
4 and thereafter............................................................. 0.00%
</TABLE>
For the fiscal year ended November 30, 1996, the Distributor received CDSCs
of $754,651 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer from a
shareholder's account to another account will be assumed to be made in the same
order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the CDSC is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
shareholder. The Class B CDSC also is waived on redemptions of shares by certain
eligible 401(a) and eligible 401(k) plans and in connection with certain group
plans placing orders through the Merrill Lynch Blueprint(SM) Program. The CDSC
also is waived for any Class B shares that are purchased by eligible 401(k) or
eligible 401(a) plans that are rolled over into a Merrill Lynch or Merrill Lynch
Trust Company custodied IRA and
29
<PAGE> 32
held in such account at the time of redemption. The Class B CDSC also is waived
for any Class B shares that are purchased by a Merrill Lynch rollover IRA that
was funded by a rollover from a terminated 401(k) plan managed by the MLAM
Private Portfolio Group and held in such account at the time of redemption. The
Class B CDSC also is waived for any Class B shares which are purchased within
qualifying Employee Access Accounts(SM). Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information. The terms of the CDSC may be modified in connection with
redemptions to fund participation in certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs."
Contingent Deferred Sales Charges -- Class C Shares. Class C shares that
are redeemed within one year of purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. No Class C CDSC will be assessed in
connection with redemption to fund participation in certain fee-based programs.
See "Shareholder Services -- Fee-Based Programs."
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
For the fiscal year ended November 30, 1996, the Distributor received CDSCs
of $1,659 with respect to the redemption of Class C shares, all of which were
paid to Merrill Lynch.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
to Class D shares of the Fund. Class D shares are subject to an ongoing account
maintenance fee of 0.25% of net assets but are not subject to the distribution
fee that is borne by Class B shares. Automatic conversion of Class B shares to
Class D shares will occur at least once each month (on the "Conversion Date") on
the basis of the relative net asset values of the shares of the two classes on
the Conversion Date, without the imposition of any sales load, fee or other
charge. Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
30
<PAGE> 33
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be "tacked" onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value per
share.
The Conversion Period may also be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each, a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.50% and
0.55%, respectively, of the average daily net assets of the Fund attributable to
the shares of the relevant class in order to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) for providing shareholder and
distribution services, and bearing certain distribution-related expenses of the
Fund, including payments to financial consultants for selling Class B and Class
C shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the
31
<PAGE> 34
Fund in that the deferred sales charges provide for the financing of the
distribution of the Fund's Class B and Class C shares.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing
distribution fee, accrued daily and payable monthly, at the annual rate of 0.75%
of the average daily net assets of the Class B shares of the Fund under a
distribution plan previously adopted by the Fund (the "Prior Plan") to
compensate the Distributor and Merrill Lynch for providing account maintenance
and distribution-related activities and services to the Class B shareholders.
The fee rate payable and the services provided under the Prior Plan are
identical to the aggregate fee rate payable and the services provided under the
Class B Distribution Plan, the difference being that the account maintenance and
distribution services have been unbundled.
For the fiscal year ended November 30, 1996, the Fund paid the Distributor
$2,709,344 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $362.2
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended November 30, 1996, the Fund paid the
Distributor $23,394 pursuant to the Class C Distribution Plan (based on average
net assets subject to such Class C Distribution Plan of approximately $2.9
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended November 30, 1996, the Fund paid the
Distributor $7,906 pursuant to the Class D Distribution Plan (based on average
net assets subject to such Class D shares of approximately $3.2 million), all of
which was paid to Merrill Lynch for providing account maintenance activities in
connection with Class D shares.
The payments under the Distribution Plans are based upon a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, the distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the distribution fees and CDSCs and the expenses consist of
financial consultant compensation. With respect to Class B shares, as of
December 31, 1996, 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 Class B shares commenced operations on December 28, 1990
exceeded fully allocated accrual revenues for such period by approximately
$5,464,000 (approximately 1.64% of Class B net assets at that date). For Class B
shares as of December 31, 1996, direct cash revenues for the same period
exceeded direct cash expenses by $8,381,401 (2.52% of Class B net assets at that
date). With respect to Class C shares, as of December 31, 1996 direct cash
revenues for the period since October 21, 1994 (commencement of operations)
exceeded direct cash expenses by $20,441 (0.61% of Class C net assets at that
date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B, Class C and Class D shares, and
32
<PAGE> 35
there is no assurance that the Board of Directors of the Fund will approve the
continuance of the Distribution Plans from year to year. However, the
Distributor intends to seek annual continuation of the Distribution Plans. In
their review of the Distribution Plans, the Directors will be asked to take into
consideration expenses incurred in connection with the account maintenance
and/or distribution of each class of shares separately. The initial sales
charges, the account maintenance fee, the distribution fee and/or the CDSCs
received with respect to one class will not be used to subsidize the sale of
shares of another class. Payment of the distribution fee on Class B shares will
terminate upon conversion of those Class B shares into Class D shares as set
forth under "Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Conversion of Class B Shares to Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the NASD Conduct Rules imposes a
limitation on certain asset-based sales charges such as the Fund's distribution
fee and the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. Charges are applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestment and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida
33
<PAGE> 36
32232-5289. Redemption requests delivered other than by mail should be delivered
to Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. Redemption requests should not be sent to the
Fund. Proper notice of redemption in the case of shares deposited with the
Transfer Agent may be accomplished by a written letter requesting redemption.
Proper notice of redemption in the case of shares for which certificates have
been issued may be accomplished by a written letter as noted above accompanied
by certificates for the shares to be redeemed. The notice in either event
requires the signatures of all persons in whose names the shares are registered,
signed exactly as their names appear on the Transfer Agent's register or on the
certificate, as the case may be. The signature(s) on the notice must be
guaranteed by an "eligible guarantor institution" as such term is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, the existence and
validity of which may be verified by the Transfer Agent through the use of
industry publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents, such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payment will be mailed within seven
days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that good
payment (e.g., cash or certified check drawn on a United States bank) has been
collected for the purchase of such shares. Normally, this delay will not exceed
10 days.
REPURCHASE
The Fund will repurchase shares through a shareholder's listed securities
dealer. The Fund normally will accept orders to repurchase shares by wire or
telephone from dealers for their customers at the net asset value next computed
after receipt of the order by the dealer, less any applicable CDSC, provided
that the request for repurchase is received by the dealer prior to the close of
business on the NYSE (generally 4:00 P.M., New York time) on the day received,
and such request is received by the Fund from such dealer not later than 30
minutes after the close of business on the NYSE on the same day.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
to such customers. Repurchases directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund, however, may redeem shares as set forth
above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares of
the Fund, as the case may be, at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within
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30 days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset value
per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in its shares. Full
details as to each of such services, copies of the various plans described below
and instructions as to how to participate in the various plans and services, or
to change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page hereof or from the Distributor or Merrill
Lynch. Included in such services are the following:
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gains distributions. Shareholders may
make additions to their Investment Account at any time by mailing a check
directly to the Transfer Agent. Shareholders also may maintain their accounts
through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch
brokerage account, an Investment Account in the transferring shareholder's name
will be opened automatically, without charge, at the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent.
Shareholders considering transferring a tax-deferred retirement account such as
an individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
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.
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EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated at any time in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his or her account in which the exchange is made at the time of the exchange or
is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the shareholder
holds Class A shares of the second fund in the account in which the exchange is
made or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable for shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is "tacked" to the holding period for the newly acquired shares of the other
fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
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<PAGE> 39
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
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 whose account is maintained through the
Transfer Agent 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. A shareholder
whose account is accepted through Merrill Lynch may, at any time, by notice to
Merrill Lynch, elect to have both dividends and capital gains distributions paid
in cash, rather than reinvested. Cash payments can also be directly deposited to
the shareholder's bank account. No CDSC will be imposed upon redemption of
shares issued as a result of the automatic reinvestment of dividends or capital
gains distributions.
Shareholders considering transferring a tax-deferred retirement account
such as an IRA from Merrill Lynch to another brokerage firm or financial
institution should be aware that if the firm to which the retirement account is
being transferred will not take delivery of shares of the Fund, the shareholder
must either redeem the shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm, or continue to
maintain a retirement account at Merrill Lynch for those shares.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from such shareholder's Investment Account in the form of payments by
check or through automatic payment by direct deposit to such shareholder's bank
account on either a monthly or quarterly basis. A Class A or Class D shareholder
whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to
have shares redeemed on a monthly, bi-monthly, quarterly, semiannual or annual
basis through the CMA(R) or CBA(R) Systematic Redemption Program, subject to
certain conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be
made in an investor's Investment Account by prearranged charges of $50 or more
to such investor's regular bank account. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more through the CMA(R) or CBA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such
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<PAGE> 40
exchanges may be waived or modified, as may the Conversion Period applicable to
the deposited shares. Termination of participation in a Program may result in
the redemption of shares held therein or the automatic exchange thereof to
another class at net asset value, which may be shares of a money market fund. In
addition, upon termination of participation in a Program, shares that have been
held for less than specified periods within such Program may be subject to a fee
based upon the current value of such shares. These Programs also generally
prohibit such shares from being transferred to another account at Merrill Lynch,
to another broker-dealer or to the Transfer Agent. Except in limited
circumstances (which may also involve an exchange as described above), such
shares must be redeemed and another class of shares purchased (which may involve
the imposition of initial or deferred sales charges and distribution and account
maintenance fees) in order for the investment not to be subject to Program fees.
Additional information regarding a specific Program (including charges and
limitations on transferability applicable to shares that may be held in such
Program) is available in the Program's client agreement and from Merrill Lynch
Investor Services at (800) MER-FUND (637-3863).
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and in certain of the other mutual funds sponsored by Merrill Lynch as well
as in other securities. Merrill Lynch charges an initial establishment fee and
an annual custodial fee for each account. In addition, eligible shareholders of
the Fund may participate in a variety of qualified employee benefit plans which
are available from the Distributor. The minimum initial purchase to establish
any such plan is $100 and the minimum subsequent purchase is $1.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with a
formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B and
Class C shares and the maximum sales charge in the case of Class A and Class D
shares. Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
fees and distribution charges and any incremental transfer agency costs relating
to each class of shares will be borne exclusively by that class. The Fund will
include performance data for all classes of shares of the Fund in any
advertisement or information including performance data of the Fund.
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<PAGE> 41
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return generally will be lower than average annual total return data since
the average annual rates of return reflect compounding; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time. In
advertisements directed to investors whose purchases are subject to waiver of
the CDSC in the case of Class B and Class C shares (such as investors in certain
retirement plans) or to reduced sales charges in the case of Class A and Class D
shares, performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
CDSC, a lower amount of expenses may be deducted. See "Purchase of Shares." The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate the effect of such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Financial
Times-Actuaries World Index, Financial Times-Actuaries Utility Index, Standard &
Poor's 500 Composite Stock Price Index, the Value Line Composite Index or the
Dow Jones Industrial Average, or to data contained in publications such as
Lipper Analytical Services, Inc., or performance data published by Morningstar
Publications, Inc., Money Magazine, U.S. News and World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine and Fortune Magazine. From time
to time, the Fund may include the Fund's Morningstar risk-adjusted performance
ratings in advertisements or supplemental sales literature. As with other
performance data, performance comparisons should not be considered indicative of
the Fund's relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income are paid quarterly. All net
realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. The per share dividends and distributions
on each class of shares will be reduced as a result of any account maintenance,
distribution and transfer agent fees applicable to that class. See "Additional
Information -- Determination of Net Asset Value." Dividends and distributions
may be reinvested automatically in shares of the Fund, at net asset value
without sales charge. Shareholders may elect in writing to receive any such
dividends or distributions or both, in cash. Dividends and distributions are
taxable to shareholders as described below whether they are reinvested in shares
of the Fund or received in
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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 of the shares of all classes of the Fund is determined once
daily as of 15 minutes after the close of business on the NYSE (generally 4:00
P.M. New York time) on each day during which the NYSE is open. 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 per share is
computed by dividing the sum of the market value of the securities held by the
Fund plus any cash or other assets (including interest and dividends accrued but
not yet received) minus all liabilities (including accrued expenses) by the
total number of shares outstanding at such time. Expenses, including the fees
payable to the Manager and any account maintenance and/or distribution fees
payable to the Distributor, are accrued daily.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C shares
and the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions, which will differ by approximately
the amount of the expense accrual differentials among the classes. The Fund
employs Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of
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the Manager, to provide certain securities prices for the Fund. The Fund paid
fees to MLSPS in the amount of $164 for the fiscal year ended November 30, 1996.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Portfolio
securities which are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes an option, the amount of the premium received is recorded on the books of
the Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or in the case of options traded in the OTC market, the
last bid price. Other investments, including futures contracts and related
options, are stated at market value. 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.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, in any taxable year in which it distributes at least 90% of its
taxable net income, the Fund (but not its shareholders) will not be subject to
Federal income tax to the extent that it distributes its net investment income
and realized capital gains which it distributes to Class A, Class B, Class C and
Class D shareholders (together, the "shareholders"). The Fund intends to
distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options) are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares.
Under Code Section 988, foreign currency gains or losses from certain
forward contracts not traded in the interbank market, from futures contracts
that are not "regulated futures contracts" and from unlisted options will
generally be treated as ordinary income or loss. Such Code Section 988 gains or
losses will increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing each shareholder's basis in his Fund
shares.
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Dividends and distributions are taxable to shareholders even though they
are reinvested in additional shares of the Fund. Not later than 60 days after
the close of its taxable year, the Fund will provide its shareholders with a
written notice designating the amount of any ordinary income dividends or
capital gains dividends. A portion of the Fund's ordinary income dividends may
be eligible for the 70% dividends received deduction allowed to corporations
under the Code, if certain requirements are met. If the Fund pays a dividend in
January which was declared in the previous October, November or December to
shareholders of record on a date in such month, then such dividend or
distribution will be treated for tax purposes as being paid by the RIC and
received by its shareholders on December 31 of the year in which the dividend
was declared.
Redemptions and exchanges of Fund shares are taxable events, and,
accordingly, shareholders may realize gains or losses on such transactions.
Under the Code, if a shareholder exercises the exchange privilege within 90 days
of acquiring Class A shares of the Fund to acquire shares in a second fund ("New
Fund"), then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent the charge paid to the Fund
reduces any charge the shareholder would have owed upon purchase of the New Fund
shares in the absence of the exchange privilege. Instead, such charges will be
treated as an amount paid for the New Fund shares and will be included in the
basis of such shares. See "Shareholder Services -- Exchange Privilege."
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
A loss on the sale or exchange of shares of the Fund held by a shareholder
for less than 6 months will be a capital loss to the extent of any long-term
capital gains distributions paid with respect to such shares.
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. Income 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. Shareholders who are
non-
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resident aliens or foreign entities may be subject to additional U.S.
withholding tax with respect to their proportionate shares of taxes treated as
income to them but not be entitled to claim any deduction or credit in the U.S.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that he is not
otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
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, capital gains distributions and gains on the sale or exchange of
shares of the Fund may also be subject to state, local and foreign 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 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent interests in the same assets of the
Fund and are identical in all respects except that Class B, Class C and Class D
shares bear certain expenses related to the account maintenance associated with
such shares, and Class B and Class C shares bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to account maintenance and distribution expenditures, as
applicable. See "Purchase of Shares." The Fund has received an order from the
Commission permitting the issuance and sale of multiple classes of Common Stock.
The Board of Directors of the Fund may classify and reclassify the shares of the
Fund into additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Directors (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. All shares of the Fund have equal voting rights, except, as noted
above, a class of shares will have exclusive voting rights with respect to
matters relating to the account maintenance and distribution
43
<PAGE> 46
expenses being borne solely by such class. There normally will be no meeting of
shareholders for the purpose of electing Directors unless and until such time as
less than a majority of the Directors holding office have been elected by the
shareholders, at which time the Directors then in office will call a
shareholders' meeting for the election of Directors. Shareholders may, in
accordance with the terms of the Articles of Incorporation, cause a meeting of
shareholders to be held for the purpose of voting on the removal of Directors.
Also, the Fund will be required to call a special meeting of shareholders in
accordance with the requirements of the Investment Company Act to seek approval
of new management and advisory arrangements, of a material increase in
distribution or account maintenance fees or of a change in fundamental policies,
objectives or restrictions. Except as set forth above, the Directors shall
continue to hold office and appoint successor Directors. Each issued and
outstanding share is entitled to participate equally in dividends and
distributions declared and in net assets upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities except that, as noted
above, the Class B, Class C and Class D shares bear certain additional expenses.
Shares issued are fully paid and non-assessable by the Fund and have no
pre-emptive rights. Shares have the conversion rights described in this
Prospectus. Voting rights for Directors are not cumulative.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
financial consultant or Merrill Lynch Financial Data Services, Inc. at
800-637-3863.
44
<PAGE> 47
MERRILL LYNCH GLOBAL UTILITY FUND, INC. --
AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM)
PROGRAM APPLICATION BY CALLING TOLL FREE (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C shares [ ] Class D
shares
of Merrill Lynch Global Utility Fund, Inc. and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. .............................. 4. ...................................
2. .............................. 5. ...................................
3. .............................. 6. ...................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.............................................
....................................................
