<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 1999
SECURITIES ACT FILE NO. 33-37103
INVESTMENT COMPANY ACT FILE NO. 811-6180
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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. 12 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 14 /X/
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
TERRY K. GLENN
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS:
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
APPROXIMATE DATE OF PROPOSED OFFERING: As soon as practicable after the
effective date of the Registration Statement.
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE FUND: MICHAEL J. HENNEWINKEL, ESQ.
JOEL H. GOLDBERG, ESQ. THOMAS D. JONES, III, ESQ.
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP MERRILL LYNCH ASSET MANAGEMENT, L.P.
919 THIRD AVENUE, NEW YORK, NEW YORK 10022 P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
</TABLE>
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
/x/ immediately upon filing pursuant to paragraph (b), or
/ / 60 days after filing pursuant to paragraph (a)(i), or
/ / on (date) pursuant to paragraph (b), or
/ / 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.
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<PAGE>
[LOGO]
Prospectus
Merrill Lynch Global Utility Fund, Inc.
March 30, 1999
This Prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>
Table of Contents
[GRAPHIC]
KEY FACTS PAGE
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The Merrill Lynch Global Utility Fund at a Glance.............................3
Risk/Return Bar Chart.........................................................5
Fees and Expenses.............................................................6
[GRAPHIC]
DETAILS ABOUT THE FUND
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How the Fund Invests..........................................................8
Investment Risks.............................................................10
[GRAPHIC]
Your Account
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Merrill Lynch Select Pricing(Service Mark) System............................17
How to Buy, Sell, Transfer and Exchange Shares...............................22
Participation in Merrill Lynch Fee-Based Programs............................26
[GRAPHIC]
MANAGEMENT OF THE FUND
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Merrill Lynch Asset Management...............................................29
Financial Highlights.........................................................30
[GRAPHIC]
FOR MORE INFORMATION
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Shareholder Reports..................................................Back Cover
Statement of Additional Information..................................Back Cover
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
THE MERRILL LYNCH GLOBAL UTILITY FUND AT A GLANCE
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WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The investment objective of the Fund 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 that are, in the
opinion of the Investment Adviser, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute electricity,
telecommunications, gas or water. The Fund cannot guarantee that it will
achieve its investment objective.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund tries to achieve its goal by investing in a diversified portfolio of
securities issued by Utilities Companies. The Fund invests, except during
temporary defensive periods, at least 65% of its total assets in equity and debt
securities issued by domestic and foreign utility companies. The Fund may invest
in common stocks, bonds and preferred stock. Although the Fund intends to invest
primarily in equity securities, Fund management may change its allocation among
these types of investments as it sees appropriate to seek to meet the Fund's
objective. The bonds the Fund invests in generally are limited to those rated
investment grade. Under normal conditions, the Fund will invest at least 65% of
its total assets in issuers domiciled in at least three-countries.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's investments, and therefore the
value of your Fund shares, may go up or down. These changes may occur because
the markets in general are rising or falling. At other times, there are specific
factors that may affect the value of a particular investment. If the value of
the Fund's investments go down, you may lose money. The Fund is also subject to
the risk that the investments that Fund management selects will underperform the
stock market or other funds with similar investment objectives and investment
strategies.
As a sector fund that invests in utility companies, the Fund is subject to the
risks associated with this sector. This makes the Fund more vulnerable to price
changes of utility companies and other factors that particularly affect the
utilities industry than a more broadly diversified mutual fund. In addition,
the prices of securities issued by utility companies may change in response to
interest rate changes. Generally when interest rates go up, the value of
securities issued by utility companies goes down. Conversely, when interest
rates go down, the value of securities issued by utility companies
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[GRAPHIC] Key Facts
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this
prospectus in the sidebar.
UTILITIES COMPANIES - companies that are primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute electricity,
telecommunications, gas or water.
COMMON STOCKS - shares of ownership of a corporation.
BONDS - debt obligations issued by corporations or governments.
PREFERRED STOCKS - class of stock that often pays dividends at a specified rate
and has preference over common stock in dividend payments and liquidation of
assets. Preferred stock may also be convertible into common stock.
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 3
<PAGE>
[GRAPHIC] Key Facts
generally go up. There is no guarantee that this relationship will continue in
the future.
The Fund may invest most of its assets in non-U.S. securities. Foreign
investing involves special risks - including foreign currency risk and the
possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
WHO SHOULD INVEST?
The Fund may be an appropriate investment for you if you:
o Are looking for capital appreciation for long-term goals, such as retirement
or funding a child's education, but also seek some current income.
o Want to diversify your portfolio to include utility companies.
o Are looking for investment in a variety of foreign markets.
o Are willing to accept the risks of foreign investing in exchange for
potentially higher long-term returns.
o Want a professionally managed and diversified portfolio.
4 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
RISK/RETURN BAR CHART
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The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for Class B shares for each complete calendar year since the Fund's inception.
Sales charges are not reflected in the bar chart. If these amounts were
reflected, returns would be less than those shown. The table compares the
average annual total returns for each class of the Fund's shares for the
periods shown with those of the Financial Times/Standard & Poor's - Actuaries
World Index and the Financial Times/Standard & Poor's - Actuaries World Utility
Index. How the Fund performed in the past is not necessarily an indication of
how the Fund will perform in the future.
1991 13.84%
1992 8.12%
1993 23.17%
1994 -10.62%
1995 22.73%
1996 13.34%
1997 23.13%
1998 24.67%
During the period shown in the bar chart, the highest return for a quarter was
15.10% (quarter ended December 31, 1998) and the lowest return for a quarter
was -7.48% (quarter ended March 31, 1994).
<TABLE>
<CAPTION>
Average Annual Total Returns
(for the calendar year ended)
December 31, 1998 Past Past Since
One Year Five Years Inception
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<S> <C> <C> <C>
Merrill Lynch Global Utility* - Class A 20.58% 13.74% 14.50%+
Financial Times/Standard & Poor's - Actuaries World Utility Index*** 36.67% 16.30% 15.96%
Financial Times/Standard & Poor's - Actuaries World Index** 23.04% 15.26% 13.87%
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Merrill Lynch Global Utility* - Class B 20.67% 13.80% 14.20%+
Financial Times/Standard & Poor's - Actuaries World Utility Index*** 36.67% 16.30% 15.96%
Financial Times/Standard & Poor's - Actuaries World Index** 23.04% 15.26% 13.87%
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Merrill Lynch Global Utility* - Class C 23.56% N/A 18.78%++
Financial Times/Standard & Poor's - Actuaries World Utility Index*** 36.67% N/A 20.67%
Financial Times/Standard & Poor's - Actuaries World Index** 23.04% N/A 16.12%
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Merrill Lynch Global Utility* - Class D 20.29% N/A 18.30%++
Financial Times/Standard & Poor's - Actuaries World Utility Index*** 36.67% N/A 20.67%
Financial Times/Standard & Poor's - Actuaries World Index** 23.04% N/A 16.12%%
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</TABLE>
* Includes sales charge.
** This unmanaged market capitalization-weighted Index is comprised of nearly
2,307 equities from 29 countries in 17 regions, including the United
States. Past performance is not predictive of future performance.
*** This unmanaged market capitalization-weighted Index is comprised of utility
stocks from any of the 24 countries that make up the Financial
Times/Standard & Poor's - Actuaries World Index. Past performance is not
predictive of future performance.
+ Inception date is December 28, 1990.
++ Inception date is October 21, 1994
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 5
<PAGE>
[GRAPHIC] Key Facts
FEES AND EXPENSES
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The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining which classes you
are eligible to buy, decide which class best suits your needs. Your Merrill
Lynch Financial Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy
and hold the different classes of shares of the Fund. Future expenses may be
greater or less than those indicated below.
<TABLE>
<CAPTION>
Shareholder Fees
(fees paid directly from your investment): Class A Class B(a) Class C Class D
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<S> <C> <C>
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) 4.00%(b) None None 4.00%(b)
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Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase price or
redemption proceeds, whichever is lower) None(c) 4.0%(b) 1.0%(b) None(c)
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Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
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Redemption Fee None None None None
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Exchange Fee None None None None
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Maximum Account Fee None None None None
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Annual Fund Operating Expenses
(expenses that are deducted from Fund assets):
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Management Fee 0.60% 0.60% 0.60% 0.60%
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Distribution and/or Service (12b-1) Fees(d) None 0.75% 0.80% 0.25%
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Other Expenses (including transfer agency fees) (e) 0.22% 0.24% 0.24% 0.22%
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Total Annual Fund Operating Expenses (f) 0.82% 1.59% 1.64% 1.07%
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</TABLE>
(a) Class B shares automatically convert to Class D shares about ten years
after you buy them and will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund calls the Service Fee an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund materials. If you hold Class B or Class C shares for a long
time, it may cost you more in distribution (12b-1) fees than the maximum
sales charge that you would have paid if you had bought one of the other
classes.