(Zip Code)
<TABLE>
<S> <C>
Occupation ......................................... Name and Address of Employer.................................................
.............................................................................
.............................................................................
..................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] Check
or [ ] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Global Utility Fund, Inc. Authorization Form.
SPECIFY TYPE OF ACCOUNT (check one): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ....................................................................
Account Number..................................................................
Bank Address....................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor..........................................................
Signature of Depositor .........................................................
Date............................................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
45
<PAGE> 48
MERRILL LYNCH GLOBAL UTILITY FUND, INC. --
AUTHORIZATION FORM (PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
-------------------------------------------------------
-------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Additional Information -- Taxes") either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am no
longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
<TABLE>
<S> <C>
......................, 19....
Dear Sir/Madam: Date of initial purchase
</TABLE>
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch 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 distributor over the next 13-month period which will
equal or exceed:
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000
[ ] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Global Utility Fund,
Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Global Utility Fund, Inc. held as security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint parties, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................. Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
This form when completed should be mailed to:
Merrill Lynch Global Utility Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
46
<PAGE> 49
MERRILL LYNCH GLOBAL UTILITY FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
------------------------------------
Name of Owner.......................................................................
------------------------------------
Social Security No.
First Name Initial Last Name or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A or [ ] Class D shares in Merrill Lynch Global Utility
Fund, Inc. at cost or current offering price. Withdrawals to be made either
(check one) [ ] Monthly on the 24th day of each month, or [ ] Quarterly on the
24th day of March, June, September and December. If the 24th falls on a weekend
or holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on ________________or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [ ]
$________ or [ ] ____% of the current value of [ ] Class A or [ ] Class D shares
in the account.
SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of..........................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print)......................................................
Address.........................................................................
...........................................................................
Signature of Owner..............................................................
Date............................................................................
Signature of Co-Owner (if any)..................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number .............................................................
Account Number..................................................................
Bank Address....................................................................
......................................................................
Signature of Depositor..........................................................
Date............................................................................
Signature of Depositor..........................................................
(If joint account, both must sign)
NOTE: If direct deposit is elected, your blank, unsigned check marked "VOID" or
a deposit slip from your savings account should accompany this application.
47
<PAGE> 50
MERRILL LYNCH GLOBAL UTILITY FUND, INC. --
AUTHORIZATION FORM (PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
[ ] Class A shares [ ] Class B shares
[ ] Class C shares [ ] Class D shares
of Merrill Lynch Global Utility Fund, Inc. subject to the terms set forth below.
In the event that I am not eligible to purchase Class A shares, I understand
that Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Global Utility Fund, Inc. as indicated below:
Amount of each check or ACH debit $..........................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month
beginning ________________ or as soon thereafter as possible.
(month)
I agree that you are preparing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such check or debit. If I change banks or desire to
terminate or suspend this program, I agree to notify you promptly in writing. I
hereby authorize you to take any action to correct erroneous ACH debits of my
bank account or purchases of Fund shares including liquidating shares of the
Fund and credit my bank account. I further agree that if a debit is not honored
upon presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip Code.......................................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: If Automatic Investment Plan is elected, your blank, unsigned check marked
"VOID" should accompany this application.
48
<PAGE> 51
APPENDIX
OPTIONS, FUTURES AND FOREIGN EXCHANGE TRANSACTIONS
The Fund is authorized to use certain derivative instruments, including
options and futures, and to purchase and sell foreign exchange, as described
below. Such instruments, which may be regarded as derivatives, are referred to
collectively herein as "Strategic Instruments."
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures, and Currency
Instruments"), 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 or currency markets occur. Reference is made to
the Statement of Additional Information for further information concerning these
Strategic Instruments.
OPTIONS ON SECURITIES AND SECURITIES INDICES
Purchasing Options. The Fund is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of which
is substantially replicated by securities held in its portfolio for hedging
purposes. 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. When the Fund purchases a put option, in consideration for an upfront
payment (the "option premium") the Fund acquires a right to sell to another
party specified securities owned by the Fund at a specified price (the "exercise
price") on or before a specified date (the "expiration date"), in the case of an
option on securities, or to receive from another party a payment based on the
amount a specified securities index declines below a specified level on or
before the expiration date, in the case of an option on a securities index. The
purchase of a put option limits the Fund's risk of loss in the event of a
decline in the market value of the portfolio holdings underlying the put option
prior to the options expiration date. If the market value of the portfolio
holdings associated with the put option increases rather than decreases,
however, the Fund will lose the option premium and will consequently realize a
lower return on the portfolio holdings than would have been realized without the
purchase of the put. The Fund will not purchase put options on securities or
securities indices if, as a result of such purchase, the aggregate cost of all
outstanding options on securities and securities indices held by the Fund would
exceed 5% of the market value of the Fund's total assets.
The Fund is also authorized to purchase call options on securities held in
its portfolio on which it has written call options, securities it intends to
purchase or securities indices the performance of which substantially replicates
the performance of the types of securities it intends to purchase. When the Fund
purchases a call option, in consideration for the option premium the Fund
acquires a right to purchase from another party specified securities at the
exercise price on or before the expiration date, in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index
A-1
<PAGE> 52
increases beyond a specified level on or before the expiration date, in the case
of an option on a securities index. The purchase of a call option may protect
the fund from having to pay more for a security as a consequence of increases in
the market value for the security during a period when the fund is contemplating
its purchase, in the case of an option on a security, or attempting to identify
specific securities in which to invest in a market the Fund believes to be
attractive, in the case of an option on an Index (an "anticipatory hedge"). In
the event the Fund determines not to purchase a security underlying a call
option, however, the Fund may lose the entire option premium.
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
Writing Covered Options. The Fund is authorized to write (i.e., sell) call
options on securities held in its portfolio or securities indices the
performance of which is substantially replicated by securities held in its
portfolio. When the Fund writes a call option, in return for an option premium
the Fund gives another party the right to buy specified securities owned by the
Fund at the exercise price on or before the expiration date, in the case of an
option on securities, or agrees to pay to another party an amount based on any
gain in a specified securities index beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The Fund may
write call options on securities to earn income, through the receipt of option
premiums; the Fund may write call options on securities indices for hedging
purposes. In the event the party to which the Fund has written an option fails
to exercise its rights under the option because the value of the underlying
securities is less than the exercise price, the Fund will partially offset any
decline in the value of the underlying securities through the receipt of the
option premium. By writing a call option, however, the Fund limits its ability
to sell the underlying securities, and gives up the opportunity to profit from
any increase in the value of the underlying securities beyond the exercise
price, while the option remains outstanding.
The Fund may also write put options on securities or securities indices.
When the Fund writes a put option, in return for an option premium the Fund
gives another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party an amount based on any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write put
options to earn income, through the receipt of option premiums. In the event the
party to which the Fund has written an option fails to exercise its rights under
the option because the value of the underlying securities is greater than the
exercise price, the Fund will profit by the amount of the option premium. By
writing a put option, however, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding, in
the case of an option on a security, or make a cash payment reflecting any
decline in the index, in the case of an option on an index. Accordingly, when
the Fund writes a put option, it is exposed to a risk of loss in the event the
value of the underlying securities falls below the exercise price, which loss
potentially may substantially exceed the amount of option premium received by
the Fund for writing the put option. The Fund will write a put option on a
security or a securities index only if the Fund would be willing to purchase the
security at the exercise price for investment purposes (in the case of an option
on a security) or is writing the put in connection with trading strategies
involving combinations of options -- for example, the sale and purchase of
options with identical expiration dates on the same security or index but
different exercise prices (a technique called a "spread").
A-2
<PAGE> 53
The Fund is also authorized to sell call options in connection with closing
out call options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call options that are "covered." A call option will be considered covered if the
Fund has segregated assets with respect to such option in the manner described
in "Risk Factors in Options, Futures and Currency Instruments" below. A call
option will also be considered covered if the Fund owns the securities it would
be required to deliver upon exercise of the option (or, in the case of option on
a securities index, securities which substantially replicate the performance of
such index) or owns a call option, warrant or convertible instrument which is
immediately exercisable for, or convertible into, such security.
Types of Options. The Fund may engage in transactions in the options on
securities or securities indices described above on U.S. and foreign exchanges
and in the over-the-counter ("OTC") markets. In general, exchange-traded options
have standardized exercise prices and expiration dates and require the parties
to post margin against their obligations, and the performance of the parties
obligations in connection with such options is guaranteed by the exchange or a
related clearing corporation. OTC options have more flexible terms negotiated
between the buyer and seller, but generally do not require the parties to post
margin and are subject to greater risk of counterparty default. See "Additional
Risk Factors of OTC Transactions" below.
FUTURES
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of a commodity at
a specified future date at a specified price. No price is paid upon entering
into a futures contract. Rather, upon purchasing or selling a futures contract
the fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 10%) of the contract value. Each day thereafter until the
futures position is closed, the Fund will pay additional margin representing any
loss experienced as a result of the futures position the prior day or be
entitled to a payment representing any profit experienced as a result of the
futures position the prior day.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive. In
the event that such securities decline in value or the Fund determines not to
complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying commodity
is a currency or securities or interest rate index) purchased or sold for
hedging purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool operator" under regulations
of the Commodity Futures Trading Commission.
A-3
<PAGE> 54
FOREIGN EXCHANGE TRANSACTIONS
The Fund may engage in spot and forward foreign exchange transactions,
purchase and sell options on currencies and purchase and sell currency futures
and related options thereon (collectively, "Currency Instruments") for purposes
of hedging 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.
Forward foreign exchange transactions are OTC contracts to purchase or sell
a specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange
transactions are similar but require current, rather than future, settlement.
The Fund will enter into foreign exchange transactions only for purposes of
hedging either a specific transaction or a portfolio position. The Fund may
enter into a foreign exchange transaction for purposes of hedging a specific
transaction by, for example, purchasing a currency needed to settle a security
transaction or selling a currency in which the Fund has received or anticipates
receiving a dividend or distribution. The Fund may enter into a foreign exchange
transaction for purposes of hedging a portfolio position by selling forward a
currency in which a portfolio position of the Fund is denominated or by
purchasing a currency in which the Fund anticipates acquiring a portfolio
position in the near future.
The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except
that futures are standardized, exchange-traded contracts. See "Futures" above.
The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through the use of currency options. Currency options
are similar to options on securities, but in consideration for an option premium
the writer of a currency option is obligated to sell (in the case of a call
option) or purchase (in the case of a put option) a specified amount of a
specified currency on or before the expiration date for a specified amount of
another currency. The Fund may engage in transactions in options on currencies
either on exchanges or OTC markets. See "Types of Options" above and "Additional
Risk Factors of OTC Transactions" below.
The Fund will not speculate in Currency Instruments. Accordingly, the Fund
will not hedge a currency in excess of the aggregate market value of the
securities which it owns (including receivables for unsettled securities sales),
or has committed to or anticipates purchasing, which are denominated in such
currency. The Fund may, however, hedge a currency by entering into a transaction
in a Currency Instrument denominated in a currency other than the currency being
hedged (a "cross-hedge"). The Fund will only enter into a cross-hedge if the
Manager believes that (i) there is a demonstrable high correlation between the
currency in which the cross-hedge is denominated and the currency being hedged,
and (ii) executing a cross-hedge through the currency in which the cross-hedge
is denominated will be significantly more cost-effective or provide
substantially greater liquidity than executing a similar hedging transaction by
means of the currency being hedged. The Fund may not incur potential net
liabilities with respect to currency or 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. The Fund will not necessarily attempt to hedge
all of its foreign portfolio positions.
Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net
A-4
<PAGE> 55
asset value of the Fund's shares will fluctuate. Moreover, although currency
Instruments will be used with the intention of hedging against adverse currency
movements, transactions in Currency Instruments involve the risk that
anticipated currency movements will not be accurately predicted and that the
Fund's hedging strategies will be ineffective. To the extent that the Fund
hedges against anticipated currency movements which do not occur, the Fund may
realize losses, and decrease its total return, as the result of its hedging
transactions. Furthermore, the Fund will only engage in hedging activities from
time to time and may not be engaging in hedging activities when movements in
currency exchange rates occur. It may not be possible for the Fund to hedge
against currency exchange rate movements, even if correctly anticipated, in the
event that (i) the currency exchange rate is so generally anticipated that the
Fund is not able to enter into a hedging transaction at an effective price, or
(ii) the currency exchange rate movement relates to a market with respect to
which Currency Instruments are not available (such as certain developing
markets) and it is not possible to engage in effective foreign currency hedging.
RISK FACTORS IN OPTIONS, FUTURES AND CURRENCY INSTRUMENTS
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments and
the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments the Fund
will experience a gain or loss which will not be completely offset by movements
in the value of the hedged instruments. 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 Fund intends to enter into transactions involving Strategic Instruments
only if there appears to be a liquid secondary market for such instruments or,
in the case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions." However, there can be no assurance that, at any specific time,
either a liquid secondary market will exist for a Strategic Instrument or the
Fund will otherwise be able to sell such instrument at an acceptable price. It
may therefore not be possible to close a position in a Strategic Instrument
without incurring substantial losses, if at all.
Certain transactions in Strategic Instruments (e.g., forward foreign
exchange transactions, futures transactions, sales of put options) may expose
the Fund to potential losses which exceed the amount originally invested by the
fund in such instruments. When the fund engages in such a transaction, the Fund
will deposit in a segregated account at its custodian liquid securities with a
value at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Securities and
Exchange Commission). Such segregation will ensure that the Fund has assets
available to satisfy its obligations with respect to the transaction, but will
not limit the Fund's exposure to loss.
ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS, LIMITATIONS ON THE USE OF OTC
STRATEGIC INSTRUMENTS
Certain Strategic Instruments traded in OTC markets, including indexed
securities and OTC options, may be substantially less liquid than other
instruments in which the Fund may invest. The absence of liquidity may make it
difficult or impossible for the Fund to sell such instruments promptly at an
acceptable price. The absence of liquidity may also make it more difficult for
the Fund to ascertain a market value for such instruments. The Fund will
therefore acquire illiquid OTC instruments (i) if the agreement pursuant to
which the instrument is purchased contains a formula price at which the
instrument may be terminated or sold, or
A-5
<PAGE> 56
(ii) for which the Manager anticipates the Fund can receive on each business day
at least two independent bids or offers, unless a quotation from only one dealer
is available, in which case that dealer's quotation may be used.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the securities underlying OTC call options currently
outstanding which have been sold by the Fund and margin deposits on the Fund's
outstanding OTC options exceeds 15% of the total assets of the Fund, taken at
market value, together with all other assets of the Fund which are deemed to be
illiquid or are otherwise not readily marketable. However, if an OTC option is
sold by the Fund to a dealer in U.S. government securities recognized as a
"primary dealer" by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option 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 exercise price).
Because Strategic Instruments traded in OTC markets are not guaranteed by
an exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in Strategic Instruments traded in OTC markets only with financial institutions
which have substantial capital or which have provided the Fund with a
third-party guaranty or other credit enhancement.
ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS
The Fund may not use any Strategic Instrument to gain exposure to an asset
or class of assets that it would be prohibited by its investment restrictions
from purchasing directly.
A-6
<PAGE> 57
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
The Chase Manhattan Bank, N.A.
4 Metro Tech Center, 18th Floor
Brooklyn, New York 11245
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
<PAGE> 58
- ------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE STATEMENT
OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE MANAGER, OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................... 2
Merrill Lynch Select Pricing(SM) System...... 3
Financial Highlights......................... 8
Risks and Special Considerations............. 10
Investment Objective and Policies............ 11
Utility Industries -- Description and
Risks.................................... 13
Investment Outside the Utility
Industries............................... 17
Other Investment Policies and Practices.... 18
Management of the Fund....................... 21
Board of Directors......................... 21
Management and Advisory Arrangements....... 22
Transfer Agency Services................... 23
Code of Ethics............................. 23
Purchase of Shares........................... 24
Initial Sales Charge Alternatives --
Class A and Class D Shares............... 26
Deferred Sales Charge Alternatives --
Class B and Class C Shares............... 28
Distribution Plans......................... 31
Limitations on the Payment of
Deferred Sales Charges................... 33
Redemption of Shares......................... 33
Redemption................................. 33
Repurchase................................. 34
Reinstatement Privilege --
Class A and Class D Shares............... 34
Shareholder Services......................... 35
Investment Account......................... 35
Exchange Privilege......................... 36
Automatic Reinvestment of Dividends and
Capital Gains Distributions.............. 37
Systematic Withdrawal Plans................ 37
Automatic Investment Plans................. 37
Fee-Based Programs......................... 37
Retirement Plans........................... 38
Performance Data............................. 38
Additional Information....................... 39
Dividends and Distributions................ 39
Determination of Net Asset Value........... 40
Taxes...................................... 41
Organization of the Fund................... 43
Shareholder Inquiries...................... 44
Shareholder Reports........................ 44
Authorization Form........................... 45
Appendix Options, Futures and Foreign
Exchange Transactions...................... A-1
Code # 11281-0397
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
GLOBAL UTILITY
FUND, INC.