(e) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year. For the fiscal year
ended November 30, 1998, the Fund paid the Transfer Agent fees totaling
$377,518. The investment adviser provides accounting services to the Fund
at its cost. For the fiscal year ended November 30, 1998, the Fund
reimbursed the Investment Adviser $86,303 for these services.
(f) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
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UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES - these include sales charges which you may pay when you buy
or sell shares of the Fund.
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
ANNUAL FUND OPERATING EXPENSES - expenses that cover the costs of operating
the Fund.
MANAGEMENT FEE - a fee paid to the Investment Adviser for managing the Fund.
DISTRIBUTION FEES - fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants.
SERVICE (ACCOUNT MAINTENANCE FEES) - fees used to compensate securities dealers
for account maintenance activities.
6 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
EXAMPLES:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C>
Class A $480 $651 $837 $1,373
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Class B $562 $702 $866 $1,889
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Class C $267 $517 $892 $1,944
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Class D $505 $727 $967 $1,653
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EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A $480 $651 $837 $1,373
- -------------------------------------------------------------------------------
Class B $162 $502 $866 $1,889
- -------------------------------------------------------------------------------
Class C $167 $517 $892 $1,944
- -------------------------------------------------------------------------------
Class D $505 $727 $967 $1,653
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</TABLE>
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 7
<PAGE>
HOW THE FUND INVESTS
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The Fund's goal is total return. Total return includes both capital
appreciation and current income. The Fund tries to achieve its goal by
investing, except during temporary defensive periods, at least 65% of its total
assets in equity and debt securities issued by domestic and foreign utility
companies. The Fund may invest in common stocks, bonds and preferred stock.
Although the Fund intends to invest primarily in equity securities, Fund
management may change its allocation among these types of investments as it
sees appropriate to seek to meet the Fund's objective.
Under normal conditions, the Fund will invest at least 65% of its total assets
in issuers domiciled in at least three countries. Under normal conditions, Fund
management anticipates that the Fund will invest more of its assets in U.S.
securities than in securities of any other single country.
In selecting securities for the Fund's portfolio, Fund management emphasizes
securities of utilities companies that have strong financial characteristics.
Fund management selects the countries and securities in which it will invest by
a combination approach of top-down and bottom-up investment analysis. First,
Fund management selects countries through top-down research and analysis of such
factors as data and forecasts about general regional economic strength,
political and economic stability, and valuation of currency. Next, Fund
management assesses the financial strength of individual utility companies
utilizing a bottom-up examination that considers such factors as financial
resources, quality of management and overall business prospects for the utility
company in comparison to its worldwide industry peers.
To meet its objective of current income, the Fund may invest in United States
utility companies that are often characterized as value investments because
they 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. To meet its objective of capital appreciation, the
Fund may also invest in foreign utility companies which are viewed more as
growth investments as they tend to pay a lower dividend and may have a geater
potential for growth than U.S. utility companies. Some U.S. utility companies
may also be selected for their growth potential.
The Fund may also look for utility companies that may prosper in a deregulated
environment. Historically, utility companies have been highly regulated.
Currently, there is a growing movement worldwide to deregulate utility
companies, particularly electric utility and telecommunication companies, and
permit competition among them. Deregulation may allow utility companies to
increase their earnings at a faster rate than was allowed in a regulated
environment. Deregulation presents both risks and opportunities for investors
in utility
- -------------------------------------------------------------------------------
Details About the Fund [GRAPHIC]
ABOUT THE PORTFOLIO MANAGER
Walter D. Rogers is a Senior Vice President and the portfolio manager of the
Fund. Mr. Rogers has been a First Vice President of Merrill Lynch Asset
Management since 1997 and a Vice President of Merrill Lynch Asset Management
from 1987 to 1997. Mr. Rogers has been primarily responsible for the management
of the Fund's portfolio since 1990.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
8 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
company securities. For example, 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,
utillity 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 emergence of competition and deregulation may 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 bonds the Fund invests in generally are limited to those rated investment
grade, though the Fund may invest up to 5% of its total assets in lower rated
debt securities also known as junk bonds. The Fund may also invest in American
Depositary Receipts, European Depositary Receipts, convertible securities,
when-issued securities, standby commitments, repurchase agreements and illiquid
securities. The Fund may also engage in securities lending.
The Fund may use derivatives, such as options and futures, to hedge against
movements in interest rates, currencies and market movements.
The Fund may invest up to 35% of its assets in securities of companies that are
not utility companies. Any investments outside the utility industry will be
selected to meet the Fund's investment objective of capital appreciation and
current income.
The Fund will normally invest a portion of its assets in short-term debt
securities, such as commercial paper. Except during temporary defensive
periods, the Fund's investment in short-term securities will not normally
exceed 20% of its total assets. During temporary defensive periods, the Fund
may invest more heavily in these securities, without limitation. Therefore, the
Fund may not achieve its investment objective. The Fund may also increase its
investments in these securities when Fund management is unable to find enough
attractive long-term investments, to reduce exposure to equities when
management believes it is advisable to do so or to meet redemptions.
Investments in short-term debt securities can be sold easily and have limited
risk of loss but earn only limited returns.
The Fund may use many different strategies in seeking its investment objectives
and it has certain investment restrictions. These strategies and certain of the
restrictions and policies governing the Fund's investments are explained in the
Fund's Statement of Additional Information. If you would like to learn more
about the Fund, request the Statement of Additional Information.
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 9
<PAGE>
[GRAPHIC] Detail About the Fund
INVESTMENT RISKS
- -------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period
of time.
SECTOR RISK-- Sector risk is the risk that the Fund's concentration in the
securities of utility companies will expose the Fund to the price movements of
companies in one industry more than a more broadly diversified mutual fund.
Because the Fund invests primarily in one sector, there is the risk that the
Fund will perform poorly during a downturn in that sector. The Fund should be
considered a vehicle for diversification and should not be considered a
balanced investment program by itself.
When interest rates go up, the value of securities issued by utility companies
generally goes down. Although the average dividend yield of utility industry
stocks historically has been higher than those of industrial companies, the
total return of utility industry securities has historically underperformed
those of industrial companies. In most countries and localities, the utilities
industry is regulated by government entities, which can increase costs and
delays for new projects and make it difficult to pass increased costs on to
consumers. In certain areas, deregulation of utilities has resulted in
increased competition and reduced profitability for certain companies. Reduced
profitability as well as new uses of funds (such as for expansion, operations
or stock buybacks) could result in reduced dividend payout rates for utility
companies. In addition, utility companies face the risk of increases in the
cost and reduced availability of fuel (such as oil, coal, nuclear or natural
gas) and high interest costs for borrowing to finance new projects.
STOCK MARKET AND SELECTION RISK -- Stock market risk is the risk that the stock
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the investments
that Fund management selects will underperform the stock market or other funds
with similar investment objectives and investment strategies.
FOREIGN MARKET RISK -- Because the Fund may invest a portion of its total
assets in foreign securities, the Fund offers you more diversification than an
investment only in the United States since prices of securities traded on
foreign markets have often, though not always, moved counter to prices in the
United States. Foreign security investment, however, involves special risks not
present in U.S. investments that can increase the chances that the Fund
10 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
will lose money. In particular, the Fund is subject to the risk that because
there are generally fewer investors on foreign exchanges and a smaller number
of shares traded each day, it may be difficult for the Fund to buy and sell
securities on those exchanges. In addition, prices of foreign securities may
fluctuate more than prices of securities traded in the United States.
FOREIGN ECONOMY RISK -- The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income
back into the United States, or otherwise adversely affect the Fund's
operations. Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the United States or other foreign countries.
CURRENCY RISK AND EXCHANGE RISK -- Securities in which the Fund invests may be
denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the securities of the
Fund. Generally, when the U.S. dollar rises in value against a foreign
currency, your investment in a security denominated in that currency loses
value because the currency is worth fewer U.S. dollars. Similarly when the U.S.
dollar decreases in value against a foreign currency, your investment in a
security denominated in that currency gains value because the currency is worth
more U.S. dollars. This risk is generally known as "currency risk" which is the
possibility that a stronger U.S. dollar will reduce returns for U.S. investors
investing overseas and a weak U.S. dollar will increase returns for U.S.
investors investing overseas.
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 11
<PAGE>
[GRAPHIC] Details About the Fund
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS -- Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Other countries may not have laws
to protect investors the way that the United States' securities laws do. For
example, some foreign countries may have no laws or rules against insider
trading (this is when a person buys or sells a company's securities based on
"inside" non-public information about that company). Accounting standards in
other countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for the Fund's portfolio manager to
completely and accurately determine a company's financial condition. Also,
brokerage commissions and other costs of buying or selling securities often are
higher in foreign countries than they are in the United States. This reduces
the amount the Fund can earn on its investments.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE UNITED STATES --
The Fund generally holds the foreign securities and cash in which it invests
outside the United States in foreign banks and securities depositories. Certain
of such foreign banks and securities depositories may be recently organized or
new to the foreign custody business and/or may have operations subject to
limited or no regulatory oversight. Also, the laws of certain countries may put
limits on the Fund's ability to recover its assets if a foreign bank or
depository or issuer of a security or any of their agents goes bankrupt. In
addition, it can be expected that it will be more expensive for the Fund to
buy, sell, and hold securities in certain foreign markets than in the U.S.
market due to higher brokerage, transaction, custody and/or other costs. The
increased expense to invest in foreign market reduces the amount the Fund can
earn on its investments and typically results in a higher operating expense
ratio for the Fund than investment companies invested only in the U.S.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement procedures
and trade regulations also may involve certain risks (such as delays in payment
for or delivery of securities) not typically generated by the settlement of
U.S. investments. Communications between the United States and emerging market
countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates. Settlements in certain foreign countries at
times have not kept pace with the number of securities transactions; these
problems may make it difficult for the Fund to carry out transactions. If the
12 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
Fund cannot settle or is delayed in settling a purchase of securities, it may
miss attractive investment opportunities and certain of its assets may be
uninvested with no return earned thereon for some period. If the Fund cannot
settle or is delayed in settling a sale of securities, it may lose money if the
value of the security then declines or, if it has contracted to sell the
security to another party, the Fund could be liable to that party for any
losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities may
be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.
EMERGING MARKETS RISK -- The risk of foreign investments are usually much
greater for emerging markets. Investments in emerging markets may be considered
speculative. Emerging markets include those in countries defined as emerging or
developing by the World Bank, the International Finance Corporation, or the
United Nation. Emerging markets are riskier because they develop unevenly and
may never fully develop. They are more likely to experience hyperinflation and
currency devaluations, which adversely affects returns to U.S. investors. In
addition, the securities markets in many of these countries have far lower
trading volumes and less liquidity than developed markets. Since these markets
are so small, they may be more likely to suffer sharp and frequent price
changes or long-term price depression because of adverse publicity, investor
perceptions, or the actions of a few large investors. In addition, traditional
measures of investment value used in the United States, such as price to
earnings ratios, may not apply to certain small markets.
Many emerging markets have histories of political instability and abrupt
changes in policies. As a result, their governments are more likely to take
actions that are hostile or detrimental to private enterprise or foreign
investment than those of more developed countries. Certain emerging markets may
also face other significant internal or external risks, including the risk of
war, and ethnic, religious, and racial conflicts. In addition, governments in
many emerging market countries participate to a significant degree in their
economies and securities markets, which may impair investment and economic
growth.
SOVEREIGN DEBT -- The Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities. Investments
in sovereign debt subject the Fund to the risk that a government
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 13
<PAGE>
[GRAPHIC] Details About the Fund
entity may delay or refuse to pay interest or repayment of principal on its
Sovereign Debt for various reasons including cash flow problems, insufficient
foreign currency reserves, political considerations, the relative size of its
debt position to its economy or its failure to put in place economic reforms
required by the International Monetary Fund or other multilateral agencies. If
a government entity defaults, it may ask for more time in which to pay or for
further loans. There is no bankruptcy proceeding by which all or part of
Sovereign Debt that a government entity has not repaid may be collected.
INTEREST RATE RISK -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest rates
increase. Prices of longer term securities generally change more in response to
interest rate changes than prices of shorter term securities.
CREDIT RISK -- Credit risk is the risk that the issuer will be unable to pay
the interest or principal when due. The degree of credit risk depends on both
the financial condition of the issuer and the terms of the obligation.
CONVERTIBLES -- Convertibles are generally debt securities or preferred stocks
that may be converted into common stock. Convertibles typically pay current
income, as either interest (debt security convertibles) or dividends (preferred
stocks). A convertible's value usually reflects both the stream of current
income payments and the value of the underlying common stock. The market value
of a convertible performs like regular debt securities; that is, if market
interest rates rise, the value of a convertible usually falls. Since it is
convertible into common stock, the convertible also has the same types of
market and issuer risk as the value of underlying common stock.
EUROPEAN ECONOMIC AND MONETARY UNION (`EMU') -- A number of European countries
have agreed to enter into EMU in an effort to reduce trade barriers between
themselves and eliminate fluctuations in their currencies. EMU establishes a
single European currency (the euro), which was introduced on January 1, 1999
and is expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. Upon introduction of the euro, certain securities
(beginning with government and corporate bonds) were redenominated in the euro.
Thereafter, these securities will trade and make dividend and other payments
only in euros. Like other investment companies and business organizations,
including the companies in which the Fund invests, the Fund could be adversely
affected:
14 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
If the euro, or EMU as a whole, does not take effect as planned.
If a participating country withdraws from EMU.
If the computing, accounting and trading systems used by the Fund's
service providers, or by other entities with which the Fund or its
service providers do business, are not capable of recognizing the
euro as a distinct currency beginning with euro conversion.
DERIVATIVES -- Derivatives allow the Fund to increase or decrease its risk
exposure more quickly and efficiently than other types of instruments. The Fund
may use the following types of derivative instruments including: Futures,
Forwards and Options.
Derivatives are volatile and involve significant risks, including:
LEVERAGE RISK -- the risk associated with certain types of investments
or trading strategies (such as borrowing money to increase the amount
of investments) that relatively small market movements may result in
large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that
greatly exceed the amount originally invested.
CREDIT RISK -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to the Fund.
CURRENCY RISK -- the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
LIQUIDITY RISK -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the
price that the seller believes the security is currently worth.
The Fund may use derivatives, including anticipatory hedges, for hedging
purposes. The Fund may also write covered call options to enhance income.
Hedging is a strategy in which the Fund uses a derivative to offset the risk
that other Fund holdings may decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if the market moves in a
different manner than anticipated by the Fund or if the cost of the derivative
outweighs the benefit of the hedge. Hedging also involves the risk that changes
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 15
<PAGE>
[GRAPHIC] Details About the Fund
in the value of the derivative will not match those of the holdings being
hedged as expected by the Fund, in which case any losses on the holdings being
hedged may not be reduced. There can be no assurance that the Fund's hedging
strategy will reduce risk or that hedging transactions will be either available
or cost effective. The Fund is not required to use hedging and may choose not
to do so.
BORROWING AND LEVERAGE -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net
asset value of Fund shares and in the yield on the Fund's portfolio. Borrowing
will cost the Fund interest expense and other fees. The cost of borrowing may
reduce the Fund's return.
Certain securities that the Fund buys may create leverage, including, for
example, when-issued securities, forward commitments and options.
STATEMENT OF ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
If you would like further information about the Fund, including how it
invests, please see the Statement of Additional Information.
16 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
[GRAPHIC] Your Account
MERRILL LYNCH SELECT PRICING(Service Mark) SYSTEM
- -------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.
For example, if you select Class A or D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.25%. You may be eligible for a sales
charge waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to distribution fees of 0.50% for Class
B shares and 0.55% for Class C shares and account maintenance of 0.25% for both
Class B and Class C shares. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B
or C shares.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 17
<PAGE>
[LOGO] Your Account
The table below summarizes key features of the Merrill Lynch Select
Pricing(Service Mark) System.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill through Merrill through Merrill
o Current Class A Lynch. Limited Lynch. Limited Lynch. Limited
shareholders availability through availability through availability through
o Certain Retirement other securities other securities other securities
Plans dealers. dealers. dealers.
o Participants in
certain Merrill
Lynch sponsored
programs
o Certain affiliates of
Merrill Lynch.
- -------------------------------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time No. Entire purchase No. Entire purchase Yes. Payable at time
Charge? of purchase. Lower price is invested in price is invested in of purchase. Lower
sales charges shares of the Fund. shares of the Fund. sales charges
available for larger available for larger
investments. investments.
- -------------------------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged Yes. Payable if you Yes. Payable if you No. (May be charged
Charge? for purchases over redeem within four redeem within one for purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within redeemed within
one year.) one year.)
- -------------------------------------------------------------------------------------------------------------------------------
Account No. 0.25% Account 0.25% Account 0.25% Account
Maintenance and Maintenance Fee Maintenance Fee Maintenance Fee
Distribution Fees? 0.50% Distribution 0.55% Distribution No Distribution Fee.
Fee. Fee.
- -------------------------------------------------------------------------------------------------------------------------------
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
ten years.
</TABLE>
18 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
RIGHT OF ACCUMULATION -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
LETTER OF INTENT -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing System funds that you
agree to buy within a 13 month period. Certain restrictions apply.