PROSPECTUS [MLYNCH COMPASS]
March 25, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 59
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
-------------------------
Merrill Lynch Global Utility Fund, Inc. (the "Fund") is a diversified
mutual fund seeking both capital appreciation and current income through
investment of at least 65% of its total assets in equity and debt securities
issued by domestic and foreign companies which are, in the opinion of Merrill
Lynch Asset Management, L.P. (the "Manager" or "MLAM"), primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water. There can be no assurance that
the Fund's investment objective will be achieved. The Fund may employ a variety
of instruments and techniques to enhance income and to hedge against market and
currency risk.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated March
25, 1997 (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 25, 1997.
<PAGE> 60
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a diversified, open-end management investment company. The
Fund's investment objective is to seek both capital appreciation and current
income through investment of at least 65% of its total assets in equity and debt
securities issued by domestic and foreign companies which are, in the opinion of
the Manager, primarily engaged in the ownership or operation of facilities used
to generate, transmit or distribute electricity, telecommunications, gas or
water. This objective is a fundamental policy which the Fund may not change
without a vote of a majority of the Fund's outstanding voting securities, as
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act"). There can be no assurance that the Fund's investment objective
will be achieved. The Fund may employ a variety of instruments and techniques to
enhance income and to hedge against market and currency risk, as described under
"Portfolio Strategies Involving Options and Futures" below.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion in the Appendix to the Prospectus for
information with respect to various portfolio strategies involving options and
futures. The following is further information relating to portfolio strategies
involving options and futures the Fund may utilize.
Writing Covered Options. As discussed in the Appendix to the Prospectus,
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. 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.
As discussed in the Appendix to the Prospectus, the Fund also may write put
options on securities or securities indices. 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
2
<PAGE> 61
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 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 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
Appendix to the Prospectus, the Fund will limit transactions in futures and
options on futures to financial futures contracts (i.e., contracts for which the
underlying commodity is a currency or securities or interest rate index)
purchased or sold for hedging purchases (including anticipatory hedges). See the
Appendix to the Prospectus. Set forth below is further information concerning
futures transactions.
3
<PAGE> 62
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 less than 10% of the contract amount,
must be deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called "variation margin," are required to be made on a daily basis as
the price of the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market." At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act in
connection with its strategy of investing in futures contracts. Section 17(f)
relates to the custody of securities and other assets of an investment company
and may be deemed to prohibit certain arrangements between the Fund and
commodities brokers with respect to initial and variation margin. Section 18(f)
of the Investment Company Act prohibits an open-end investment company such as
the Fund from issuing a "senior security" other than a borrowing from a bank.
The staff of the Commission has in the past indicated that a futures contract
may be a "senior security" under the Investment Company Act.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund permit the Fund's futures and options on futures
transactions to include (i) bona fide hedging transactions without regard to the
percentage of the Fund's assets committed to margin and option premiums, and
(ii) non-hedging transactions, provided that the Fund may 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 liquid 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 Exchange Transactions. 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
4
<PAGE> 63
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
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 that 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
5
<PAGE> 64
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, Futures and Currency Transactions. Utilization of
futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the prices of options and futures contracts and
movements in the price of the securities or currencies which are the subject of
the hedge. If the price of the futures contract moves more or less than the
price of the securities or currency, the Fund will experience a gain or loss
which will not be completely offset by movements in the price of the hedged
securities or currency which is the subject of the hedge.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. 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 OTC options for which management believes the Fund can
receive on each business day at least two independent bids or offers, unless a
quotation from only one dealer is available, in which case that dealer's
quotation may be used. 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 or futures commission merchant 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 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 that 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
6
<PAGE> 65
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 that 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
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 15% of its
total 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.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price in a specified
currency, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during such
period although it may be affected by currency fluctuations. In the case of
repurchase agreements, the prices at which the trades are conducted do not
reflect the accrued interest on the underlying obligations. Such agreements
usually cover short periods, often under one week. Repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
constitute only collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or
7
<PAGE> 66
possible losses in connection with the disposition of the collateral. In the
event of a default under such a repurchase agreement, instead of the contractual
fixed rate of return the rate of return to the Fund will depend on intervening
fluctuations of the market value of such security and the accrued interest on
the security. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform. The Fund may not invest more
than 15% of its total assets in repurchase agreements maturing in more than
seven days.
Lending of Portfolio Securities. 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.
Illiquid Securities. The Fund may purchase securities that are not
registered ("restricted securities") under the Securities Act of 1933 as amended
(the "Securities Act"), but can be offered and sold to "qualified institutional
buyers" under Rule 144A under the Securities Act. However, the Fund will not
invest more than 15% of its total assets in illiquid investments, which includes
securities for which there is no readily available market, securities subject to
contractual restrictions on resale, certain investments in asset-backed and
receivable-backed securities and restricted securities, unless the Fund's Board
of Directors continuously determines, based on the trading markets for the
specific restricted security, that it is liquid. The Board of Directors may
adopt guidelines and delegate to the Manager the daily function of determining
and monitoring liquidity of restricted securities. The Board of Directors,
however, will retain sufficient oversight and be ultimately responsible for the
determinations.
The Board of Directors monitors the Fund's investments in these securities
purchased pursuant to Rule 144A, focusing on such factors, among others, as
valuation, liquidity and availability of information. These investments in
securities purchased pursuant to Rule 144A could have the effect of increasing
the level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted securities.
High Yield-High Risk Bonds. Fixed income securities in which the Fund will
invest generally will be limited to those rated investment grade; that is, rated
in one of the four highest rating categories by Standard & Poor's Ratings Group
("S&P") or Moody's Investors Service, Inc. ("Moody's") (i.e., securities rated
at least BBB by S&P or Baa by Moody's), or deemed to be of equivalent quality 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
8
<PAGE> 67
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 rated lower than CCC for S&P or Caa
for Moody's.
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 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.
Under the fundamental investment restrictions, the Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities) except that, under
normal circumstances, the Fund will invest more than 25% of its total
assets in the securities of issuers in the utility industry.
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and
9
<PAGE> 68
the guidelines set forth in the Fund's Prospectus and Statement of
Additional Information, as they may be amended from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
The following non-fundamental investment restrictions have been adopted by
the Fund and may be changed by the Board of Directors without approval by the
shareholders. Under these restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the Securities Act
(a "Rule 144A security") and determined to be liquid by the Fund's Board of
Directors are not subject to the limitations set forth in this investment
restriction.
d. Notwithstanding fundamental restriction (7) above, borrow amounts
in excess of 10% of its total assets, taken at market value (including the
amount borrowed), and then only from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares.
In addition, the Fund will not purchase securities while borrowings exceed
5% (taken at market value) of its total assets.
10
<PAGE> 69
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 that are held by the Fund, the market value of the
underlying securities covered by OTC call options currently outstanding that
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceed 15% of the total assets of the Fund taken at market
value, together with all other assets of the Fund that are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the Fund to
a primary U.S. Government securities dealer recognized by the Federal Reserve
Bank of New York and the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities as is equal
to the repurchase price less the amount by which the option is "in-the-money"
(i.e., current market value of the underlying security minus the option's strike
price). The repurchase price with the primary dealers is typically a formula
price which is generally based on a multiple of the premium received for the
option, plus the amount by which the option is "in-the-money." This policy as to
OTC options is not a fundamental policy of the Fund and may be amended by the
Directors of the Fund without the approval of the Fund's shareholders. However,
the Fund will not change or modify this policy prior to the change or
modification by the Commission staff of its position.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving the Manager's
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
or its affiliates except for brokerage transactions permitted under the
Investment Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions and Brokerage." Without such an exemptive order, the
Fund is prohibited from engaging in portfolio transactions with Merrill Lynch or
its affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act of 1933 in which
such firms or any of their affiliates participate as an underwriter or dealer.
11
<PAGE> 70
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each executive officer and Director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (64) -- President and Director (1)(2) -- President of the
Manager (which term, as used herein, includes its corporate predecessors) since
1977; President of Fund Asset Management, L.P. ("FAM") (which term, as used
herein, includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML&Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1977.
RONALD W. FORBES (56) -- Director (2) -- 1400 Washington Avenue, Albany,
New York 12222. Professor of Finance, School of Business, State University of
New York at Albany, since 1989. Member, Task Force on Municipal Securities
Markets, Twentieth Century Fund.
CYNTHIA A. MONTGOMERY (44) -- Director (2) -- Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 20163. Professor, Harvard Business
School since 1989; Associate Professor, J.L. Kellogg Graduate School of
Management, Northwestern University from 1985 to 1989; Assistant Professor,
Graduate School of Business Administration, The University of Michigan from 1979
to 1985; Director, UNUM Corporation since 1990 and Director of Newell Co. since
1995.
CHARLES C. REILLY (65) -- Director (2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to 1990;
Partner, Small Cities Cable Television since 1986.
KEVIN A. RYAN (64) -- Director (2) -- 127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02167. Founder, current Director and Professor of The Boston
University Center for the Advancement of Ethics and Character; Professor of
Education at Boston University since 1982; formerly taught on the faculties of
The University of Chicago, Stanford University and Ohio State University.
RICHARD R. WEST (59) -- Director (2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, and Dean from 1984 to 1993, and currently Dean
Emeritus of New York University Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado,
Inc. (real estate holding company), Smith-Corona Corporation (manufacturer of
typewriters and word processors) and Alexander's Inc. (real estate company).
TERRY K. GLENN (56) -- Executive Vice President (1)(2) -- Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.
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<PAGE> 71
NORMAN R. HARVEY (63) -- Senior Vice President (1)(2) -- Senior Vice
President of the Manager and FAM since 1982; Senior Vice President of Princeton
Services since 1993.
WALTER D. ROGERS (54) -- 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 (47) -- 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 (36) -- Vice President (1)(2) -- Vice President and
Director of Taxation of the Manager since 1990.
PATRICK D. SWEENEY (42) -- Secretary (1)(2) -- Vice President of the
Manager since 1990; Vice President and Associate Counsel of Security Pacific
Merchant Bank from 1988 to 1990; Lawyer in private practice from 1981 to 1988.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director is a director, trustee or officer of other investment
companies for which the Manager or FAM acts as Manager.
As of February 28, 1997, the officers and Directors of the Fund as a group
(12 persons) owned an aggregate of less than 1% of the outstanding shares of
Common Stock of ML & Co. and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
The Fund pays each Director not affiliated with the Manager (each a
"non-interested Director") 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 (the "Committee"), which consists of all of the
non-interested Directors, with a fee of $1,000 per year; the Chairman of the
Committee receives an additional fee of $1,000 per year. For the fiscal year
ended November 30, 1996, fees and expenses paid to the non-interested Directors
aggregated $19,137.
The following table sets forth the compensation paid by the Fund to the
non-interested Directors for the fiscal year ended November 30, 1996 and the
aggregate compensation paid by all investment companies advised by MLAM and its
affiliate, FAM ("MLAM/FAM Advised Funds") to the non-interested Directors for
the calendar year ended December 31, 1996.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM FUND AND
AGGREGATE PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO
NAME OF DIRECTOR FROM FUND PART OF FUND EXPENSES DIRECTOR(1)
- -------------------------------------------- ------------ --------------------- ----------------
<S> <C> <C> <C>
Ronald W. Forbes............................ $3,600 None $142,500
Cynthia A. Montgomery....................... $3,600 None $142,500
Charles C. Reilly........................... $3,600 None $293,833
Kevin A. Ryan............................... $3,600 None $142,500
Richard R. West............................. $4,600 None $269,833
</TABLE>
- ---------------
(1) The Directors serve on the Boards of MLAM/FAM Advised Funds as follows: Mr.
Forbes (23 registered investment companies consisting of 36 portfolios); Ms.
Montgomery (23 registered investment companies consisting of 36 portfolios);
Mr. Reilly (41 registered investment companies consisting of 54 portfolios);
Mr. Ryan (23 registered investment companies consisting of 36 portfolios);
and Mr. West (41 registered investment companies consisting of 54
portfolios).
13
<PAGE> 72
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager is a Delaware limited partnership and is owned and controlled
by ML & Co., a financial services holding company and the parent of Merrill
Lynch. Reference is made to "Management of the Fund -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its advisory clients arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold there may be
an adverse effect on price.
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, 1996, 1995 and 1994, the total management fees paid by the Fund to the
Manager were $2,463,017, $2,811,414 and $3,831,948, respectively.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of the Manager or any of
their affiliates. The Fund pays all other expenses incurred in the operation of
the Fund, including, among other things, taxes; expenses for legal and auditing
services; costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent paid
by the Distributor); charges of the Custodian, any sub-custodian and Transfer
Agent; expenses of redemption of shares; Securities and Exchange Commission
fees; expenses of registering the shares under Federal, state or foreign laws;
fees and expenses of unaffiliated Directors; accounting and pricing costs
(including the daily calculation of net asset value; insurance; interest;
brokerage costs; litigation and other extraordinary or non-recurring expenses;
and other expenses properly payable by the Fund). Accounting services are
provided to the Fund by the Manager and the Fund reimburses the Manager for its
costs in connection with such services on a semi-annual basis. As required by
the Fund's distribution agreement, the Distributor will pay the promotional
expenses of the Fund incurred in connection with the offering of its shares.
Certain expenses in connection with the offering of the Fund's Class B, Class C
and Class D shares will be financed by the Fund pursuant to each class's
respective Distribution Plan in compliance with Rule 12b-1 under the Investment
Company Act. See "Purchase of Shares -- Distribution Plans."
The Manager is a limited partnership, the partners of which are ML&Co. and
Princeton Services. ML&Co. and Princeton Services are "controlling persons" of
the Manager as defined under the Investment Company Act because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management or policies.
14
<PAGE> 73
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML&Co., and
an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a fee
for providing investment advisory services to the Manager with respect to the
Fund in an amount to be determined from time to time by the Manager and MLAM
U.K. but in no event in excess of the amount that the Manager actually receives
for providing services to the Fund pursuant to the Management Agreement.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will remain in effect for two years from the date of
its adoption. Thereafter, it will remain in effect from year to year if approved
annually (a) by the Board of Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties to
such contract or interested persons (as defined in the Investment Company Act)
of any such party. Such contracts are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party thereto
or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives and shares of Class B and Class C are sold
to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees and Class B and Class C shares bear the expenses of the ongoing
distribution fees and the additional incremental transfer agency costs resulting
from the deferred sales charge arrangements. Class B, Class C and Class D shares
each have exclusive voting rights with respect to the Rule 12b-1 distribution
plan adopted with respect to such class pursuant to which the account
maintenance and/or distribution fees are paid. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by the Manager or its affiliate, FAM.
Funds advised by FAM or the Manager that utilize the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Management Agreement described
above.
15
<PAGE> 74
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal year
ended November 30, 1996 was $6,768, of which the Distributor received $610, and
Merrill Lynch received $6,158. The gross sales charges for the sale of Class A
shares for the fiscal year ended November 30, 1995 was $8,983, of which the
Distributor received $689 and Merrill Lynch received $8,294. The gross sales
charges for the sale of Class A shares for the fiscal year ended November 30,
1994 was $336,856, of which the Distributor received $19,018 and Merrill Lynch
received $317,838. During the fiscal year ended November 30, 1996, the
Distributor received no CDSCs on Class A shares for which the initial sales
charge was waived. During the fiscal year ended November 30, 1995 the
Distributor received no CDSCs on Class A shares for which the initial sales
charge was waived. During the fiscal year ended November 30, 1994, the
Distributor received CDSCs of $468 on Class A shares for which the initial sales
charge was waived.
The gross sales charges for the sale of Class D shares for the fiscal year
ended November 30, 1996 was $17,277, of which the Distributor received $1,510,
and Merrill Lynch received $15,767. The gross sales charges for the sales of
Class D shares for the fiscal year ended November 30, 1995 was $18,233 of which
the Distributor received $1,975 and Merrill Lynch received $16,258. The gross
sales charges for the sale of Class D shares for the fiscal period October 21,
1994 (commencement of operations) to November 30, 1995 was $6,159 of which the
Distributor received $565 and Merrill Lynch received $5,594. During the fiscal
year ended November 30, 1996, the Distributor received no CDSCs on Class D
shares for which the initial sales charge was waived. During the fiscal year
ended November 30, 1995, the Distributor received no CDSC's on Class D shares
for which the initial sales charge was waived. For the fiscal period October 21,
1994 (commencement of operations) to November 30, 1995, the Distributor received
no CDSC's on Class D shares for which the initial sales charge was waived.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as that
term is defined in the Investment Company Act, but does not include purchases of
any such company which has not been in existence for at least six months or
which has no purpose other than the purchase of shares of the Fund or shares of
other registered investment companies at a discount; provided, however, that it
shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders of
a company, policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities
16
<PAGE> 75
dealer, with sufficient information to permit confirmation of qualification.
Acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares held in the name
of a nominee or custodian under pension, profit-sharing, or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A and Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent, Merrill Lynch Financial
Data Services, Inc. (the "Transfer Agent"). The Letter of Intention is not
available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A and Class D shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares does not equal the amount stated in the Letter of Intention
(minimum of $25,000), the investor will be notified and must pay, within 20 days
of the expiration of such Letter, the difference between the sales charge on the
Class A or Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or Class
D shares equal to at least five percent of the intended amount will be held in
escrow during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If a purchase
during the term of such Letter would otherwise be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to the reduced percentage sales charge
which would be applicable to a single purchase equal to the total dollar value
of the Class A shares then being purchased under such Letter, but there will be
no retroactive reduction of the sales charges on any previous purchase. The
value of any shares redeemed or otherwise disposed of by the purchaser prior to
termination or completion of the Letter of Intention will be deducted from the
total purchases made under such Letter. An exchange from a MLAM-advised money
market fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are
offered to participants in the Merrill Lynch Blueprint(SM) Program
("Blueprint"). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
Blueprint is directed to small investors, group Individual Retirement Accounts
("IRAs") and participants in certain affinity groups such as credit unions,
trade associations and benefit plans. Investors placing orders to purchase Class
A or Class D shares of the Fund through Blueprint will acquire the Class A or
Class D shares at net asset value plus a sales charge calculated in accordance
with the Blueprint sales charge schedule (i.e., up to $5,000 at 3.5%, and
$5,000.01 or more at the standard sales charge rates disclosed in the
Prospectus). In addition, Class A or Class D shares of the Fund are being
offered at net asset value plus a sales charge of 1/2 of 1% for corporate or
group IRA programs placing orders to purchase their Class A or Class D shares
through Blueprint. Services,
17
<PAGE> 76
including the exchange privilege, available to Class A and Class D investors
through Blueprint, however, may differ from those available to other investors
in Class A or Class D shares. Orders for purchases and redemptions of Class A or
Class D shares of the Fund may be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price is
$100, with a $50 minimum for subsequent purchases through Blueprint. There are
no minimum initial or subsequent purchase requirements for participants who are
part of an automatic investment plan.
Class A and Class D shares are offered at net asset value, 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 rollover assets from Employer
Sponsored Retirement and Savings Plans (see definition below) whose Trustee
and/or Plan Sponsor has entered into a Merrill Lynch Directed IRA Rollover
Program Service Agreement. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employee Access Accounts(SM). Class A or Class D shares are offered at net
asset value to Employee Access Accounts(SM) available through qualified
employers with 500 or more eligible employees that provide employer-sponsored
retirement or savings plans that are eligible to purchase such shares at net
asset value. The initial minimum for such accounts is $500, except that the
initial minimum for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
Purchase Privileges of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, directors and employees
of ML & Co., and its subsidiaries (the term "subsidiaries," when used herein
with respect to ML & Co., includes MLAM, FAM and certain other entities directly
or indirectly wholly-owned and controlled by ML & Co.), and any trust, pension,
profit-sharing or other benefit plan for such persons, may purchase Class A
shares of the Fund at net asset value. Under such programs, the Fund realizes
economies of scale and reduction of sales-related expenses by virtue of
familiarity with the Fund.
Employees and directors or trustees wishing to purchase shares of the Fund
must satisfy the Fund's suitability standards.
Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, the investor must also establish that such redemption had been
made within 60 days prior to the investment in the Fund, and the proceeds from
the redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied. First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from a
18
<PAGE> 77
redemption of such shares of other mutual funds and that such shares have been
outstanding for a period of no less than 6 months. Second, such purchase of
Class D shares must be made within 60 days after the redemption and the proceeds
from the redemption must have been maintained in the interim in cash or a money
market fund.
Class D shares of the Fund also will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied. First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund was
subject to a sales charge either at the time of purchase or on a deferred basis.
Second, such purchase of Class D shares must be made within 90 days after such
notice.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or FAM
who purchased such closed-end fund shares prior to October 21, 1994 and wish to
reinvest the net proceeds of a sale of their closed-end fund shares of common
stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D shares"), if the following conditions are met. First,
the sale of closed-end fund shares must be made through Merrill Lynch, and the
net proceeds therefrom must be immediately reinvested in Eligible Class A or
Class D shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the fund in
connection with a tender offer conducted by the eligible fund and reinvest the
proceeds immediately in the designated class of shares of the Fund. This
investment option is available only with respect to eligible shares as to which
no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
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<PAGE> 78
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund which
might result from an acquisition of assets having net unrealized appreciation
which is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any
MLAM-advised mutual fund. Minimum purchase requirements may be waived or varied
for such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is
20
<PAGE> 79
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors or
by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are required to be
approved by the vote of the Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the National Association of Securities
Dealers, Inc. ("NASD") Conduct Rules imposes a limitation on certain asset-based
sales charges such as the distribution fee and the CDSC borne by the Class B and
Class C shares, but not the account maintenance fee. The maximum sales charge
rule is applied separately to each class. As applicable to the Fund, the maximum
sales charge rule limits the aggregate of distribution fee payments and CDSCs
payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares and
Class C shares, computed separately (defined to exclude shares issued pursuant
to dividend reinvestments and exchanges), plus (2) interest on the unpaid
balance for the respective class, computed separately, at the prime rate plus 1%
(the unpaid balance being the maximum amount payable minus amounts received from
the payment of the distribution fee and CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest charges on the
unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges at
any time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance fee.
In certain circumstances the amount payable pursuant to the voluntary maximum
may exceed the amount payable under the NASD formula. In such circumstances,
payment in excess of the amount payable under the NASD formula will not be made.
The following table sets forth comparative information as of November 30,
1996 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to Class B shares only, the Distributor's voluntary
maximum. The information is shown for the period December 28, 1990 (commencement
of operations) to November 30, 1996, with respect to Class B shares, and for the
period October 21, 1994 (commencement of operations) to November 30, 1996, with
respect to Class C shares.
21
<PAGE> 80
DATA CALCULATED AS OF NOVEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Under NASD Rule as Adopted......... $635,280 $39,705 $11,662 $51,367 $ 14,002 $37,365 $1,677
Under Distributor's Voluntary
Waiver........................... $635,280 $39,705 $3,176 $42,881 $ 14,002 $28,879 $1,677
CLASS C SHARES
Under NASD Rule as Adopted......... $ 3,731 $ 233 $ 28 $ 261 $ 28 $ 233 $ 18
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B shares sold since December 28, 1990
(commencement of operations) and all eligible Class C shares sold since
October 21, 1994 (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 CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 6, 1993 under a prior plan
applicable to Class B shares at the 0.75% rate, 0.50% has been treated as a
distribution fee and 0.25% has been treated as a service fee and not subject
to the NASD maximum sales charge rule.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the New
York Stock Exchange is restricted as determined by the Commission or such
Exchange is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the Commission as a result
of which disposal of portfolio securities or determination of the net asset
value of the Fund is not reasonably practicable, and for such other periods as
the Commission may by order permit for the protection of shareholders of the
Fund.
Shares are redeemable at the option of the Fund if, in the opinion of the
Fund, ownership of the shares has or may become concentrated to the extent which
would cause the Fund to be deemed a personal holding company within the meaning
of the Code.
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an IRA or other
retirement plan or on redemptions of Class B shares following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a distribution
following retirement under a tax-
22
<PAGE> 81
deferred retirement plan or attaining age 59 1/2 in the case of an IRA or other
retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for life (or life expectancy) or any redemption
resulting from the tax-free return of an excess contribution to an IRA; or (b)
any partial or complete redemption following the death or disability (as defined
in the Code) of a Class B shareholder (including one who owns the Class B shares
as joint tenant with his or her spouse), provided the redemption is requested
within one year of the death or initial determination of disability.
For the fiscal years ended November 30, 1996, 1995, and 1994, the
Distributor received CDSCs of $754,651, $1,378,994 and $1,469,812, respectively,
with respect to redemptions of Class B shares, all of which were paid to Merrill
Lynch. For the fiscal years ended November 30, 1996 and 1995 the Distributor
received CDSCs of $1,659 and $1,926, respectively, with respect to redemptions
of Class C shares all of which were paid to Merrill Lynch. For the fiscal period
October 21, 1994 (commencement of operations) to November 30, 1994, the
Distributor received no CDSCs with respect to redemption of Class C shares.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to
participants in Blueprint. Blueprint is directed to small investors, group IRAs
and participants in certain affinity groups such as trade associations and
credit unions. Class B shares of the Fund are offered through Blueprint only to
members of certain affinity groups. The CDSC is waived in connection with
purchase orders placed through Blueprint. Services, including the exchange
privilege, available to Class B shareholders through Blueprint, however, may
differ from those available to other Class B investors. Orders for purchases and
redemptions of Class B shares of the Fund will be grouped for execution purposes
which, in some circumstances, may involve the execution of such orders two
business days following the day such orders are placed. The minimum initial
purchase price is $100, with a $50 minimum for subsequent purchases through
Blueprint. There is no minimum initial or subsequent purchase requirement for
investors who are part of a Blueprint automatic investment plan. Additional
information concerning these Blueprint programs, including any annual fees or
transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith
Incorporated, The Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies -- Other Investment
Policies and Practices" 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 NASD
and policies established by the Directors of the Fund,
23
<PAGE> 82
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, 1996, the Fund paid total brokerage
commissions of $251,065, of which $5,724 or 2.28% was paid to Merrill Lynch for
effecting 2.56% of the aggregate amount of transactions in which the Fund paid
brokerage commissions. For the fiscal year ended November 30, 1995, the Fund
paid total brokerage commissions of $354,790, of which $8,312 or 2.3% was paid
to Merrill Lynch for effecting 2.3% of the aggregate amount of transactions in
which the Fund paid brokerage commissions. For the fiscal year ended November
30, 1994, the Fund paid total brokerage commissions of $432,917, of which
$27,114 or 6.3% was paid to Merrill Lynch for effecting 6.6% of the aggregate
amount of transactions in which the Fund paid brokerage commissions. The
portfolio turnover rates for the fiscal years ended November 30, 1996 and 1995
were 5.03% and 2.92%, respectively.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation of
foreign stock exchanges and brokers than in the United States.
The Fund invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with the dealers who make a market in
the securities involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund are prohibited from dealing with the Fund as principal
in the purchase and sale of securities. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the Fund, including
Merrill Lynch, will not serve as the Fund's dealer in such transactions.
However, affiliated persons of the Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in United States dollars, the Fund intends to manage its portfolio so as
to give reasonable assurance that it will be able to obtain United States
dollars to the extent necessary to meet anticipated redemptions. Under present
conditions, it is not believed that these considerations will have any
significant effect on its portfolio strategy.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, Merrill Lynch may execute transactions for the Fund on the floor of any
national securities exchange provided that prior authorization of such
transactions is obtained and Merrill Lynch furnishes a statement to the Fund at
least annually setting forth the compensation it has received in connection with
such transactions.
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
24
<PAGE> 83
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 as
of 15 minutes after the close of business on the New York Stock Exchange
("NYSE") (generally 4:00 P.M. New York time) on each day the NYSE is open for
trading. The NYSE is not open on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Any assets or liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market rates as
quoted by one or more banks or dealers on the day of valuation. The net asset
value is computed by dividing the value of the securities held by the Fund plus
any cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total number
of shares outstanding at such time. Expenses, including the fees payable to the
Manager and the Distributor and any account maintenance and/or distribution fees
are accrued daily. The per share net asset value of the Class B, Class C and
Class D shares generally will be lower than the per share net asset value of the
Class A shares reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares and the daily expense accruals of the account
maintenance fees applicable with respect to the Class D shares; moreover, the
per share net asset value of the Class B and Class C shares generally will be
lower than the per share net asset value of the Class D shares reflecting the
daily expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to the Class B and Class C shares of the Fund. It is
expected, however, that the per share net asset value of the classes will tend
to converge (although not necessarily meet) immediately after the payment of
dividends or distributions, which will differ by approximately the amount of the
expense accrual differential among the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. Securities traded in the
over-the-counter market are valued at the last available bid price in the
over-the-counter ("OTC") market prior to the time of valuation. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. When the Fund writes an option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the OTC
market, the last asked price. Options purchased by the Fund are valued at their
last sale price in the case of exchange-traded options or in the case of options
traded in the OTC market, the last bid price. Other investments, including
futures contracts and related options, are stated at market value. 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. Such valuations and procedures will be reviewed
periodically by the Board of Directors.
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SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below that are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to United States investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends and
long-term capital gains distributions. The quarterly statements will also show
any other activity in the account since the preceding statement. Shareholders
will receive separate transaction confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital 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 or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class A or Class D
shares so that the cash proceeds can be transferred to the account at the new
firm or such shareholder must continue to maintain an Investment Account at the
Transfer Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder.
If the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he be issued certificates for his
shares, and then must turn the certificates over to the new firm for re-
registration as described in the preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to the Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through Blueprint, no minimum charge to the
investors' bank account is required. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund, in the
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more ($1 for retirement accounts) through the CMA(R) or CBA(R) Automated
Investment Program.
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AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund, without sales charge, as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing or by telephone (1-800-MER-FUND)
to receive either their income dividends or capital gains distributions, or
both, in cash, in which event payment will be mailed or direct deposited on or
about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing that
they no longer wish to have their dividends and/or distributions reinvested in
shares of the Fund or vice versa and, commencing ten days after the receipt by
the Transfer Agent of such notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS -- CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account in the form of payments by check or through automatic
payment by direct deposit to such shareholder's bank account, on either a
monthly or quarterly basis as provided below. Quarterly withdrawals are
available for shareholders who have acquired Class A or Class D shares of the
Fund having a value, based on cost or the current offering price, of $5,000 or
more, and monthly withdrawals are available for shareholders with Class A or
Class D shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value determined as
described herein on the 24th day of each month or the 24th day of the last month
of each quarter, whichever is applicable. If the Exchange is not open for
business on such date, the Class A or Class D shares will be redeemed at the
close of business on the following business day. The check for the withdrawal
payment will be mailed, or the direct deposit for withdrawal payment will be
made, on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends and distributions on all Class A or
Class D shares in the Investment Account are reinvested automatically in Fund
Class A or Class D shares, respectively. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Fund's Transfer Agent or the Distributor. Withdrawal
payments should not be considered as dividends, yield or income. Each withdrawal
is a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced correspondingly.
Purchases of additional Class A or Class D shares concurrent with withdrawals
are ordinarily disadvantageous to the shareholder because of sales charges and
tax liabilities. The Fund will not knowingly accept purchase orders for Class A
or Class D shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bi-monthly, quarterly, semiannual or annual basis through the CMA(R)/CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$25.
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<PAGE> 86
The proceeds of systematic redemptions will be posted to the shareholder's
account three 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
CMA(R)/CBA(R) Systematic Redemption Program is not available if Fund shares are
being purchased within the account pursuant to the Automatic Investment Program.
For more information on the CMA(R)/CBA(R) Systematic Redemption Program,
eligible shareholders should contact their financial consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as
in other securities. Merrill Lynch charges an initial establishment fee and an
annual custodial fee for each account. Information with respect to these plans
is available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100 and the minimum subsequent purchase is $1.
However, there is no minimum for purchases through Blueprint's systematic
investment plans.
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing(SM) System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund, and
the shareholder does not hold Class A shares of the second fund in his account
at the time of the exchange and is not otherwise eligible to acquire Class A
shares of the second fund, the shareholder will receive Class D shares of the
second fund as a result of the exchange. Class D shares also may be exchanged
for Class A shares of a second MLAM-advised mutual fund at any time as long as,
at the time of the exchange, the shareholder holds Class A shares of the second
fund in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund. Class B, Class C and Class D shares
will be exchangeable with shares of the same class of other MLAM-advised mutual
funds. For purposes of computing the CDSC that may be payable upon a disposition
of the shares acquired in the exchange, the holding period for the previously
owned shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other Fund as more fully described below. Class A, Class B, Class
C and Class D shares also will be exchangeable for shares of certain
MLAM-advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C or Class D shares. Shares with
an aggregate net asset value of at least
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<PAGE> 87
$100 are required to qualify for the exchange privilege, and any shares utilized
in an exchange must have been held by the shareholder for 15 days.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
dividend reinvestment Class A and Class D shares shall be exchanged into the
Class A or Class D shares of the other funds or into shares of the Class A and
Class D money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively ("new Class B or
Class C shares"), of another MLAM-advised mutual fund, on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the sales load that
may be payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B or Class C shares is "tacked" to the
holding period of the new Class B or Class C shares. For example, an investor
may exchange Class B shares of the Fund for those of Merrill Lynch Special Value
Fund, Inc. ("Special Value Fund") after having held the Fund's Class B shares
for two-and-a-half years. The 2% CDSC that generally would apply to a redemption
would not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Special Value Fund and receive cash. There will be
no CDSC due on this redemption, since by "tacking" the two-and-a-half-year
holding period of the Fund's Class B shares to the three year holding period for
the Special Value Fund Class B shares, the investor will be deemed to have held
the new Special Value Fund Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
toward satisfaction of the holding period requirement for purposes of reducing
the CDSC or with respect to Class B shares, toward satisfaction of the
conversion period. However, shares of a money market fund that were acquired as
a result of an exchange for Class B or Class C shares of the Fund may, in turn,
be exchanged back into Class B or Class C shares, respectively, of any fund
offering such shares, in which event the holding period for Class B or Class C
shares of that fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange Class
B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the
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Class B shares for two-and-a-half years and three years later decide to redeem
the shares of Institutional Fund for cash. At the time of this redemption, the
2% CDSC that would have been due had the Class B shares of the Fund been
redeemed for cash rather than exchanged for shares of Institutional Fund will be
payable. If, instead of such redemption the shareholder exchanged such shares
for Class B shares of a fund which the shareholder continued to hold for an
additional two-and-a-half years, any subsequent redemption would not incur a
CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire transfer through their securities dealers. The Fund
reserves the right to require a properly completed Exchange Application. This
exchange privilege may be modified or terminated in accordance with the rules of
the Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares to the general public at any time and may
thereafter resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income are paid quarterly. All net
realized long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. From time to time, the Fund may declare a
special distribution at or about the end of the calendar year in order to comply
with a Federal income tax requirement that certain percentages of its ordinary
income and capital gains be distributed during the taxable year. Premiums from
expired call options written by the Fund and net gains from closing purchase
transactions are treated as short-term capital gains for Federal income tax
purposes. See "Shareholder Services -- Automatic Reinvestment of Dividends and
Capital Gains Distributions" for information concerning the manner in which
dividends and distributions may be reinvested automatically in shares of the
Fund. Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as described below whether they are invested in shares of the Fund
or received in cash. The per share dividends and distributions on Class B and
Class C shares will be lower than the per share dividends and distributions on
Class A and Class D shares as a result of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and Class
C shares; similarly, the per share dividends and distributions on Class D shares
will be lower than the per share dividends and distributions on Class A shares
as a result of the account maintenance fees applicable with respect to the Class
D shares. See "Determination of Net Asset Value."