CLASS A AND CLASS D SHARES -- INITIAL SALES CHARGE OPTIONS
If you select Class A or Class D shares, you will pay a sales charge at the time
of purchase.
Dealer
Compensation
As a % of As a % of As a % of
Your Investment Offering Price Your Investment* Offering Price
- --------------------------------------------------------------------------------
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%
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This
charge is 1% of the lesser of the original cost of the shares being
redeemed or your redemption proceeds. 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.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
o Purchases under a Right of Accumulation or Letter of Intent.
o Merrill Lynch Blueprint(Service Mark) Program participants.
o TMA(Service Mark) Managed Trusts.
o Certain Merrill Lynch investment or central asset accounts.
o Certain employer-sponsored retirement or savings plans.
o Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances.
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 19
<PAGE>
[LOGO] Your Account
o Certain investors, including directors of Merrill Lynch mutual
funds and Merrill Lynch employees.
o Certain Merrill Lynch fee-based programs.
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to an account maintenance fee, while Class A
shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of the
same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
CLASS B AND CLASS C SHARES -- DEFERRED SALES CHARGE OPTIONS
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.50% for Class B shares and 0.55% for Class C shares and account
maintenance fees of 0.25% for both Class B and Class C shares each year under a
distribution plan that the Fund has adopted under Rule 12b-1 under the
Investment Company Act of 1940. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. The
Distributor uses the money that it receives from the deferred sales charges and
the distribution fees to cover the costs of marketing, advertising and
compensating the Merrill Lynch Financial Consultant or other securities dealer
who assists you in purchasing Fund shares.
CLASS B SHARES
If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases as
you hold your shares over time, according to the following schedule:
20 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
Years Since Purchase Sales Charge*
-----------------------------------------
0 - 1 4.00%
1 - 2 3.00%
2 - 3 2.00%
3 - 4 1.00%
4 and thereafter 0.00%
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends or distributions are not subject to a
deferred sales charge. Not all Merrill Lynch funds have identical deferred
sales charge schedules. If you exchange your shares for shares of another
fund, the higher charge will apply.
The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:
o Certain post-retirement withdrawals from an IRA or other retirement
plan if you are over 59 1/2 years old.
o Redemption by certain eligible 401(a) and 401(k) plans, certain
related accounts, group plans participating in the Merrill Lynch
Blueprint Program and certain retirement plan rollovers.
o Redemption in connection with participation in certain Merrill Lynch
fee-based programs.
o Withdrawals resulting from shareholder death or disability as long as
the waiver request is made within one year of death or disability or,
if later, reasonably promptly following completion of probate, or in
connection with involuntary termination of an account in which Fund
shares are held.
o Withdrawal through the Merrill Lynch Systematic Withdrawal Plan of up
to 10% per year of your Class B account value at the time the plan is
established.
Your Class B shares convert automatically into Class D shares approximately ten
years after purchase. Any Class B shares received through reinvestment of
dividends or distributions paid on converting shares will also convert at that
time. Class D shares are subject to lower annual expenses than Class B shares.
The conversion of Class B to Class D shares is not a taxable event for Federal
income tax purposes.
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 21
<PAGE>
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund convert
approximately ten years after purchase compared to approximately eight years for
equity funds. If you acquire your Class B shares in an exchange from another
fund with a shorter conversion schedule, the Fund's ten year conversion schedule
will apply. If you exchange your Class B shares in the Fund for Class B shares
of a fund with a longer conversion schedule, the other fund's conversion
schedule will apply. The length of time that you hold both the original and
exchanged Class B shares in both funds will count toward the conversion
schedule. The conversion schedule may be modified in certain other cases as
well.
CLASS C SHARES
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends or distributions. The deferred
sales charge relating to Class C shares may be reduced or waived in connection
with involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart below summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
22 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing table on page 18. Be sure to
appropriate for you read this prospectus carefully.
Next, determine the amount The minimum initial investment for the Fund is $1,000 for all
of your investment accounts except:
o $500 for Employee Access(Service Mark) Accounts
o $250 for certain Merrill Lynch fee-based programs
o $100 for Merrill Lynch Blueprint(Service Mark) Program
o $100 for retirement plans
(The minimums for initial investments may be waived or reduced
under certain circumstances.)
Have your Merrill Lynch The price of your shares is based on the next calculation of net asset
Financial Consultant or value after your order is placed. Any purchase orders placed within 15
securities dealer submit your minutes after the close of business on the New York Stock Exchange will
purchase order be priced at the net asset value determined that day.
Purchase orders placed after that time will be priced at the net asset
value determined on the next business day. The Fund may reject any
order to buy shares and may suspend the sale of shares at any time.
Merrill Lynch may charge a processing fee to confirm a purchase.
This fee is currently $5.35.
Or contact the Transfer Agent You can purchase shares by calling the Transfer Agent to request an
application and making a purchase order directly to the Transfer
Agent at the address on the inside back cover of this prospectus.
Add to Your Purchase additional shares The minimum investment for additional purchases is $50 for all
Investment accounts except that retirement plans have a minimum additional
purchase of $1.
(The minimums for additional purchases may be waived under certain
circumstances.)
Acquire additional shares All dividends and capital gains distributions are automatically
through the automatic reinvested without a sales charge.
dividend reinvestment plan
Participate in the automatic You may invest a specific amount on a periodic basis through certain
investment plan Merrill Lynch investment or central asset accounts.
Transfer Shares Transfer to a participating You may transfer your Fund shares only to another securities dealer
to Another securities dealer that has entered into an agreement with Merrill Lynch. All
Securities Dealer shareholder services will be available for the transferred shares. You
may only purchase additional shares of funds previously owned before
the transfer. All future trading of these assets must be coordinated by
the receiving firm.
</TABLE>
23 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
[GRAPHIC] Your Account
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Transfer Shares Transfer to a You must either:
to Another non-participating securities o Transfer your shares to an account with the Transfer Agent; or
Securities Dealer dealer o Sell your shares.
(continued)
Sell Your Shares Have your Merrill Lynch The price of your shares is based on the next calculation of net asset
Financial Consultant or value after your order is placed. For your redemption request to be
securities dealer submit your priced at the net asset value on the day of your request, you must
sales order submit your request to your dealer within 15 minutes after
the close of business on the New York Stock Exchange (the New York
Stock Exchange generally close 4:00 p.m. Eastern time).
Any redemption request placed after that time will be priced at
the net asset value at the close of business on the next business
day. Dealers must submit redemption requests to the Fund not more
than thirty minutes after the close of business on the New York
Stock Exchange on the day the request was received.
Securities dealers, including Merrill Lynch, may charge a fee to
process a redemption of shares. Merrill Lynch currently charges a fee
of $5.35. No processing fee is charged if you redeem shares directly
through the Transfer Agent.
The Fund may reject an order to sell shares under certain
circumstances.
Sell through the Transfer You may sell shares held at the Transfer Agent by writing to the
Agent Transfer Agent at the address on the inside back cover of this
prospectus. All shareholders on the account must sign the letter and
signatures must be guaranteed. If you hold stock certficiates, return
the certificates with the letter. The Transfer Agent will normally mail
redemption proceeds within seven days following receipt of a
properly completed request. If you make a redemption request
before the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your proceeds.
This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered to the Transfer
Agent before they can be converted. Check with the Transfer Agent
or your Merrill Lynch Financial Consultant for details.
</TABLE>
24 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sell Shares Participate in the Fund's You can choose to receive systematic payments from your Fund
Systematically Systematic Withdrawal Plan account either by check or through direct deposit to your bank
account on a monthly or quarterly basis. If you have a Merrill Lynch
CMA(Registered), CBA(Registered) or Retirement Account you can arrange
for systematic redemptions of a fixed dollar amount on a monthly,
bi-monthly, quarterly, semi-annual or annual basis, subject to certain
conditions. Under either method you must have dividends and other
distributions automatically reinvested. For Class B and C shares your
total annual withdrawals cannot be more than 10% per year of the
value of your shares at the time your plan is established. The
deferred sales charge is waived for systematic redemptions. Ask your
Merrill Lynch Financial Consultant for details.
Exchange Your Select the fund into which You can exchange your shares of the Fund for shares of many other
Shares you want to exchange. Be Merrill Lynch mutual funds. You must have held the shares used in
sure to read that fund's the exchange for at least 15 calendar days before you can exchange
prospectus to another fund.
Each class of Fund shares is generally exchangeable for shares of the
same class of another fund. If you own Class A shares and wish to
exchange into a fund in which you have no Class A shares, you will
exchange into Class D shares.