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TAXES
The Fund has qualified and intends to continue to qualify for the special
tax treatment afforded regulated investment companies ("RICs") under the
Internal Revenue Code of 1986, as amended (the "Code"). As a RIC, the Fund will
not be subject to Federal income tax on the part of its net ordinary income and
net realized capital gains which it distributes to Class A, Class B, Class C and
Class D shareholders (together, the "shareholders"). In order to qualify, the
Fund must, among other things, (i) derive at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, gains
from the sale of securities, certain gains from foreign currencies, or other
income (including but not limited to gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; (ii) derive less than 30% of its gross income from
gains from the sale or other disposition of stock, 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, United States
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 United States
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, Class B, Class C and Class D shareholders according to a
method (which it believes is consistent with the Commission exemptive order
permitting the issuance and sale of multiple classes of stock) that is based
upon the gross income that is allocable to the Class A, Class B, Class C and
Class D shareholders during the taxable year, or such other method as the
Internal Revenue Service may prescribe. If the Fund pays a dividend in January
that was declared in the previous October, November or December to shareholders
of record on a date in such a month, then such dividend or distribution will be
treated for tax purposes as being paid on December 31, and will be taxable to
its shareholders on December 31 of the year in which the dividend was declared.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains dividends and
redemption payments ("backup withholding").
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<PAGE> 90
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.
Income 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,
subject to certain restrictions, 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 among the classes of
shareholders according to a method similar to that described above for the
allocation of dividends eligible for the dividends received deduction.
No deductions for foreign taxes, however, may be claimed by noncorporate
shareholders who do not itemize deductions. Foreign tax credits cannot be
claimed by certain retirement accounts. A shareholder that is a nonresident
alien individual or a foreign corporation may be subject to United States
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
United States tax for the foreign taxes treated as having been paid by such
shareholder. The Fund will report annually to its shareholders the amount per
share of such withholding taxes.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.
If a shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss he can recognize on the exchange will be
reduced (or the gain increased) to the extent the sales charge paid to the Fund
reduces any sales charge the shareholder would have owed upon purchase of the
new shares in the absence of the exchange privilege. Instead, such charge will
be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar basis, and 98% of its capital
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<PAGE> 91
gains, determined, in general, on an October 31 year end, plus certain
undistributed amounts from previous years. While the Fund intends to distribute
its income and capital gains in the manner necessary to avoid imposition of the
4% excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution requirements.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell options and futures. Options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each such
option or futures contract will be treated as sold for its fair market value on
the last day of the taxable year. In general, unless the special election
referred to in the previous sentence is made, gain or loss from transactions in
options and futures contracts will be 60% long-term and 40% short-term capital
gain or loss.
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.
Similarly, Code Section 1091, which deals with "wash sales," may cause the Fund
to postpone recognition of certain losses for tax purposes; and Code Section
1258, which deals with "conversion transactions," may apply to recharacterize
certain capital gains as ordinary income for tax purposes.
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.
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.
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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 and gains on the sale or exchange
of shares in the Fund also may be subject to state and local taxes.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state, local or foreign taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with a formula specified by the Securities
and Exchange Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment. Such data will be
computed as described above, except that (i) as required by the periods of the
quotations, actual annual, annualized or aggregate data, rather than average
annual data, may be quoted and (ii) the maximum applicable sales charges will
not be included. Actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
34
<PAGE> 93
Set forth below is total return information for the Class A, Class B, Class
C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES* CLASS D SHARES*
--------------------------- --------------------------- --------------------------- ---------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF $1,000 THE END OF $1,000 THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
- -------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ended
November 30,
1996........ 13.23% $1,132.30 13.07% $1,130.70
Five Years
Ended
November 30,
1996........ 10.92% $1,679.40 10.97% $1,683.00
Inception
(December
28, 1990) to
November 30,
1996........ 11.05% $1,861.20 10.96% $1,852.10
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
November 30,
1996........ 17.94% $1,179.40 17.07% $1,170.70
Year Ended
November 30,
1995........ 16.34% $1,163.40 15.38% $1,153.80
Year Ended
November 30,
1994........ (4.89)% $ 951.10 (5.60)% $ 944.00
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
Inception
(December
28, 1990) 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> <C> <C> <C> <C>
Inception
(December
28, 1990) to
November 30,
1996........ 86.12% $1,861.20 85.21% $1,852.10
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ended
November 30,
1996........ 16.03% $1,160.30 12.75% $1,127.50
Inception
(October 21,
1994) to
November 30,
1996........ 14.01% $1,318.60 12.44% $1,280.60
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
November 30,
1996........ 17.03% $1,170.30 17.45% $1,174.50
Year Ended
November 30,
1995........ 15.38% $1,153.80 16.21% $1,162.10
Inception
(October 21,
1994) to
November 30,
1994........ (2.35)% $ 976.50 (2.26)% $ 977.40
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(October 21,
1994) to
November 30,
1996........ 31.86% $1,318.60 28.06% $1,280.60
</TABLE>
- ---------------
* Class C Shares and Class D Shares commenced operations on October 21, 1994.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares," respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may not
35
<PAGE> 94
take into account the CDSC and therefore may reflect greater total return since,
due to the reduced sales charges or the waiver of sales charges, a lower amount
of expenses may be deducted.
From time to time, the Fund may include the Fund's Morningstar
risk-adjusted performance rating in advertisements or supplemental sales
literature.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on September 26, 1990. It has
an authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock each represent an interest in the same assets
of the Fund and are identical in all respects except that the Class B, Class C
and Class D shares bear certain expenses related to the account maintenance
and/or distribution of such shares and have exclusive voting rights with respect
to matters relating to such account maintenance and/or distribution
expenditures. The Fund has received an order from the Commission permitting the
issuance and sale of multiple classes of Common Stock. The Board of Directors of
the Fund may classify and reclassify the shares of the Fund into additional
classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent accountants. Also, the by-laws of the Fund require that a special
meeting of stockholders be held upon the written request of at least 10% of the
outstanding shares of the Fund entitled to vote at such meeting. Voting rights
for Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive rights. Redemption and conversion rights
are discussed elsewhere herein and in the Prospectus. Each share is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund upon liquidation or dissolution after satisfaction of
outstanding liabilities. Stock certificates are issued by the Transfer Agent
only on specific request. Certificates for fractional shares are not issued in
any case.
The Manager provided the initial capital for the Fund by purchasing 5,000
shares of each class of stock for an aggregate of $100,000. Such shares were
acquired for investment and can only be disposed of by redemption. The
organizational expenses of the Fund will be paid by the Fund and amortized over
a period not exceeding five years. The proceeds realized by the Manager upon
redemption of any of such shares will be reduced by the proportionate amount of
the unamortized organizational expenses which the number of shares redeemed
bears to the number of shares initially purchased.
36
<PAGE> 95
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A, Class B, Class C and Class D shares of the
Fund, based on the value of the Fund's net assets and number of shares
outstanding as of November 30, 1996, is calculated as set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net Assets........................... $40,054,901 $335,486,980 $3,325,148 $4,365,263
=========== ============ ======== ========
Number of Shares Outstanding......... 2,654,294 22,291,538 221,280 289,073
=========== ============ ======== ========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)....................... $ 15.09 $ 15.05 $ 15.03 $ 15.10
Sales Charge (for Class A and Class D
shares: 4.00% of offering price
(4.17% of net asset value per
share))*........................... 0.63 ** ** 0.63
----------- ------------ -------- --------
Offering Price....................... $ 15.72 $ 15.05 $ 15.03 $ 15.73
=========== ============ ======== ========
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" in the Prospectus and
"Redemption of Shares -- Deferred Sales Charges -- Class B and Class C
Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, have
been selected as the independent auditors of the Fund. 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
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The
Transfer Agent 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, LLP, 919 Third Avenue, New York, New
York 10022, is counsel for the Fund.
37
<PAGE> 96
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends November 30 of each year. The Fund sends
to its shareholders at least quarterly reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
independent auditors, is sent to shareholders each year. After the end of each
year shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act, to which reference is hereby made.
Under a separate agreement Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on March 1, 1997.
38
<PAGE> 97
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.
39
<PAGE> 98
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.
40
<PAGE> 99
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
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
AA An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that
earnings and asset protection will remain relatively well maintained
in the foreseeable future.
A 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,
neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over
any great length of time.
BA An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
B An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be
small.
CAA An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
CA An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of
eventual payment.
C This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
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.
41
<PAGE> 100
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S ("STANDARD & POOR'S") CORPORATE
DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
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
42
<PAGE> 101
likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic
conditions to meet timely payments of interest and repayments of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest
and repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition
has been filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
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
43
<PAGE> 102
laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
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.
44
<PAGE> 103
The preferred stock ratings are based on the following considerations:
<TABLE>
<S> <C>
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."
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, B, CCC Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to 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.
</TABLE>
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information.
45
<PAGE> 104
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, 1996, 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 each of the years in the five-year
period then ended. 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, 1996 by correspondence with the custodian. 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, 1996, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
January 8, 1997
46
<PAGE> 105
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks & Warrants Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Argentina Telecommunications 100,000 Telecom Argentina STET S.A.
(ADR) (b) $ 3,770,294 $ 3,937,500 1.0%
200,000 Telefonica de Argentina S.A.
(ADR) (b) 4,140,594 5,100,000 1.3
------------ ------------ ------
7,910,888 9,037,500 2.3
Utilities--Electric 6,600 Central Costanera S.A. (ADR) (b)++++ 158,400 204,600 0.1
Total Common Stocks in Argentina 8,069,288 9,242,100 2.4
Australia Utilities--Gas 2,000,000 Australian Gas & Light Co., Ltd. 5,280,752 11,144,950 2.9
Total Common Stocks in Australia 5,280,752 11,144,950 2.9
Austria Utilities--Gas 41,820 Energie-Versorgung Niederoesterreich
AG (EVN) 3,050,014 6,102,373 1.6
Total Common Stocks in Austria 3,050,014 6,102,373 1.6
Brazil Telecommunications 45,000 Telecomunicacoes Brasileiras S.A.--
Telebras (ADR) (b) 2,176,897 3,408,750 0.9
Total Common Stocks in Brazil 2,176,897 3,408,750 0.9
Canada Telecommunications 140,000 BC Telecom, Inc. 2,593,297 3,200,000 0.9
Utilities--Electric 369,100 Nova Scotia Power Co. 3,476,309 3,862,197 1.0
Utilities--Gas 200,000 Transcanada Pipeline Co. Ltd. 3,147,485 3,575,000 0.9
Total Common Stocks in Canada 9,217,091 10,637,197 2.8
Chile Telecommunications 51,000 Compania de Telecomunicaciones de
Chile S.A. (ADR) (b) 3,711,460 4,851,375 1.3
Utilities--Electric 65,000 Chilgener S.A. (ADR) (b) 1,495,000 1,373,125 0.3
156,000 Distribuidora Chilectra Metropolitana
S.A. (ADR) (b)++++ 4,249,463 8,424,000 2.2
------------ ------------ ------
5,744,463 9,797,125 2.5
Total Common Stocks in Chile 9,455,923 14,648,500 3.8
Denmark Telecommunications 160,000 Tele Danmark A/S (ADR) (b) 3,764,160 4,000,000 1.0
Total Common Stocks in Denmark 3,764,160 4,000,000 1.0
France Utilities--Water 89,715 Generale des Eaux S.A. 9,668,083 11,054,945 2.9
40,000 Lyonnaise des Eaux S.A. (f) 3,989,365 3,805,369 1.0
------------ ------------ ------
13,657,448 14,860,314 3.9
Total Common Stocks in France 13,657,448 14,860,314 3.9
Germany Telecommunications 24,300 ++Deutsche Telekom AG 462,162 528,673 0.2
Utilities--Electric 140,000 Veba AG 4,568,890 8,190,569 2.1
Total Common Stocks in Germany 5,031,052 8,719,242 2.3
Hong Kong Utilities--Gas 1,200,000 The Hong Kong & China Gas Co., Ltd. 1,627,410 2,382,461 0.6
100,000 The Hong Kong & China Gas Co., Ltd.
(Warrants) (a) 0 63,054 0.0
------------ ------------ ------
1,627,410 2,445,515 0.6
Total Common Stocks & Warrants
in Hong Kong 1,627,410 2,445,515 0.6
</TABLE>
47
<PAGE> 106
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks & Warrants Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Indonesia Telecommunications 5,500 PT Indonesian Satellite Corp.
(Indosat) (ADR) (b) $ 176,275 $ 151,938 0.0%
29,600 PT Telekomunikasi Indonesia
(Persero) (ADR) (b) 532,800 973,100 0.3
------------ ------------ ------
709,075 1,125,038 0.3
Total Common Stocks in Indonesia 709,075 1,125,038 0.3
Italy Telecommunications 2,891,700 Societa Finanziara Telefonica S.p.A.
(STET) 5,447,174 8,890,905 2.3
3,900,000 Telecom Italia Mobile S.p.A. 2,605,057 9,173,413 2.4
3,700,000 Telecom Italia S.p.A 3,497,148 8,715,188 2.3
------------ ------------ ------
11,549,379 26,779,506 7.0
Utilities--Gas 1,786,300 Italgas Torino S.p.A. 5,169,953 7,425,091 1.9
Total Common Stocks in Italy 16,719,332 34,204,597 8.9
Korea Utilities--Electric 114,200 Korea Electric Power Corp. (KEPCO)
(ADR) (b) 2,298,275 2,012,775 0.5
Total Common Stocks in Korea 2,298,275 2,012,775 0.5
Malaysia Telecommunications 860,000 Telekom Malaysia BHD 6,389,867 7,829,012 2.0
Total Common Stocks in Malaysia 6,389,867 7,829,012 2.0
Mexico Telecommunications 105,000 Telefonos de Mexico, S.A. de C.V.
(ADR) (b) 5,594,445 3,189,375 0.8
Total Common Stocks in Mexico 5,594,445 3,189,375 0.8
New Telecommunications 89,000 Telecom Corporation of New Zealand
Zealand Ltd. (ADR) (b) 3,564,658 7,487,125 2.0
Total Common Stocks in New Zealand 3,564,658 7,487,125 2.0
Peru Telecommunications 195,000 Telefonica del Peru (ADR) (b) 3,997,500 3,778,125 1.0
Total Common Stocks in Peru 3,997,500 3,778,125 1.0
Philippines Telecommunications 94,000 Philippine Long Distance Telephone
Co. (ADR) (b) 4,077,062 5,405,000 1.4
Utilities---Electric 74,100 Manila Electric Co. (MERALCO) 'B' 497,246 549,745 0.2
Total Common Stocks in the
Philippines 4,574,308 5,954,745 1.6
Portugal Telecommunications 205,740 Portugal Telecom, S.A. (ADR) (b) 4,576,844 5,452,110 1.4
Total Common Stocks in Portugal 4,576,844 5,452,110 1.4
Spain Telecommunications 537,300 Telefonica de Espana S.A. 6,164,064 11,781,439 3.1
Utilities--Electric 129,800 Empresa Nacional de Electricidad,
S.A. (ADR) (b) 4,566,202 8,647,925 2.3
92,000 HidroElectrica Del Cantabrico, S.A. 3,107,921 3,100,525 0.8
808,500 Iberdrola I S.A. 4,998,321 9,332,207 2.4
------------ ------------ ------
12,672,444 21,080,657 5.5
Total Common Stocks in Spain 18,836,508 32,862,096 8.6
Switzerland Utilities--Electric 4,300 Elektrowatt AG 1,687,158 1,727,398 0.5
Total Common Stocks in Switzerland 1,687,158 1,727,398 0.5
Thailand Telecommunications 15,000 ++TelecomAsia Corporation Public
Co., Ltd. PLC (ADR) (b) 328,050 300,000 0.1
</TABLE>
48
<PAGE> 107
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
Utilities--Electric 332,000 Electricity Generating Company of
Thailand (EGCOMP) 296,433 1,027,019 0.2
Total Common Stocks in Thailand 624,483 1,327,019 0.3
United Telecommunications 671,000 British Telecommunications PLC 4,688,465 4,246,230 1.1
Kingdom 180,000 Vodafone Group PLC (ADR) (b) 5,355,931 7,785,000 2.0
------------ ------------ ------
10,044,396 12,031,230 3.1
Utilities--Electric 208,000 National Power PLC 1,723,671 1,615,182 0.4
445,000 PowerGen PLC 3,253,482 4,341,885 1.2
------------ ------------ ------
4,977,153 5,957,067 1.6
Total Common Stocks in the
United Kingdom 15,021,549 17,988,297 4.7
United Telecommunications 31,000 AT&T Corp. 1,255,940 1,216,750 0.3
States 70,000 Ameritech Corp. 2,996,450 4,121,250 1.1
91,800 BellSouth Corp. 2,702,773 3,706,425 1.0
108,000 Frontier Corp. 2,193,480 2,835,000 0.7
85,000 GTE Corp. 3,145,450 3,814,375 1.0
10,046 Lucent Technologies, Inc. (c) 493,515 514,858 0.1
62,000 NYNEX Corp. 2,819,654 2,875,250 0.7
69,900 SBC Communications, Inc. 2,939,711 3,678,487 1.0
68,000 U S West Communications Group (d) 1,895,186 2,125,000 0.6
------------ ------------ ------
20,442,159 24,887,395 6.5
Utilities--Electric 241,000 Allegheny Power System, Inc. 6,450,560 7,320,375 1.9
87,200 Boston Edison Co. 2,722,264 2,234,500 0.6
202,962 CINergy Corp. 4,891,811 6,799,227 1.8
84,200 Consolidated Edison Co. of New York 2,991,744 2,441,800 0.6
118,900 DTE Energy Co. (e) 4,092,463 3,804,800 1.0
95,250 Dominion Resources, Inc. 3,965,452 3,631,406 1.0
127,000 Duke Power Co. 4,961,185 5,889,625 1.5
283,000 Edison International 6,379,546 5,624,625 1.5
188,300 GPU, Inc. (g) 5,864,594 6,331,587 1.6
265,200 Houston Industries, Inc. 6,491,433 5,834,400 1.5
184,800 NIPSCO Industries, Inc. 5,394,297 7,161,000 1.9
159,000 New York State Electric & Gas Corp. 5,705,686 3,438,375 0.9
140,500 PECO Energy Co. 4,344,731 3,582,750 0.9
323,000 PacifiCorp 6,465,176 6,783,000 1.8
192,000 Public Service Co. of Colorado 5,832,890 7,488,000 1.9
304,200 Southern Co. 5,575,899 6,768,450 1.8
97,300 Western Resources Co. 3,260,997 3,077,112 0.8
------------ ------------ ------
85,390,728 88,211,032 23.0
Utilities--Gas 95,100 AGL Resources Inc. 1,781,042 2,008,987 0.5
130,000 The Brooklyn Union Gas Co. 3,371,550 4,062,500 1.1
226,000 The Coastal Corp. 6,038,593 10,876,250 2.9
236,000 Questar Corp. 6,554,436 9,233,500 2.4
127,300 Sonat, Inc. 3,309,934 6,587,775 1.7
------------ ------------ ------
21,055,555 32,769,012 8.6
Utilities--Water 86,000 American Water Works Co., Inc. 1,617,875 1,698,500 0.4
Total Common Stocks in the
United States 128,506,317 147,565,939 38.5
Total Investments in Common Stocks
& Warrants 274,430,354 357,712,592 93.3
</TABLE>
49
<PAGE> 108
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks & Warrants Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Australia Telecommuni- US$ 7,960,000 Telstra Corp., Ltd., 6.50% due
cations 7/31/2003++++ $ 8,115,578 $ 7,974,806 2.1%
Total Fixed-Income Securities in
Australia 8,115,578 7,974,806 2.1
Korea Telecommunications 2,500,000 Korea Telecom, 7.40% due 12/01/1999 2,499,500 2,579,925 0.7
Total Fixed-Income Securities in
Korea 2,499,500 2,579,925 0.7
United Telecommunications 4,000,000 Rochester Telephone Corp., 9.25% due
States 6/01/2000 4,111,200 4,370,800 1.1
Utilities--Electric 4,000,000 Consumer Power Co., 8.875% due
11/15/1999 4,190,000 4,219,160 1.1
Total Fixed-Income Securities in the
United States 8,301,200 8,589,960 2.2
Total Investments in Fixed-Income
Securities 18,916,278 19,144,691 5.0
Short-Term Securities
US Government & 6,140,000 Federal Home Loan Mortgage Corp.,
Agency Obligations* 5.70% due 12/02/1996 6,138,056 6,138,056 1.6
Total Investments in Short-Term
Securities 6,138,056 6,138,056 1.6
Total Investments $299,484,688 382,995,339 99.9
============
Other Assets Less Liabilities 236,953 0.1
------------ ------
Net Assets $383,232,292 100.0%
============ ======
<FN>
*Certain US Government & Agency Obligations are traded on a discount
basis; the interest rate shown is the discount rate paid at the time
of purchase by the Fund.
(a)These warrants were acquired through a corporate action. Warrants
entitle the Fund to purchase a predetermined number of shares of
Common Stock. The purchase price and number of shares are subject to
adjustment under certain conditions until the expiration date.
(b)American Depositary Receipts (ADR).
(c)Lucent Technologies, Inc. was acquired through a spinoff of AT&T.
(d)U S West Inc. spun off U S West Media Group and changed its name
to U S West Communications Group.
(e)Formerly Detroit Edison Co.
(f)Formerly Lyonnaise des Eaux-Dumez S.A.
(g)Formerly General Public Utilities Corp.
++Non-income producing securities.
++++Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $16,603,000,
representing 4.3% of net assets.
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <S> <C> <C>
Central Costanera S.A. (ADR) 12/17/1993 $ 158,400 $ 204,600
Distribuidora Chilectra
Metropolitana S.A. (ADR) 2/12/1992-12/21/1993 4,249,463 8,424,000
Telstra Corp., Ltd., 6.50% due 7/31/2003 7/26/1993-9/29/1993 8,115,578 7,974,806
Total $12,523,441 $16,603,406
=========== ===========
See Notes to Financial Statements.
</TABLE>
50
<PAGE> 109
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of November 30, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$299,484,688) (Note 1a) $382,995,339
Cash 49,365
Receivables:
Dividends $ 1,097,642
Interest 339,223
Capital shares sold 44,047 1,480,912
------------
Prepaid registration fees and other assets (Note 1f) 29,263
------------
Total assets 384,554,879
------------
Liabilities: Payables:
Capital shares redeemed 576,895
Distributor (Note 2) 202,208
Investment adviser (Note 2) 181,896 960,999
------------
Accrued expenses and other liabilities 361,588
------------
Total liabilities 1,322,587
------------
Net Assets: Net assets $383,232,292
============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $ 265,429
Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 2,229,154
Class C Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 22,128
Class D Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized 28,907
Paid-in capital in excess of par 284,570,115
Undistributed investment income--net 1,373,289
Undistributed realized capital gains on investments and foreign
currency transactions--net 11,235,313
Unrealized appreciation on investments and foreign currency
transactions--net 83,507,957
------------
Net assets $383,232,292
============
Net Asset Class A--Based on net assets of $40,054,901 and 2,654,294 shares
Value: outstanding $ 15.09
============
Class B--Based on net assets of $335,486,980 and 22,291,538 shares
outstanding $ 15.05
============
Class C--Based on net assets of $3,325,148 and 221,280 shares
outstanding $ 15.03
============
Class D--Based on net assets of $4,365,263 and 289,073 shares
outstanding $ 15.10
============
See Notes to Financial Statements.
</TABLE>
51
<PAGE> 110
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended November 30, 1996
<S> <S> <C> <C>
Investment Income Dividends (net of $1,037,124 foreign withholding tax) $ 15,939,897
(Notes 1d & 1e): Interest and discount earned 1,968,432
------------
Total income 17,908,329
------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 2,709,344
Investment advisory fees (Note 2) 2,463,017
Transfer agent fees--Class B (Note 2) 501,379
Custodian fees 136,543
Accounting services (Note 2) 104,641
Printing and shareholder reports 103,555
Registration fees (Note 1f) 89,829
Professional fees 51,887
Transfer agent fees--Class A (Note 2) 48,903
Account maintenance and distribution fees--Class C (Note 2) 23,394
Directors' fees and expenses 19,137
Account maintenance fees--Class D (Note 2) 7,906
Transfer agent fees--Class C (Note 2) 4,128
Transfer agent fees--Class D (Note 2) 3,313
Amortization of organization expenses (Note 1f) 1,741
Pricing fees 544
Other 17,783
------------
Total expenses 6,287,044
------------
Investment income--net 11,621,285
------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 11,235,378
(Loss) on Foreign currency transactions--net (25,221) 11,210,157
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 41,383,405
(Notes 1b, 1c, Foreign currency transactions--net (14,406) 41,368,999
1e & 3): ------------ ------------
Net realized gain on investments and foreign currency
transactions 52,579,156
------------
Net Increase in Net Assets Resulting from Operations $ 64,200,441
============
See Notes to Financial Statements.
</TABLE>
52
<PAGE> 111
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended November 30,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 11,621,285 $ 14,205,177
Realized gain on investments and foreign currency
transactions--net 11,210,157 9,039,213
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 41,368,999 43,819,383
------------ ------------
Net increase in net assets resulting from operations 64,200,441 67,063,773
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (1,619,986) (1,952,696)
Shareholders Class B (10,429,834) (12,961,394)
(Note 1g): Class C (83,508) (47,650)
Class D (99,132) (39,117)
Realized gain on investments--net:
Class A (807,670) --
Class B (6,874,204) --
Class C (38,876) --
Class D (29,790) --
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (19,983,000) (15,000,857)
------------ ------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (90,445,913) (139,129,318)
(Note 4): ------------ ------------
Net Assets: Total decrease in net assets (46,228,472) (87,066,402)
Beginning of year 429,460,764 516,527,166
------------ ------------
End of year* $383,232,292 $429,460,764
============ ============
<FN>
*Undistributed investment income--net (Note 1h) $ 1,373,289 $ 2,009,685
============ ============
See Notes to Financial Statements.
</TABLE>
53
<PAGE> 112
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived Class A
from information provided in the financial statements.
For the Year Ended November 30,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.52 $ 12.08 $ 13.22 $ 11.23 $ 10.67
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .50 .51 .94 .40 .47
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.84 1.42 (1.57) 2.01 .57
-------- -------- -------- -------- --------
Total from investment operations 2.34 1.93 (.63) 2.41 1.04
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.53) (.49) (.47) (.41) (.48)
Realized gain on investments--net (.24) -- (.04) (.01) --
-------- -------- -------- -------- --------
Total dividends and distributions (.77) (.49) (.51) (.42) (.48)
-------- -------- -------- -------- --------
Net asset value, end of year $ 15.09 $ 13.52 $ 12.08 $ 13.22 $ 11.23
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 17.94% 16.34% (4.89%) 21.80% 10.05%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses .84% .91% .86% .82% 1.01%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 3.51% 3.73% 3.58% 3.57% 4.47%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 40,055 $ 44,775 $ 56,659 $ 81,718 $ 29,772
Data: ======== ======== ======== ======== ========
Portfolio turnover 5.03% 2.92% 17.02% 8.92% 30.91%
======== ======== ======== ======== ========
Average commission rate paid+++++ $ .0328 -- -- -- --
======== ======== ======== ======== ========
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements.
For the Year Ended November 30,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.47 $ 12.04 $ 13.17 $ 11.20 $ 10.65
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .39 .38 .74 .33 .39
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.84 1.44 (1.46) 1.98 .57
-------- -------- -------- -------- --------
Total from investment operations 2.23 1.82 (.72) 2.31 .96
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.41) (.39) (.37) (.33) (.41)
Realized gain on investments--net (.24) -- (.04) (.01) --
-------- -------- -------- -------- --------
Total dividends and distributions (.65) (.39) (.41) (.34) (.41)
-------- -------- -------- -------- --------
Net asset value, end of year $ 15.05 $ 13.47 $ 12.04 $ 13.17 $ 11.20
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 17.07% 15.38% (5.60%) 20.86% 9.20%
Return:** ======== ======== ======== ======== ========
</TABLE>
54
<PAGE> 113
<TABLE>
<S> <S> <C> <C> <C> <C> <C>
Ratios to Average Expenses 1.61% 1.68% 1.63% 1.59% 1.77%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 2.74% 2.95% 2.82% 2.81% 3.65%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $335,487 $381,098 $459,185 $596,455 $200,396
Data: ======== ======== ======== ======== ========
Portfolio turnover 5.03% 2.92% 17.02% 8.92% 30.91%
======== ======== ======== ======== ========
Average commission rate paid+++++ $ .0328 -- -- -- --
======== ======== ======== ======== ========
<CAPTION>
Class C Class D
For the For the
The following per share data and ratios Period Period
have been derived from information provided For the Oct. 21, For the Oct. 21,
in the financial statements. Year Ended 1994++ to Year Ended 1994++ to
Nov. 30, Nov. 30, Nov. 30, Nov. 30,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994 1996++++ 1995 1994
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.46 $ 12.05 $ 12.34 $ 13.55 $ 12.09 $ 12.37
Operating -------- -------- -------- -------- -------- --------
Performance: Investment income--net .38 .39 .01 .50 .52 .02
Realized and unrealized gain (loss)
on investments and foreign
currency transactions--net 1.84 1.43 (.30) 1.79 1.40 (.30)
-------- -------- -------- -------- -------- --------
Total from investment operations 2.22 1.82 (.29) 2.29 1.92 (.28)
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.41) (.41) -- (.50) (.46) --
Realized gain on investments--net (.24) -- -- (.24) -- --
-------- -------- -------- -------- -------- --------
Total dividends and distributions (.65) (.41) -- (.74) (.46) --
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 15.03 $ 13.46 $ 12.05 $ 15.10 $ 13.55 $ 12.09
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share 17.03% 15.38% (2.35%)+++17.45% 16.21% (2.26%)+++
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses 1.66% 1.73% 1.60%* 1.07% 1.15% 1.08%*
Net Assets: ======== ======== ======== ======== ======== ========
Investment income--net 2.65% 2.85% 3.01%* 3.30% 3.36% 3.25%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 3,325 $ 2,072 $ 445 $ 4,365 $ 1,516 $ 239
======== ======== ======== ======== ======== ========
Portfolio turnover 5.03% 2.92% 17.02% 5.03% 2.92% 17.02%
======== ======== ======== ======== ======== ========
Average commission rate
paid+++++ $ .0328 -- -- $ .0328 -- --
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the year.
+++Aggregate total investment return.
+++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
55
<PAGE> 114
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 four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of securities--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Options--The Fund is authorized to write and purchase call options
and put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of
an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
56
<PAGE> 115
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--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$25,221 have been reclassified between undistributed net realized
capital gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset values
per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operation of the Fund. For such
services, the Fund pays a monthly fee of 0.60%, on an annual basis,
of the average daily value of the Fund's net assets.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
<TABLE>
<CAPTION>
Account Distribution
Maintenance Fee Fee
<S> <C> <C>
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
</TABLE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended November 30, 1996, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
<TABLE>
<CAPTION>
MLFD MLPF&S
<S> <C> <C>
Class A $ 610 $ 6,158
Class D $1,510 $15,767
</TABLE>
For the year ended November 30, 1996, MLPF&S received contingent
deferred sales charges of $754,651 and $1,659, relating to
transactions in Class B Shares and Class C Shares, respectively.
In addition, MLPF&S received $5,724 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
November 30, 1996.
For the year ended November 30, 1996, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $164 for security
price quotations to compute the net asset value of the Fund.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended November 30, 1996 were $20,336,925 and
$115,129,275, respectively.