Some of the Merrill Lynch mutual funds impose a different initial or
deferred sales charge schedule. If you exchange Class A or D shares
for shares of a fund with a higher initial sales charge than you
originally paid, you will be charged the difference at the time of
exchange. If you exchange Class B shares for shares of a fund with a
different deferred sales charge schedule, the higher schedule will
apply. The time you hold Class B or C shares in both funds will count
when determining your holding period for calculating a deferred
sales charge at redemption. If you exchange Class A or D shares for
money market fund shares, you will receive Class A shares of Summit
Cash Reserves Fund. Class B or C shares of the Fund will be
exchanged for Class B shares of Summit.
Although there is currently no limit on the number of exchanges that you
can make, the exchange privilege may be modified or terminated at any
time in the future.
</TABLE>
25 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
[GRAPHIC] Your Account
NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the NET ASSET VALUE, plus any applicable
sales charge. This is the offering price. Shares are also redeemed at their net
asset value, minus any applicable deferred sales charge. The Fund calculates
its net asset value (generally by using market quotations) each day the New
York Stock Exchange is open, fifteen minutes after the close of business on the
Exchange (the Exchange generally closes at 4:00 p.m. Eastern time). The net
asset value used in determining your price is the next one calculated after
your purchase or redemption order is placed. Foreign securities owned by the
Fund may trade on weekends or other days when the Fund does not price its
shares. As a result, the Fund's net asset value may change on days when you
will not be able to purchase or redeem the Fund's shares. If an event occurs
after the close of a foreign exchange that is likely to significantly affect
the Fund's net asset value, "fair value" pricing may be used. This means that
the Fund may value its foreign holdings at prices other than their last closing
prices, and the Fund's net asset value will reflect this.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class
D shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
26 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
If you leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of Fund shares or into a money
market fund. The class you receive may be the class you originally owned when
you entered the program, or in certain cases, a different class. If the
exchange is into Class B shares, the period before conversion to Class D shares
may be modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your Merrill
Lynch Financial Consultant.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute net investment income on a quarterly basis. The Fund
attempts to pay a stable quarterly dividend. As a result, some quarters the
Fund will pay a dividend of less than the full amount of investment income
earned during the particular quarter, while other quarters the Fund will pay a
dividend out of accumulated but previously undistributed investment income. The
Fund intends to distribute all of its investment income earned each fiscal
year. The Fund will distribute any net realized long or short-term capital
gains at least annually. The Fund may also pay a special distribution at the
end of the calendar year to comply with federal tax requirements. If your
account is with Merrill Lynch and you would like to receive DIVIDENDS in cash,
contact your Merrill Lynch Financial Consultant. If your account is with the
Transfer Agent and you would like to receive dividends in cash, contact the
Transfer Agent.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. The Fund
intends to make distributions that will either be taxed as ordinary income or
capital gains. Capital gains dividends received by individuals are generally
taxed at different rates than ordinary income dividends.
- --------------------------------------------------------------------------------
DIVIDENDS -- ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 27
<PAGE>
[GRAPHIC] Your Account
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
By law, the Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number or social security number.
This section summarizes some of the consequences under current federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws.
- --------------------------------------------------------------------------------
"BUYING A DIVIDEND"
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed income or capital
gains, you will pay the full price for the shares and then receive a portion of
the price back in the form of a taxable dividend. Before investing you may want
to consult your tax adviser.
28 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
Management of the Fund [GRAPHIC]
MERRILL LYNCH ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Merrill Lynch Asset Management, the Fund's Investment Adviser, manages the
Fund's investments and its business operations under the overall supervision of
the Fund's Board of Trustees. The Investment Adviser has the responsibility for
making all investment decisions for the Fund. The Investment Adviser has a
sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an
affiliate, under which the Investment Adviser may pay a fee for services it
receives. The Fund pays the Investment Adviser a fee at the annual rate of 0.60%
of the Fund's average daily net assets.
Merrill Lynch Asset Management is part of Merrill Lynch Asset Management Group,
which had approximately $501 billion in investment company and other portfolio
assets under management as of December 1998. This amount includes assets managed
for Merrill Lynch affiliates.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund's management will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected.
The Year 2000 Problem could also have a negative impact on the companies in
which the Fund invests, and this could hurt the Fund's investment
returns.
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 29
<PAGE>
[GRAPHIC] Management of the Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions.) This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Fund's financial statements, are included in the Fund's annual report to
shareholders, which is available upon request.
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------------------------
For the Year Ended November 30,
-----------------------------------------------------------------------------
Increase (Decrease) In Net Asset Value: 1998+ 1997+ 1996+ 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $16.97 $15.09 $13.52 $12.08 $13.22
Investment income--net .41 .47 .50 .51 .94
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 3.77 2.35 1.84 1.42 (1.57)
Total from investment operations 4.18 2.82 2.34 1.93 (.63)
Less dividends and distributions:
Investment income--net (.42) (.49) (.53) (.49) (.47)
Realized gain on investments--net (1.24) (.45) (.24) -- (.04)
Total dividends and distributions (1.66) (.94) (.77) (.49) (.51)
Net asset value, end of year $19.49 $16.97 $ 15.09 $13.52 $12.08
Total Investment Return:*
Based on net asset value per share 26.47% 19.65% 17.94% 16.34% (4.89)%
Ratios to Average Net Assets:
Expenses .82% .82% .84% .91% .86%
Investment income--net 2.26% 2.98% 3.51% 3.73% 3.58%
Supplemental Data:
Net assets, end of year (in thousands) $41,977 $38,825 $ 40,055 $44,775 $56,659
Portfolio turnover 6.56% 6.23% 5.03% 2.92% 17.02%
</TABLE>
+ Based on average shares outstanding.
* Total investment returns exclude the effects of sales loads.
30 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-----------------------------------------------------------------------------
For the Year Ended November 30,
-----------------------------------------------------------------------------
Increase (Decrease) In Net Asset Value: 1998+ 1997+ 1996+ 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year $16.93 $15.05 $13.47 $12.04 $13.17
Investment income--net .27 .35 .39 .38 .74
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 3.74 2.35 1.84 1.44 (1.46)
Total from investment operations 4.01 2.70 2.23 1.82 (.72)
Less dividends and distributions:
Investment income--net (.28) (.37) (.41) (.39) (.37)
Realized gain on investments--net (1.24) (.45) (.24) -- (.04)
Total dividends and distributions (1.52) (.82) (.65) (.39) (.41)
Net asset value, end of year $19.42 $16.93 $15.05 $13.47 $12.04
Total Investment Return:*
Based on net asset value per share 25.40% 18.77% 17.07% 15.38% (5.60)%
Ratios to Average Net Assets:
Expenses 1.59% 1.59% 1.61% 1.68% 1.63%
Investment income--net 1.48% 2.22% 2.74% 2.95% 2.82%
Supplemental Data:
Net assets, end of year (in thousands) $327,589 $301,459 $335,487 $381,098 $459,185
Portfolio turnover 6.56% 6.23% 5.03% 2.92% 17.02%
</TABLE>
+ Based on average shares outstanding.
* Total investment returns exclude the effects of sales loads.
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 31
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
[GRAPHIC] Management of the Fund
<TABLE>
<CAPTION>
Class C
-----------------------------------------------------------------------------
For the
Period
October 21,
For the Year Ended November 30, 1994+ to
------------------------------------------------------------ November 30,
Increase (Decrease) In Net Asset Value: 1998++ 1997++ 1996++ 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $16.89 $15.03 $13.46 $12.05 $12.34
Investment income--net .25 .33 .38 .39 .01
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 3.73 2.35 1.84 1.43 (.30)
Total from investment operations 3.98 2.68 2.22 1.82 (.29)
Less dividends and distributions:
Investment income--net (.26) (.37) (.41) (.41) --
Realized gain on investments--net (1.24) (.45) (.24) -- --
Total dividends and distributions (1.50) (.82) (.65) (.41) --
Net asset value, end of period $19.37 $16.89 $ 15.03 $13.46 $12.05
Total Investment Return:**
Based on net asset value per share 25.34% 18.66% 17.03% 15.38% (2.35)%#
Ratios to Average Net Assets:
Expenses 1.64% 1.63% 1.66% 1.73% 1.60%*
Investment income-- net 1.38% 2.07% 2.65% 2.85% 3.01%*
Supplemental Data:
Net assets, end of period (in thousands) $7,954 $5,486 $3,325 $2,072 $ 445
Portfolio turnover 6.56% 6.23% 5.03% 2.92% 17.02%
</TABLE>
+ Commencement of operations.
++ Based on average shares outstanding.
# Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
32 MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class D
-----------------------------------------------------------------------------
For the
Period
October 21,
For the Year Ended November 30, 1994+ to
-------------------------------------------------------------- November 30,
Increase (Decrease) In Net Asset Value: 1998++ 1997++ 1996++ 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $16.98 $15.10 $13.55 $12.09 $12.37
Investment income--net .36 .43 .50 .52 .02
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 3.77 2.35 1.79 1.40 (.30)
Total from investment operations 4.13 2.78 2.29 1.92 (.28)
Less dividends and distributions:
Investment income--net (.38) (.45) (.50) (.46) --
Realized gain on investments--net (1.24) (.45) (.24) -- --
Total dividends and distributions (1.62) (.90) (.74) (.46) --
Net asset value, end of period $19.49 $16.98 $ 15.10 $13.55 $12.09
Total Investment Return:**
Based on net asset value per share 26.09% 19.35% 17.45% 16.21% (2.26)%#
Ratios to Average Net Assets:
Expenses 1.07% 1.06% 1.07% 1.15% 1.08%*
Investment income--net 1.97% 2.70% 3.30% 3.36% 3.25%*
Supplemental Data:
Net assets, end of period (in thousands) $11,541 $6,935 $4,365 $1,516 $ 239
Portfolio turnover 6.56% 6.23% 5.03% 2.92% 17.02%
</TABLE>
+ Commencement of operations.
++ Based on average shares outstanding.
# Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 33
<PAGE>
(This page intentionally left blank)
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
<PAGE>
<TABLE>
<S> <C>
________________________________
| |
| POTENTIAL |
________________________| INVESTORS |________________________
| | | |
| | Open an account (two options). | |
__|__ |________________________________| __|__
\ 1 / \ 2 /
_________\ /__________ ______\ /_______
| | | |
____________| MERRILL LYNCH |____________ _______________| TRANSFER AGENT |______________
| | FINANCIAL CONSULTANT | | | |________________| |
| | OR SECURITIES DEALER | | | |
| |______________________| | | Financial Data Services, Inc. |
| | | P.O. Box 45289 |
| Advises shareholders on their Fund investments.| | Jacksonville, Florida 32232-5289 |
|________________________________________________| | |
/|\ | Performs recordkeeping and reporting services.|
| |_______________________________________________|
| _________________________________________________ /|\
| | | |
| | DISTRIBUTOR | |
| | | |
| | Merrill Lynch Funds Distributor, | |
|_______________| a division of Princeton Funds Distributor, Inc.|_____________________|
| P.O. Box 9081 |
| Princeton, New Jersey 08543-9081 |
| |
| Arranges for the sale of Fund shares. |
|_________________________________________________|
|
|
___________ \|/ _____________
| | ________________________ | |
__________| COUNSEL |____________ | | _____________| CUSTODIAN |_____________
| |___________| | | THE FUND | | |_____________| |
| | | | | |
| SWIDLER BERLIN |__________ | The Board of Directors | ________| The Chase Manhattan Bank, N.A. |
| SHEREFF FRIEDMAN, LLP | | oversees the Fund. | | 4 Chase MetroTech Center, 18th Floor |
| 919 Third Avenue | |________________________| | Brooklyn, New York 11245 |
| New York, New York 10022 | | |
| Provides legal advice to the Fund.| / \ | Holds the Fund's assets for safekeeping.|
|___________________________________| / \ |_________________________________________|
/ \
________________/_____ ______\_____________
| | | |
______| INDEPENDENT AUDITORS |_______ _________| INVESTMENT ADVISER |____________
| |______________________| | | |____________________| |
| | | |
| Deloitte & Touche LLP | | Merrill Lynch Asset |
| 117 Campus Drive | | Management, L.P. |
| Princeton, New Jersey 08540-6400 | | |
| | | ADMINISTRATIVE OFFICES |
| Audits the financial | | 800 Scudders Mill Road |
| statements of the Fund on behalf of | | Plainsboro, New Jersey 08536 |
| the shareholders. | | |
|_____________________________________| | MAILING ADDRESS |
| P.O. Box 9011 |
| Princeton, New Jersey 08543-9011 |
| |
| TELEPHONE NUMBER |
| 1-800-MER-FUND |
| |
| Manages the Fund's day-to-day activities. |
|___________________________________________|
</TABLE>
MERRILL LYNCH GLOBAL UTILITY FUND, INC. 35
<PAGE>
For More Information [GRAPHIC]
Shareholder Reports
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch
Financial Consultant or write to the Transfer Agent at its mailing address.
Include your name, address, tax identification number and Merrill Lynch
brokerage or mutual fund account number. If you have any questions, please call
your Merrill Lynch Financial Consultant or the Transfer Agent at
1-800-MER-FUND.
Statement of Additional Information
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc. P.O. Box 45289 Jacksonville, Florida 32232-5289 or
by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated on the inside back cover of this prospectus if you
have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
Investment Company Act file #811-6180
Code #11281-0399
(Copyright)Fund Asset Management, L.P.
[LOGO]Merrill Lynch
Merrill Lynch Global
Utility Fund, Inc.
Prospectus
March 30, 1999
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011 o 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 "Investment Adviser" 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 Merrill Lynch Select Pricing(Service Mark) 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(Service Mark) 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 30, 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) 637-3863 or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information has been incorporated
by reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1998 annual report to shareholders. You may request a copy of the annual report
at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m.
on any business day.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is March 30, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................................................... 3
Other Investment Policies, Practices and Risk Factors...................................................... 4
Utility Industries....................................................................................... 4
Investment Outside the Utility Industries.................................................................. 7
Convertible Securities................................................................................... 8
Foreign Investment Risk.................................................................................. 9
Portfolio Strategies Involving Options, Futures and Foreign Exchange Transactions.......................... 13
Options on Securities and Securities Indices............................................................... 13
Futures.................................................................................................. 14
Foreign Exchange Transactions............................................................................ 15
Risk Factors in Options, Futures and Currency Instruments................................................ 16
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives..................... 16
Additional Limitations on the Use of Strategic Instruments............................................... 17
Investment Restrictions.................................................................................. 17
Portfolio Turnover....................................................................................... 19
Management of the Fund..................................................................................... 19
Directors and Officers................................................................................... 19
Compensation of Directors................................................................................ 20
Management and Advisory Arrangements..................................................................... 21
Code of Ethics........................................................................................... 23
Purchase of Shares......................................................................................... 24
Initial Sales Charge Alternatives--Class A and Class D Shares............................................ 24
Eligible Class A Investors............................................................................... 25
Reduced Initial Sales Charges............................................................................ 26
Deferred Sales Charge Alternatives--Class B and Class C Shares........................................... 29
Contingent Deferred Sales Charges--Class B Shares........................................................ 29
Contingent Deferred Sales Charges--Class C Shares........................................................ 32
Distribution Plans....................................................................................... 32
Limitations on the Payment of Deferred Sales Charges..................................................... 34
Redemption of Shares....................................................................................... 35
Redemption............................................................................................... 35
Repurchase............................................................................................... 36
Reinstatement Privilege--Class A and Class D Shares...................................................... 36
Pricing of Shares.......................................................................................... 37
Determination of Net Asset Value......................................................................... 37
Computation of Offering Price Per Share.................................................................. 38
Portfolio Transactions and Brokerage....................................................................... 38
Transactions in Portfolio Securities..................................................................... 38
Shareholder Services....................................................................................... 40
Investment Account....................................................................................... 40
Exchange Privilege....................................................................................... 40
Fee-Based Programs....................................................................................... 42
Retirement Plans......................................................................................... 43
Automatic Investment Plans............................................................................... 43
Automatic Dividend Reinvestment Plan..................................................................... 43
Systematic Withdrawal Plan............................................................................... 43
Dividends and Taxes........................................................................................ 45
Taxes.................................................................................................... 45
Tax Treatment of Options and Futures Transactions........................................................ 47
Special Rules for Certain Foreign Currency Transactions.................................................. 47
Performance Data........................................................................................... 48
General Information........................................................................................ 50
Description of Shares.................................................................................... 50
Independent Auditors..................................................................................... 50
Custodian................................................................................................ 50
Transfer Agent........................................................................................... 51
Legal Counsel............................................................................................ 51
Reports to Shareholders.................................................................................. 51
Shareholder Inquiries.................................................................................... 51
Additional Information................................................................................... 51
Financial Statements....................................................................................... 51
Appendix................................................................................................... A-1
</TABLE>
2
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a diversified, open-end management investment company. The
Fund's investment objective is to seek both capital appreciation and current
income through investment of at least 65% of its total assets in equity and debt
securities issued by domestic and foreign companies that are, in the opinion of
the Investment Adviser, 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 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
is permitted to invest up to 35% of its assets in the securities of issuers that
are outside 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 Investment Adviser,
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 Investment Adviser 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 generally 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.