57
<PAGE> 116
NOTES TO FINANCIAL STATEMENTS (concluded)
Net realized and unrealized gains (losses) as of November 30, 1996
were as follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains Gains
(Losses) (Losses)
<S> <C> <C>
Long-term investments $11,235,378 $83,510,651
Foreign currency transactions (25,221) (2,694)
----------- -----------
Total $11,210,157 $83,507,957
=========== ===========
</TABLE>
As of November 30, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $83,510,651, of which $93,801,484
related to appreciated securities and $10,290,833 related to
depreciated securities. The aggregate cost of investments at
November 30, 1996 for Federal income tax purposes was $299,484,688.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $90,445,913 and $139,129,318 for the years ended November 30,
1996 and November 30, 1995, respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended November 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 178,410 $ 2,530,252
Shares issued to shareholders
in reinvestment of dividends
and distributions 135,223 1,872,625
------------- -------------
Total issued 313,633 4,402,877
Shares redeemed (971,846) (13,721,257)
------------- -------------
Net decrease (658,213) $ (9,318,380)
============= =============
</TABLE>
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended November 30, 1995 Shares Amount
<S> <C> <C>
Shares sold 165,580 $ 2,080,607
Shares issued to shareholders
in reinvestment of dividends 116,128 1,460,439
------------- -------------
Total issued 281,708 3,541,046
Shares redeemed (1,658,669) (20,944,113)
------------- -------------
Net decrease (1,376,961) $ (17,403,067)
============= =============
</TABLE>
<TABLE>
<CAPTION>
Class B Shares for the Year Dollar
Ended November 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 1,480,280 $ 20,727,309
Shares issued to shareholders
in reinvestment of dividends
and distributions 975,884 13,460,853
------------- -------------
Total issued 2,456,164 34,188,162
Automatic conversion of shares (110,150) (1,536,242)
Shares redeemed (8,345,774) (117,187,340)
------------- -------------
Net decrease (5,999,760) $ (84,535,420)
============= =============
</TABLE>
<TABLE>
<CAPTION>
Class B Shares for the Year Dollar
Ended November 30, 1995 Shares Amount
<S> <C> <C>
Shares sold 1,655,159 $ 20,831,069
Shares issued to shareholders
in reinvestment of dividends 796,753 9,996,426
------------- -------------
Total issued 2,451,912 30,827,495
Automatic conversion of shares (10,704) (138,527)
Shares redeemed (12,290,113) (154,903,079)
------------- -------------
Net decrease (9,848,905) $(124,214,111)
============= =============
</TABLE>
58
<PAGE> 117
<TABLE>
<CAPTION>
Class C Shares for the Year Dollar
Ended November 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 116,923 $ 1,634,417
Shares issued to shareholders
in reinvestment of dividends and
distributions 7,871 109,069
------------- -------------
Total issued 124,794 1,743,486
Shares redeemed (57,428) (802,893)
------------- -------------
Net increase 67,366 $ 940,593
============= =============
</TABLE>
<TABLE>
<CAPTION>
Class C Shares for the Year Dollar
Ended November 30, 1995 Shares Amount
<S> <C> <C>
Shares sold 259,375 $ 3,186,034
Shares issued to shareholders
in reinvestment of dividends 3,375 43,016
------------- -------------
Total issued 262,750 3,229,050
Shares redeemed (145,762) (1,797,850)
------------- -------------
Net increase 116,988 $ 1,431,200
============= =============
</TABLE>
<TABLE>
<CAPTION>
Class D Shares for the Year Dollar
Ended November 30, 1996 Shares Amount
<S> <C> <C>
Shares sold 1,906,770 $ 26,889,122
Automatic conversion of shares 109,766 1,536,242
Shares issued to shareholders
in reinvestment of dividends
and distributions 7,595 106,392
------------- -------------
Total issued 2,024,131 28,531,756
Shares redeemed (1,846,953) (26,064,462)
------------- -------------
Net increase 177,178 $ 2,467,294
============= =============
</TABLE>
<TABLE>
<CAPTION>
Class D Shares for the Year Dollar
Ended November 30, 1995 Shares Amount
<S> <C> <C>
Shares sold 2,762,874 $ 34,867,068
Automatic conversion of shares 9,840 138,527
Shares issued to shareholders
in reinvestment of dividends 1,912 24,419
------------- -------------
Total issued 2,774,626 35,030,014
Shares redeemed (2,682,472) (33,973,354)
------------- -------------
Net increase 92,154 $ 1,056,660
============= =============
</TABLE>
5. Subsequent Event:
On December 1, 1996, the Fund's Board of Directors declared an
ordinary income dividend in the amount of $0.115190 per Class A
Share, $0.085793 per Class B Share, $0.084346 per Class C Share, and
$0.106208 per Class D Share, and a long-term capital gains
distribution of $0.446232 per share for each of the four classes,
payable on December 23, 1996 to shareholders on record as of
December 13, 1996.
59
<PAGE> 118
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 119
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 120
- ------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies....... 2
Portfolio Strategies Involving Options
and Futures......................... 2
Other Investment Policies and
Practices........................... 6
Management of the Fund.................. 12
Directors and Officers................ 12
Management and Advisory
Arrangements........................ 14
Purchase of Shares...................... 15
Initial Sales Charge Alternatives --
Class A and Class D Shares.......... 16
Reduced Initial Sales Charges......... 16
Employer-Sponsored Retirement or
Savings Plans and Certain Other
Arrangements........................ 20
Distribution Plans.................... 20
Limitations on the Payment of Deferred
Sales Charges....................... 21
Redemption of Shares.................... 22
Deferred Sales Charges --
Class B and Class C Shares.......... 22
Portfolio Transactions and Brokerage.... 23
Determination of Net Asset Value........ 25
Shareholder Services.................... 26
Investment Account.................... 26
Automatic Investment Plans............ 26
Automatic Reinvestment of Dividends
and Capital Gains Distributions..... 27
Systematic Withdrawal Plans --
Class A and Class D Shares.......... 27
Retirement Plans...................... 28
Exchange Privilege.................... 28
Dividends, Distributions and Taxes...... 30
Dividends and Distributions........... 30
Taxes................................. 31
Tax Treatment of Options and Futures
Transactions........................ 33
Performance Data........................ 34
General Information..................... 36
Description of Shares................. 36
Computation of Offering Price Per
Share............................... 37
Independent Auditors.................. 37
Custodian............................. 37
Transfer Agent........................ 37
Legal Counsel......................... 37
Reports to Shareholders............... 38
Additional Information................ 38
Appendix................................ 39
Independent Auditors' Report............ 46
Financial Statements.................... 47
Code # 11280-0397
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
GLOBAL UTILITY
FUND, INC.
STATEMENT OF [MLYNCH COMPASS]
ADDITIONAL
INFORMATION
March 25, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 121
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
</TABLE>
<PAGE> 122
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
Contained in Part A, the Prospectus:
Financial Highlights for each of the years in the five-year period
ended November 30, 1996 and for the period December 28, 1990
(commencement of operations) to November 30, 1991.
Contained in Part B, the Statement of Additional Information:
Schedule of Investments as of November 30, 1996.
Statement of Assets and Liabilities as of November 30, 1996.
Statement of Operations for the year ended November 30, 1996.
Statements of Changes in Net Assets for each of the years in the
two-year period ended November 30, 1996.
Financial Highlights for each of the years in the five-year period
ended November 30, 1996.
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
1(a) -- Articles of Incorporation of Registrant.(a)
(b) -- Articles of Amendment.(j)
(c) -- Articles Supplementary.(j)
2 -- Amended and Restated By-Laws of Registrant.(h)
3 -- None.
4 -- Instruments Defining Rights of Shareholders. Incorporated by reference to
Exhibits 1 and 2 above.
5 -- Management Agreement between Registrant and Merrill Lynch Asset Management,
L.P.(f)
6(a) -- Class A Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(i)
(b) -- Class B Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(f)
(c) -- Class C Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(i)
(d) -- Class D Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(i)
7 -- None.
8 -- Custody Agreement between Registrant and The Chase Manhattan Bank, N.A.(f)
9(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Merrill Lynch Financial Data Services, Inc.(f)
(b) -- License Agreement Relating to Use of Name between Merrill Lynch & Co., Inc. and
Registrant.(f)
10 -- Opinion and consent of Shereff, Friedman, Hoffman & Goodman, LLP, counsel for
Registrant.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Asset Management, L.P.(c)
14 -- Not applicable.
15(a) -- Amended and Restated Class B Distribution Plan of the Registrant and Class B
Distribution Plan Sub-Agreement.(h)
(b) -- Class C Distribution Plan and Class C Distribution Plan Sub-Agreement.(i)
(c) -- Class D Distribution Plan and Class D Distribution Plan Sub-Agreement.(i)
16(a) -- Schedule for computation of each performance quotation for Class A and Class B
Shares provided in the Registration Statement in response to Item 22.(l)
(b) -- Schedule for computation of each performance quotation for Class C and Class D
Shares provided in the Registration Statement in response to Item 22.(f)
</TABLE>
C-1
<PAGE> 123
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<S> <C> <C>
17(a) -- Other Exhibits.
Powers of Attorney for Officers and Directors
Arthur Zeikel(g)
Gerald M. Richard(g)
Ronald W. Forbes(g)
Cynthia A. Montgomery(i)
Charles C. Reilly(g)
Kevin A. Ryan(g)
Richard R. West(g)
(b) -- Financial Data Schedule for Class A Shares.
(c) -- Financial Data Schedule for Class B Shares.
(d) -- Financial Data Schedule for Class C Shares.
(e) -- Financial Data Schedule for Class D Shares.
18 -- Rule 18f-3 Plan of the Registrant(k)
</TABLE>
- ---------------
(a) Incorporated by reference to identically numbered exhibit to Post-Effective
Amendment No. 7 to Registrant's Registration Statement under the Securities
Act of 1933 on Form N-1A. Initially filed as an exhibit to the Fund's
initial Registration Statement (File No. 33-37103).
(b) Incorporated by reference to identically numbered exhibit to Post-Effective
Amendment No. 7 to Registrant's Registration Statement under the Securities
Act of 1933 on Form N-1A. Initially filed as Exhibit 10 in Pre-Effective
Amendment No. 2 to the Fund's Registration Statement (File No. 33-37103).
(c) Incorporated by reference to identically numbered exhibit to Post-Effective
Amendment No. 7 to Registrant's Registration Statement under the Securities
Act of 1933 on Form N-1A. Initially filed as Exhibit 13 in Pre-Effective
Amendment No. 2 to the Fund's Registration Statement (File No. 33-37103).
(d) Incorporated by reference to identically numbered exhibit to Post-Effective
Amendment No. 7 to Registrant's Registration Statement under the Securities
Act of 1933 on Form N-1A. Initially filed as Exhibit 14 to Pre-Effective
Amendment No. 1 to the Registration Statement under the Securities Act of
1933 on Form N-1 (File No. 2-74584) of Merrill Lynch Retirement Series
Trust, filed on January 26, 1982.
(e) Incorporated by reference to identically numbered exhibit to Post-Effective
Amendment No. 7 to Registrant's Registration Statement under the Securities
Act of 1933 on Form N-1A. Initially filed as Exhibit 14 to Post-Effective
Amendment No. 3 to the Registration Statement under the Securities Act of
1933 on Form N-1A (File No. 2-74584) of Merrill Lynch Retirement Series
Trust, filed on December 29, 1983.
(f) Incorporated by reference to identically numbered exhibit to Post-Effective
Amendment No. 7 to Registrant's Registration Statement under the Securities
Act of 1933 on Form N-1A. Initially filed as an exhibit to Post-Effective
Amendment No. 1 to the Fund's Registration Statement (File No. 33-37103).
(g) Incorporated by reference to identically numbered exhibit to Post-Effective
Amendment No. 7 to Registrant's Registration Statement under the Securities
Act of 1933 on Form N-1A. Initially filed as Exhibit 17 to Post-Effective
Amendment No. 3 to the Fund's Registration Statement (File No. 33-37103).
(h) Incorporated by reference to identically numbered exhibit to Post-Effective
Amendment No. 7 to Registrant's Registration Statement under the Securities
Act of 1933 on Form N-1A. Initially filed as an exhibit to Post-Effective
Amendment No. 5 to the Fund's Registration Statement (File No. 33-37103).
(i) Incorporated by reference to identically numbered exhibit to Post-Effective
Amendment No. 7 to Registrant's Registration Statement under the Securities
Act of 1933 on Form N-1A. Initially filed as an exhibit to Post-Effective
Amendment No. 6 to the Fund's Registration Statement (File No. 33-37103).
C-2
<PAGE> 124
(j) Incorporated by reference to identically numbered exhibit to Post-Effective
Amendment No. 7 to Registrant's Registration Statement under the Securities
Act of 1933 on Form N-1A. Initially filed as an exhibit to Post-Effective
Amendment No. 7 to the Fund's Registration Statement (File No. 33-37103).
(k) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to Registration Statement under the Securities Act of 1933 on Form N-1A of
Merrill Lynch Multi-State Municipal Series Trust on January 25, 1996 (File
Nos. 2-99473 and 811-4375).
(l) Filed electronically herewith. Initially filed as Exhibit 16 to
Post-Effective Amendment No. 1 to the Fund's Registration Statement (File
No. 33-37103).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS JANUARY 31, 1997
- ------------------------------------------------------------------------------ ----------------
<S> <C>
Class A Common Stock, par value $.10 per share................................ 3,323
Class B Common Stock, par value $.10 per share................................ 25,600
Class C Common Stock, par value $.10 per share................................ 373
Class D Common Stock, par value $.10 per share................................ 476
</TABLE>
Note: The number of holders shown in the table includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
as amended to date, Article VI of Registrant's Amended and Restated By-Laws (the
"By-Laws") and Section 2-418 of the Maryland General Corporation Law and Section
9 of the Distribution Agreements.
Article VI of the By-Laws provides that each officer and Director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. Absent a court determination that
an officer or director seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent directors, after
review of the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Each officer and director of the Registrant claiming indemnification with
the scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the General Laws of the State of Maryland; provided, however,
that the person seeking indemnification shall provide to the Registrant a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Registrant has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available
C-3
<PAGE> 125
to the Registrant at the time the advance is proposed to be made, that there is
reason to believe that the person seeking indemnification will ultimately be
found to be entitled to indemnification.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or purports
to protect such person from liability to the Registrant or to its stockholders
to which such officer or director would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
The Registrant may indemnify or purchase insurance to the extent provided
in Article VI on behalf of an employee or agent who is not an officer or
director of the Registrant.
The Registrant has purchased an insurance policy insuring its officers and
Trustees against liabilities, and certain costs of defending claims against such
officers and Trustees, to the extent such officers and Trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties.
The Management Agreement between Registrant and Merrill Lynch Asset
Management, Inc. (now called Merrill Lynch Asset Management, L.P.) ("MLAM")
limits the liability of MLAM to liabilities arising from willful misfeasance,
bad faith or gross negligence in the performance of their respective duties or
from reckless disregard of their respective duties and obligations.
In Section 9 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the "Act"), against certain types of civil liabilities
arising in connection with the Registration Statement or Prospectus and
Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM") also acts as
investment adviser for the following open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Fund for Tomorrow, Inc., Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
C-4
<PAGE> 126
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc.; and the following closed-end investment companies:
Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc.
and Merrill Lynch Senior Floating Rate Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund,
Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and the following closed-end investment companies: Apex Municipal
Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced
Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey
Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield
New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNew York Holdings, Inc., and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of the Manager, FAM, Princeton Services,
Inc. ("Princeton Services") and Princeton Administrators, L.P. ("Princeton
Administrators") is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Merrill Lynch Funds Distributor, Inc. ("MLFD") is P.O. Box 9081,
Princeton, New Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.")
is World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281. The address of Merrill Lynch Financial Data Services ("FDS") is 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
January 30, 1994, for such person's or entity's own account or in the capacity
of director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President of all or
substantially all of the investment companies described in the preceding
paragraph. Mr. Zeikel is a director of substantially all of such companies, and
Mr. Glenn is a director of certain of such companies. Messrs. Giordano, Harvey,
Hewitt, Kirstein and Monagle are directors or officers of one or more of such
companies.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------ ------------------------- --------------------------------------
<S> <C> <C>
ML & Co....................... Limited Partner Financial Services Holding Company;
Limited Partner of FAM.
Princeton Services............ General Partner General Partner of FAM
</TABLE>
C-5
<PAGE> 127
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------ ------------------------- --------------------------------------
<S> <C> <C>
Arthur Zeikel................. President President of FAM; President and
Director of Princeton Services;
Director of Merrill Lynch Funds
Distributor, Inc. ("MLFD");
Executive Vice President of ML &
Co.; Executive Vice President of
Merrill Lynch.
Terry K. Glenn................ Executive Vice President Executive Vice President of FAM;
Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of FDS; President of
Princeton Administrators L.P.
Vincent R. Giordano........... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Elizabeth Griffin............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Norman R. Harvey.............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Michael J. Hennewinkel........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Philip L. Kirstein............ Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of FAM; Senior Vice
Secretary President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD.
Ronald M. Kloss............... Senior Vice President and Senior Vice President and Controller
Controller of FAM; Senior Vice President and
Controller of Princeton Services.
Stephen M. M. Miller.......... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services.
Joseph T. Monagle, Jr. ....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Michael L. Quinn.............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch, Pierce,
Fenner & Smith Incorporated from
1989 to 1995.
Richard L. Reller............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Gerald M. Richard............. Senior Vice President and Senior Vice President and Treasurer of
Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD.
Ronald L. Welburn............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Anthony Wiseman............... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: Merrill Lynch
EuroFund, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Corporate Bond Fund, Inc., Corporate High Yield Fund, Inc., Corporate High
C-6
<PAGE> 128
Yield Fund II, Inc., Convertible Holdings, Inc. Merrill Lynch Consults
International Portfolio, Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Global Holdings, Merrill Lynch Growth Fund, Merrill Lynch Global Resources
Trust, Merrill Lynch Healthcare Fund, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch Variable Series Funds, Inc., Merrill Lynch World Income Fund, Inc.,
Worldwide DollarVest Fund, Inc., and Merrill Lynch Short-Term Global Income
Fund, Inc. The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of MLAM U.K. is Milton Gate, 1
Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since July 1,
1994, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Richard
and Yardley are officers of one or more of the registered investment companies
listed in the first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION OTHER SUBSTANTIAL BUSINESS,
NAME WITH MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------ ---------------------- --------------------------------------
<S> <C> <C>
Arthur Zeikel................. Director and Chairman President of the Manager and FAM;
President and Director of Princeton
Services, Director of MLFD;
Executive Vice President of ML & Co.
Alan J. Albert................ Senior Managing Vice President of the Manager
Director
Terry K. Glenn................ Director Executive Vice President of the
Manager and FAM; Executive Vice
President and Director of Princeton
Services; President and Director of
MLFD; Director of MLFDS; President
of Princeton Administrators, L.P.
Adrian Holmes................. Managing Director Director of Merrill Lynch Global
Assets Management
Andrew John Bascand........... Director Director of Merrill Lynch Global Asset
Management
Edward Gobora................. Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride.............. Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan................ Director Vice President, Institutional
Marketing, Debt and Equity Group,
Merrill Lynch Capital Markets from
1989 to 1994
Gerald M. Richard............. Senior Vice President Senior Vice President and Treasurer of
the Manager and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and
Treasurer of MLFD
Stephen J. Yardley............ Director Director of Merrill Lynch Global Asset
Management
Carol Ann Langham............. Company Secretary None
Debra Anne Searle............. Assistant Company None
Secretary
</TABLE>
C-7
<PAGE> 129
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first paragraph of Item
28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc. and also acts as principal underwriter
for the following closed-end funds: Merrill Lynch High Income Municipal Bond
Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc. and Merrill Lynch
Municipal Strategy Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Breen, Crook, Fatseas and Wasel is One Financial Center, Boston, Massachusetts
02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
- ------------------------------ ----------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn................ President Executive Vice President
Arthur Zeikel................. Director President and Director
Philip L. Kirstein............ Director None
William E. Aldrich............ Senior Vice President None
Robert W. Crook............... Senior Vice President None
Kevin P. Boman................ Vice President None
Michael J. Brady.............. Vice President None
William M. Breen.............. Vice President None
Michael G. Clark.............. Vice President None
Mark A. DeSario............... Vice President None
James T. Fatseas.............. Vice President None
Debra W. Landsman-Yaros....... Vice President None
Michelle T. Lau............... Vice President None
Gerald M. Richard............. Vice President and Treasurer Treasurer
Salvatore Venezia............. Vice President None
William Wasel................. Vice President None
Robert Harris................. Secretary None
</TABLE>
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant and its Transfer
Agent, Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Fund -- Management and Advisory Arrangements" in the Prospectus constituting
Part A of the Registration Statement and under "Management of the
Fund--Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, Registrant is not
party to any management-related service contact.
ITEM 32. UNDERTAKINGS.
(a) Not Applicable.
(b) Not Applicable.
(c) The Registrant will furnish each person to whom a Prospectus is
delivered with a copy of Registrant's latest annual report to shareholders, upon
request and without charge.
C-8
<PAGE> 130
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF
THE REQUIREMENTS FOR EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933
AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
TOWNSHIP OF PLAINSBORO, AND STATE OF NEW JERSEY, ON THE 25TH DAY OF MARCH, 1997.
Merrill Lynch Global Utility Fund,
Inc.
(Registrant)
By /s/ ARTHUR ZEIKEL
---------------------------------
(Arthur Zeikel, President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATE(S) INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------- ------------------
<C> <S> <C>
/s/ ARTHUR ZEIKEL President (Principal March 25, 1997
- ------------------------------------------ Executive Officer) and
(Arthur Zeikel) Director
* Treasurer (Principal March 25, 1997
- ------------------------------------------ Financial and Accounting
(Gerald M. Richard) Officer)
* Director
- ------------------------------------------
(Ronald W. Forbes)
* Director
- ------------------------------------------
(Cynthia A. Montgomery)
* Director
- ------------------------------------------
(Charles C. Reilly)
* Director
- ------------------------------------------
(Kevin A. Ryan)
* Director
- ------------------------------------------
(Richard R. West)
*By /s/ ARTHUR ZEIKEL March 25, 1997
- ------------------------------------------
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
* This Amendment has been signed by each of the persons so indicated by the
undersigned as Attorney-in-Fact.
C-9
<PAGE> 131
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------
<C> <C> <S> <C>
10 -- Opinion and consent of Shereff, Friedman, Hoffman & Goodman, LLP.
11 -- Consent of Deloitte & Touche LLP.
16 -- Schedule for computation of each performance quotation for Class A and
Class B shares provided in the Registration Statement in response to
Item 22.
17(b) -- Financial Data Schedule for Class A Shares.
(c) -- Financial Data Schedule for Class B Shares.
(d) -- Financial Data Schedule for Class C Shares.
(e) -- Financial Data Schedule for Class D Shares.
</TABLE>
<PAGE> 1
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022-9998
(212) 758-9500
March 25, 1997
Merrill Lynch Global Utility Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08536-9011
Ladies and Gentlemen:
Merrill Lynch Global Utility Fund, Inc. (the "Fund"), a Maryland
corporation (the "Fund"), is filing with the Securities and Exchange Commission
(the "Commission") Post-Effective Amendment No. 9 (the "Amendment") to its
Registration Statement under the Securities Act of 1933, as amended (the "1933
Act"), and the Investment Company Act of 1940, as amended (the "1940 Act"), on
Form N-1A (1933 Act File No. 33-37103, 1940 Act File No. 811-6180) relating,
among other things, to the registration under the 1933 Act of 10,117,560
additional shares of common stock, par value $.10 per share (the "Additional
Shares"), which are to be offered and sold by the Fund in the manner and on the
terms set forth in the Prospectus current and effective under the 1933 Act at
the time of sale. 10,095,428 of the Additional Shares are previously outstanding
shares of common stock of the Fund, par value $.10 per share, which were
redeemed by the Fund during its fiscal year ended November 30, 1996. According
to the Amendment, none of the Additional Shares have previously been used by the
Fund for reduction pursuant to paragraph (a) of Rule 24e-2 under the 1940 Act on
previous filings of post-effective amendments to the Fund's Registration
Statement during the current fiscal year, or reduction pursuant to paragraph (c)
of Rule 24f-2 under the 1940 Act during the Fund's current fiscal year, of the
registration fee payable by the Fund for the registration of shares for sale
under the 1933 Act.
We have, as counsel, participated in various corporate and other
proceedings relating to the Fund and to the proposed issuance of the Additional
Shares. We have examined copies, either certified or otherwise proven to our
satisfaction to be genuine, of its Articles of Incorporation and By-Laws, as
currently in effect, other documents related to its organization and operation,
and a certificate of recent date issued by the Department of Assessments and
Taxation of the State of Maryland, certifying the existence and good standing of
the Fund. We are generally familiar with the corporate affairs of the Fund.
Based upon the foregoing, it is our opinion that:
<PAGE> 2
Merrill Lynch Global Utility Fund, Inc.
March 25, 1997
Page 2
1. The Fund has been duly organized and is legally existing under
the laws of the State of Maryland.
2. The Fund is authorized to issue 400,000,000 shares of common
stock.
3. Subject to the effectiveness under the Act of the Amendment and
compliance with applicable state securities laws, upon the
issuance of the Additional Shares for a consideration of not
less than the par value thereof, and not less than the net asset
value thereof as required by the 1940 Act and in accordance with
the terms of the Registration Statement, such shares will be
legally issued and outstanding and fully paid and
non-assessable.
We hereby consent to the filing of this opinion with the Securities
and Exchange Commission as part of the Amendment, and with any state securities
commission where such filing is required. We also consent to the reference to
our firm as counsel in the prospectus and Statement of Additional Information of
the Fund. In giving this consent we do not admit that we come within the
category of persons whose consent is required under Section 7 of the 1933 Act.
We are members of the Bar of the State of New York and do not hold
ourselves out as being conversant with the laws of any jurisdiction other than
those of the United States of America and the State of New York. We note that we
are not licensed to practice law in the State of Maryland, and to the extent
that any opinion herein involves the law of Maryland, such opinion should be
understood to be based solely upon our review of the documents referred to
above, the published statutes of the State of Maryland and, where applicable,
published cases, rules or regulations of regulatory bodies of that State.
Very truly yours,
/s/ Shereff, Friedman, Hoffman & Goodman, LLP
Shereff, Friedman, Hoffman & Goodman, LLP
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Global Utility Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 9 to Registration
Statement No. 33-37103 of our report dated January 8, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
March 21, 1997
<PAGE> 1
EXHIBIT 16
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
AVERAGE ANNUAL AND TOTAL RETURNS
CLASS A
Period from 12/28/90 (inception) to 2/28/91
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVG ANNUAL TOTAL
RETURN RETURN*
---------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Maximum Offering Price 10.70
----------
Dividend by Net Asset Value 10.00
---------
Equals Shares Purchased 93.46 100.00
Plus Shares Acquired through
Dividend Reinvestment 0.00 0.00
---------- ---------
Equals Shares Held at 02/28/91 93.50 100.00
Multiplied by Net Asset
Value at 02/28/91 10.06 10.06
---------- ---------
Equals Ending Redeemable
Value at $1,000
Investment (ERV) at 02/28/91 $ 940.60 $1,006.00
Divided by $1,000 (P) 0.9406 1.0060
Subtract 1 -0.0594 0.0060
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) -5.94%
==========
Expressed as a percentage
equals the Aggregate Total
Return for the Period 0.60%
=========
ERV divided by P 0.9406
Raise to the power of 5.8871
Equals 0.6974
Subtract 1 0.3026
Expressed as a percentage
equals the Average
Annualized Total Return -30.26%
==========
</TABLE>
* Does not include sales charge for the period.
<PAGE> 2
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
AVERAGE ANNUAL AND TOTAL RETURNS
CLASS B
Period from 12/28/90 (inception) to 2/28/91
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVG ANNUAL TOTAL
RETURN RETURN*
---------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 10.00 10.00
---------- ---------
Equals Shares Purchased 100.00 100.00
Plus Shares Acquired through
Dividend Reinvestment 0.00 0.00
---------- ---------
Equals Shares Held
at 02/28/91 100.00 100.00
Multiplied by Net Asset
Value at 02/28/91 10.05 10.05
---------- ---------
Equals Ending Value before
deduction for contingent
deferred sales charge 1,005.00 1,005.00
Less deferred sales charge (40.00) 0.00
---------- ---------
Equals Ending Redeemable
Value of a $1,000
Investment (ERV) $ 965.00 $1,005.00
Divided by $1,000 (P) 0.9650 1.0050
Subtract 1 -0.0350 0.0050
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) -3.50%
==========
Expressed as a percentage
equals the Aggregate Total
Return for the Period 0.50%
=========
ERV divided by P 0.9650
Raise to the power of 5.8871
Equals 0.8108
Subtract 1 -0.1892
Expressed as a percentage
equals the Average
Annualized Total Return -18.92%
==========
</TABLE>
* Does not include sales charge for the period.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 299,484,688
<INVESTMENTS-AT-VALUE> 382,995,339
<RECEIVABLES> 1,480,912
<ASSETS-OTHER> 78,628
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 384,554,879
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,322,587
<TOTAL-LIABILITIES> 1,322,587
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 287,115,733
<SHARES-COMMON-STOCK> 2,654,294
<SHARES-COMMON-PRIOR> 3,312,507
<ACCUMULATED-NII-CURRENT> 1,373,289
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,235,313
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 83,507,957
<NET-ASSETS> 40,054,901
<DIVIDEND-INCOME> 15,939,897
<INTEREST-INCOME> 1,968,432
<OTHER-INCOME> 0
<EXPENSES-NET> (6,287,044)
<NET-INVESTMENT-INCOME> 11,621,285
<REALIZED-GAINS-CURRENT> 11,210,157
<APPREC-INCREASE-CURRENT> 41,368,999
<NET-CHANGE-FROM-OPS> 64,200,441
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,619,986)
<DISTRIBUTIONS-OF-GAINS> (807,670)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 178,410
<NUMBER-OF-SHARES-REDEEMED> (971,846)
<SHARES-REINVESTED> 135,223
<NET-CHANGE-IN-ASSETS> (46,228,472)
<ACCUMULATED-NII-PRIOR> 2,009,685
<ACCUMULATED-GAINS-PRIOR> 7,750,475
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,463,017
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,287,044
<AVERAGE-NET-ASSETS> 43,288,671
<PER-SHARE-NAV-BEGIN> 13.52
<PER-SHARE-NII> .50
<PER-SHARE-GAIN-APPREC> 1.84
<PER-SHARE-DIVIDEND> (.53)
<PER-SHARE-DISTRIBUTIONS> (.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.09
<EXPENSE-RATIO> .84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 299,484,688
<INVESTMENTS-AT-VALUE> 382,995,339
<RECEIVABLES> 1,480,912
<ASSETS-OTHER> 78,628
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 384,554,879
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,322,587
<TOTAL-LIABILITIES> 1,322,587
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 287,115,733
<SHARES-COMMON-STOCK> 22,291,538
<SHARES-COMMON-PRIOR> 28,291,298
<ACCUMULATED-NII-CURRENT> 1,373,289
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,235,313
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 83,507,957
<NET-ASSETS> 335,486,980
<DIVIDEND-INCOME> 15,939,897
<INTEREST-INCOME> 1,968,432
<OTHER-INCOME> 0
<EXPENSES-NET> (6,287,044)
<NET-INVESTMENT-INCOME> 11,621,285
<REALIZED-GAINS-CURRENT> 11,210,157
<APPREC-INCREASE-CURRENT> 41,368,999
<NET-CHANGE-FROM-OPS> 64,200,441
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,429,834)
<DISTRIBUTIONS-OF-GAINS> (6,874,204)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,480,280
<NUMBER-OF-SHARES-REDEEMED> (8,455,924)
<SHARES-REINVESTED> 975,884
<NET-CHANGE-IN-ASSETS> (46,228,472)
<ACCUMULATED-NII-PRIOR> 2,009,685
<ACCUMULATED-GAINS-PRIOR> 7,750,475
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,463,017
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,287,044
<AVERAGE-NET-ASSETS> 362,235,533
<PER-SHARE-NAV-BEGIN> 13.47
<PER-SHARE-NII> .39
<PER-SHARE-GAIN-APPREC> 1.84
<PER-SHARE-DIVIDEND> (.41)
<PER-SHARE-DISTRIBUTIONS> (.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.05
<EXPENSE-RATIO> 1.61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 299,484,688
<INVESTMENTS-AT-VALUE> 382,995,339
<RECEIVABLES> 1,480,912
<ASSETS-OTHER> 78,628
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 384,554,879
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,322,587
<TOTAL-LIABILITIES> 1,322,587
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 287,115,733
<SHARES-COMMON-STOCK> 221,280
<SHARES-COMMON-PRIOR> 153,914
<ACCUMULATED-NII-CURRENT> 1,373,289
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,235,313
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 83,507,957
<NET-ASSETS> 3,325,148
<DIVIDEND-INCOME> 15,939,897
<INTEREST-INCOME> 1,968,432
<OTHER-INCOME> 0
<EXPENSES-NET> (6,287,044)
<NET-INVESTMENT-INCOME> 11,621,285
<REALIZED-GAINS-CURRENT> 11,210,157
<APPREC-INCREASE-CURRENT> 41,368,999
<NET-CHANGE-FROM-OPS> 64,200,441
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (83,508)
<DISTRIBUTIONS-OF-GAINS> (38,876)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 116,923
<NUMBER-OF-SHARES-REDEEMED> (57,428)
<SHARES-REINVESTED> 7,871
<NET-CHANGE-IN-ASSETS> (46,228,472)
<ACCUMULATED-NII-PRIOR> 2,009,685
<ACCUMULATED-GAINS-PRIOR> 7,750,475
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,463,017
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,287,044
<AVERAGE-NET-ASSETS> 2,932,303
<PER-SHARE-NAV-BEGIN> 13.46
<PER-SHARE-NII> .38
<PER-SHARE-GAIN-APPREC> 1.84
<PER-SHARE-DIVIDEND> (.41)
<PER-SHARE-DISTRIBUTIONS> (.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.03
<EXPENSE-RATIO> 1.66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 299,484,688
<INVESTMENTS-AT-VALUE> 382,995,339
<RECEIVABLES> 1,480,912
<ASSETS-OTHER> 78,628
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 384,554,879
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,322,587
<TOTAL-LIABILITIES> 1,322,587
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 287,115,733
<SHARES-COMMON-STOCK> 289,073
<SHARES-COMMON-PRIOR> 111,895
<ACCUMULATED-NII-CURRENT> 1,373,289
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,235,313
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 83,507,957
<NET-ASSETS> 4,365,263
<DIVIDEND-INCOME> 15,939,897
<INTEREST-INCOME> 1,968,432
<OTHER-INCOME> 0
<EXPENSES-NET> (6,287,044)
<NET-INVESTMENT-INCOME> 11,621,285
<REALIZED-GAINS-CURRENT> 11,210,157
<APPREC-INCREASE-CURRENT> 41,368,999
<NET-CHANGE-FROM-OPS> 64,200,441
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (99,132)
<DISTRIBUTIONS-OF-GAINS> (29,790)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,016,536
<NUMBER-OF-SHARES-REDEEMED> (1,846,953)
<SHARES-REINVESTED> 7,595
<NET-CHANGE-IN-ASSETS> (46,228,472)
<ACCUMULATED-NII-PRIOR> 2,009,685
<ACCUMULATED-GAINS-PRIOR> 7,750,475
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,463,017
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,287,044
<AVERAGE-NET-ASSETS> 3,170,990
<PER-SHARE-NAV-BEGIN> 13.55
<PER-SHARE-NII> .50
<PER-SHARE-GAIN-APPREC> 1.79
<PER-SHARE-DIVIDEND> (.50)
<PER-SHARE-DISTRIBUTIONS> (.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.10
<EXPENSE-RATIO> 1.07
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