The Fund will invest in common stocks (including preferred or debt
securities convertible into common stocks), preferred stocks and debt
securities. While the Fund intends to invest primarily in equity securities, the
relative weightings among common stocks, debt securities and preferred stocks
will vary from time to time based upon the Investment Adviser'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 ("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 Investment Adviser. 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 Investment Adviser. The Fund may also invest up to
5% of its total assets at the time of the purchase in fixed income securities
rated below investment grade by S&P or Moody's, or in unrated fixed income
securities which, in the judgment of the manager possess similar credit
characteristics as fixed income securities rated investment grade or fixed
income securities rated below investment grade (commonly known as "junk bonds").
The fund will not invest in any fixed income securities with a rating 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.
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 Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which
3
<PAGE>
they may be converted. ADRs are receipts typically issued by an American bank or
trust company that evidence ownership of underlying securities issued by a
foreign corporation. EDRs are receipts issued in Europe that 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.
The Fund may engage in various portfolio strategies to hedge its portfolio
against movements in the securities markets and exchange rates between
currencies by the use of options, futures and options thereon. Utilization of
options and futures transactions involves the risk of imperfect correlation in
movements in the price of options and futures and movements in the price of the
securities or currencies which are the subject of the hedge. There can be no
assurance that a liquid secondary market for options and futures contracts will
exist at any specific time. See "Portfolio Strategies Involving Options, Futures
and Foreign Exchange Transactions."
Because of its emphasis on securities of companies in the utilities
industries, the Fund should be considered as a vehicle for diversification and
not as a balanced investment program. The suitability for any particular
investor of a purchase of shares of the Fund will depend upon, among other
things, such investor's investment objectives and such investor's ability to
accept the risks of investing in such securities including the risk of a loss of
principal.
OTHER INVESTMENT POLICIES, PRACTICES AND RISK FACTORS
UTILITY INDUSTRIES
Under normal circumstances, the Fund will invest at least 65% of its total
assets in common stock (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. 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 Investment Adviser, 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 that 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 electric generation,
including, among other considerations, the problems associated with the use of
radioactive materials and the disposal of
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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 held in the Fund's 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 Investment Adviser 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. Reduced profitability, as well as new uses of funds (such as for
expansion, operations or stock buybacks) could result in cuts in dividend payout
rates. The Investment Adviser 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 Investment Adviser believes that, in order to
attract significant capital for growth, foreign governments are likely to seek
global investors through the privatization of their utility industries.
Privatization, which refers to the trend toward investor ownership of assets
rather than government ownership, is expected to occur in newer, faster-growing
economies and in mature economies. 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 development in the geographic areas in which they do
business. The Investment Adviser will take into account anticipated economic
growth rates and other economic developments when selecting securities of
utility companies.
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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
decommissioning such plants.
In October 1993, S&P stiffened its debt-ratings formula for the electric
utility industry, stating that the industry is in long-term decline. In
addition, Moody's stated that it expected a drop in the next three years in its
average credit ratings for the industry. Reasons set forth for these outlooks
included slowing demand and increasing cost pressures as a result of competition
from rival providers. 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. Moreover, the
rating agencies are taking a closer look at the business profile of utilities.
Ratings for companies are expected to be impacted to a greater extent in the
future by the division of their asset base. Electric utility companies that
focus more on the generation of electricity may be assigned less favorable
ratings as this business is expected to be competitive and the least regulated.
On the other hand, companies that focus on transmission and distribution which
is expected to be the least competitive and the more regulated part of the
business may see higher ratings given the greater predictability of cash flow.
Currently, several states 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 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
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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 proposed 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
removed regulatory restrictions on entry that prevented local and long-distance
telephone companies and cable television companies from competing against one
another. The Act also removed most cable rate controls and allows broadcasters
to own more radio and television stations. Litigation concerning the
constitutionality of certain major provisions of the Act has slowed the
implementation of such provisions.
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 Investment Adviser,
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
Investment Adviser, there may be opportunities for certain companies to acquire
other water utility companies and for foreign acquisition of domestic companies.
The Investment Adviser believes that favorable investment opportunities may
result from consolidation of this segment.
There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur or
that risk factors other than those noted above will not develop in the future.
INVESTMENT OUTSIDE THE UTILITY INDUSTRIES
As noted above, 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 below.
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 Associates ("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 "Risks and Special 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
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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.
CONVERTIBLE SECURITIES
Convertible securities entitle the holder to receive interest payments paid
on corporate debt securities or the dividend preference on a preferred stock
until such time as the convertible security matures or is redeemed or until the
holder elects to exercise the conversion privilege.
The characteristics of convertible securities make them appropriate
investments for an investment company seeking both capital appreciation and
investment income. These characteristics include the potential for capital
appreciation as the value of the underlying common stock increases, the
relatively high yield received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in value relative to the
underlying common stock due to their fixed-income nature. As a result of the
conversion feature, however, the interest rate or dividend preference on a
convertible security is generally less than would be the case if the securities
were issued in nonconvertible form.
In analyzing convertible securities, the Investment Adviser will consider
both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. Even in cases where a substantial portion of the convertible securities
held by the Fund are denominated in United States dollars, the underlying equity
securities may be quoted in the currency of the country where the issuer is
domiciled. With respect to convertible securities denominated in a currency
different from that of the underlying equity securities, the conversion price
may be based on a fixed exchange rate established at the time the security is
issued. As a result, fluctuations in the exchange rate between the currency in
which the debt security is denominated and the currency in which the share price
is quoted will affect the value of the convertible security. As described below,
the Fund is authorized to enter into foreign currency hedging transactions in
which it may seek to reduce the effect of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock the conversion value is substantially below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security. The yield and conversion
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premium of convertible securities issued in Japan and the Euromarket are
frequently determined at levels that cause the conversion value to affect their
market value more than the securities investment value.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security under certain
circumstances.
FOREIGN INVESTMENT RISK
European Economic and Monetary Union ("EMU"). For a number of years,
certain European countries have been seeking economic unification that would,
among other things, reduce barriers between countries, increase competition
among companies, reduce government subsidies in certain industries, and reduce
or eliminate currency fluctuations among these European countries. The Treaty on
European Union (the "Maastricht Treaty") seeks to set out a framework for the
European Economic and Monetary Union ("EMU") among the countries that comprise
the European Union ("EU"). Among other things, EMU establishes a single common
European currency (the "euro") that was introduced on January 1, 1999 and is
expected to replace the existing national currencies of all EMU participants by
July 1, 2002. EMU took effect for the initial EMU participants as of January 1,
1999, and was implemented over the weekend January 1, 1999 through January 3,
1999 ("conversion weekend"). Upon implementation of EMU, certain securities
issued in participating EU countries (beginning with government and corporate
bonds) were redenominated in the euro, and thereafter, were listed, traded, and
make dividend and other payments only in euros.
Because any participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could choose to
abandon EMU, which would diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries, including sharp appreciation or depreciation of the
participants' national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of confidence
in the European markets, an undermining of European economic stability, the
collapse or slowdown of the drive toward European economic unity, and/or
reversion of the attempts to lower government debt and inflation rates that were
introduced in anticipation of EMU. Also, withdrawal from EMU at any time after
the conversion weekend by an initial participant could cause disruption of the
financial markets as securities redenominated in euros are transferred back into
that country's national currency, particularly if the withdrawing country is a
major economic power. Such developments could have an adverse impact on the
Fund's investments in Europe generally or in specific countries participating in
EMU. Gains or losses resulting from the euro conversion may be taxable to Fund
shareholders under foreign or, in certain limited circumstances, U.S. tax laws.
When-Issued Securities, Delayed Delivery Securities and Forward
Commitments. The Fund may purchase or sell securities that it is entitled to
receive on a when-issued basis. The Fund may also purchase or sell securities on
a delayed delivery basis. The Fund may also purchase or sell securities through
a forward commitment. These transactions involve the purchase or sale of
securities by the Fund at an established price with payment and delivery taking
place in the future. The Fund enters into these transactions to obtain what is
considered an advantageous price to the Fund at the time of entering into the
transaction. The Fund has not established any limit on the percentage of its
assets that may be committed in connection with these transactions. When the
Fund purchases securities in these transactions, the Fund segregates liquid
securities in an amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on a when-issued basis
will be issued, or a security purchased or sold through a forward commitment
will be delivered. The value of securities in these transactions
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<PAGE>
on the delivery date may be more or less than the Fund's purchase price. The
Fund may bear the risk of a decline in the value of the security in these
transactions and may not benefit from an appreciation in the value of the
security during the commitment period.
Illiquid or Restricted Securities. The Fund may invest up to 15% of its
total assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
The Fund may invest in securities that are not registered ("restricted
securities.") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases, privately
placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly traded securities.
To the extent that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due to illiquidity,
could be less than those originally paid by the Fund or less than their fair
market value. In addition, issuers whose securities are not publicly traded may
not be subject to the disclosure and other investor protection requirements that
may be applicable if their securities were publicly traded. If any privately
placed securities held by the Fund are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Fund may
be required to bear the expenses of registration. Certain of the Fund's
investments in private placements may consist of direct investments and may
include investments in smaller, less-seasoned issuers, which may involve greater
risks. These issuers may have limited product lines, markets or financial
resources, or they may be dependent on a limited management group. In making
investments in such securities, the Fund may obtain access to material nonpublic
information which may restrict the Fund's ability to conduct portfolio
transactions in such securities.
144A Securities. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Directors has determined to treat as liquid Rule
144A securities that are either (i) freely tradable in their primary markets
offshore or (ii) non-investment grade debt securities that the Fund's management
determines are as liquid as publicly registered non-investment grade debt
securities. The Board of Directors has adopted guidelines and delegated to the
Fund's management the daily function of determining and monitoring liquidity of
restricted securities. The Board of Directors, however, will retain sufficient
oversight and be ultimately responsible for the determinations. Since it is not
possible to predict with assurance exactly how this market for restricted
securities sold and offered under Rule 144A will continue to develop, the Board
of Directors will carefully monitor the Fund's investments in these securities.
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.
Standby Commitment Agreements. The Fund may enter into standby commitment
agreements. These agreements commit the Fund, for a stated period of time, to
purchase a stated amount of securities that may be issued and sold to the Fund
at the option of the issuer. The price 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.
The Fund will enter into such agreements for the purpose of investing in the
security underlying the commitment at a price that is considered advantageous to
the Fund. The Fund will not enter into a standby commitment with a remaining
term in excess of 45 days and will limit its investment in such commitments so
that the aggregate purchase price of securities subject to such commitments,
together with the value of portfolio securities subject to legal restrictions on
resale that affect their marketability, will not exceed 15% of its net assets
taken at the time of the commitment. The Fund segregates liquid assets in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
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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, thereby
determining the yield during the term of the agreement. This insulates the Fund
from fluctuations in the market value of the underlying security during such
period, although, to the extent the repurchase agreement is not denominated in
U.S. dollars, the Fund's return may be affected by currency fluctuations. The
Fund may not invest more than 15% of its net assets in repurchase agreements
maturing in more than seven days (together with other illiquid securities).
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the 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 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 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.
Securities Lending. The Fund may lend securities with a value not
exceeding 33 1/3% of its total assets. In return, the Fund receives collateral
in an amount equal to at least 100% of the current market value of the loaned
securities in cash or securities issued or guaranteed by the U.S. Government.
The Fund receives securities as collateral for the loaned securities and the
Fund and the borrower negotiate a rate for the loan premium to be received by
the Fund for the loaned securities, which increases the Fund's yield. The Fund
may receive a flat fee for its loans. The loans are terminable at any time and
the borrower, after notice, is required to return borrowed securities within
five business days. The Fund may pay reasonable finder's, administrative and
custodial fees in connection with its loans. In the event that the borrower
defaults on its obligation to return borrowed securities because of insolvency
or for any other reason, the Fund could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent the value of the
collateral falls below the market value of the borrowed securities.
Junk 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 S&P or 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 Investment Adviser. The Fund is authorized to invest up to
5% of its total assets at the time of purchase in junk bonds.
Junk bonds are debt securities that are rated below investment grade by the
major rating agencies or are unrated securities that the fund management
believes are of comparable quality. Although junk bonds generally pay higher
rates of interest than investment grade bonds, they are high-risk investments
that may cause income and principal losses for the Fund. The major risk in junk
bond investments include:
Junk bonds may be issued by less creditworthy companies. These securities
are vulnerable to adverse changes in the issuer's industry and to general
economic conditions. Issuers of junk bonds may be unable to meet
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their interest or principal payment obligations because of an economic downturn,
specific issuer developments or the unavailability of additional financing.
The issuers of junk bonds may have a larger amount of outstanding debt
relative to their assets than issuers of investment grade bonds. If the issuer
experiences financial stress, it may be unable to meet its debt obligations. The
issuer's ability to pay its debt obligations also may be lessened by specific
issuer developments, or the unavailability of additional financing.
Junk bonds are frequently ranked junior in claims by other creditors. If
the issuer cannot meet its obligations, the senior obligations are generally
paid off before the junior obligations.
Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from the Fund before it matures. If the issuer redeems
the junk bonds the Fund may have to invest the proceeds in bonds with lower
yields and may lose income.
Prices of junk bonds are subject to extreme price fluctuations. Negative
economic developments may have a greater impact on the prices of junk bonds than
on other higher rated fixed-income securities.
Junk bonds may be less liquid than higher rated fixed-income securities
even under normal economic conditions. There are fewer dealers in the junk bond
market, and there may be significant differences in the prices quoted for junk
bonds by the dealers. Because they are less liquid, judgment may play a greater
role in valuing junk bonds than in the case with securities trading in a more
liquid market.
The Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate a new terms with a defaulting issuer.
Investments in junk bonds will be made only when, in the judgment of the
Investment Adviser, such securities provide attractive total return potential,
relative to the risk of such securities, as compared to higher quality debt
securities. The Fund will not invest in debt securities in the lowest rating
categories (CC or lower for S&P or Ca or lower for Moody's) unless the
Investment Adviser believes that the financial condition of the issuer or the
protection afforded the particular securities is stronger than would otherwise
be indicated by such low ratings.
Borrowing and Leverage. The use of leverage by the Fund creates an
opportunity for greater total return, but, at the same time, creates special
risks. For example, leveraging may exaggerate changes in the net asset value of
Fund shares and in the yield on the Fund's portfolio. Although the principal of
such borrowings will be fixed, the Fund's assets may change in value during the
time the borrowings are outstanding. Borrowings will create interest expenses
for the Fund which can exceed the income from the assets purchased with the
borrowings. To the extent the income or capital appreciation derived from
securities purchased with borrowed funds exceeds the interest the Fund will have
to pay on the borrowings, the Fund's return will be greater than if leverage had
not been used. Conversely, if the income or capital appreciation from the
securities purchased with such borrowed funds is not sufficient to cover the
cost of borrowing, the return to the Fund will be less than if leverage had not
been used, and therefore the amount available for distribution to shareholders
as dividends and other distributions will be reduced. In the latter case, the
Investment Adviser in its best judgment nevertheless may determine to maintain
the Fund's leveraged position if it expects that the benefits to the Fund's
shareholders of maintaining the leveraged position will outweigh the current
reduced return.
Certain types of borrowings by the Fund may result in the Fund being
subject to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Investment Adviser from managing
the Fund's portfolio in accordance with the Fund's investment objectives and
policies. However, a breach of any such covenants not cured within the specified
cure period may result in acceleration of outstanding indebtedness and require
the Fund to dispose of portfolio investments at a time when it may be
disadvantageous to do so.
The Fund at times may borrow from affiliates of the Investment Adviser,
provided that the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the marketplace.
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PORTFOLIO STRATEGIES INVOLVING 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.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency Instruments"),
the Investment Adviser believes that, because the Fund will (i) use derivatives
to enhance income only through writing covered options on portfolio securities
and (ii) engage in any 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.
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 option's 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 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 correlated to 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
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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").
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 or put options that are "covered." A put 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 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 that 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
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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.
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 will not enter into a forward contract
with a term of more than one year.
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 enter into a cross hedge only if the
Investment Adviser believes that (i) there is a demonstrable high correlation
between the currency in which the
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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 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 movement 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 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 DERIVATIVES
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 (ii) for which the Manager
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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 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.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to
the investment of its assets and its activities, which are fundamental policies
and may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). The Fund may not:
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 total 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 utilities 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 law, the Fund may invest in securities directly or indirectly secured by
real estate or interests therein or issued by companies which invest in
real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
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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 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 Fund has also adopted certain non-fundamental investment restrictions,
which may be changed by the Directors without approval by the shareholders.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of
the Investment Company Act at any time the Fund's shares are owned by
another investment company that is part of the same group of investment
companies as the Fund.
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
have 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% of its total assets.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of such
transaction, the sum of the market value of OTC options currently outstanding
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
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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.
In addition, to comply with tax requirements for qualification as a
"regulated investment company," the Fund's investments will be limited in a
manner such that, at the close of each quarter of each fiscal year, (a) no more
than 25% of the Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of the Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
For purposes of this restriction, the Fund will regard each state and each
political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity as a separate issuer,
except that if the security is backed only by the assets and revenues of a
non-government entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Board of Directors of the Fund to
the extent necessary to comply with changes to the Federal tax requirements.
Because of the affiliation of the Investment Adviser with the Fund, the
Fund is prohibited from engaging in certain transactions involving the
Investment Adviser'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.
PORTFOLIO TURNOVER
While the Fund generally does not expect to engage in trading for
short-term gains, the Investment Adviser 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.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors, executive officers and portfolio Investment Adviser 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 the portfolio
Investment Adviser and of each executive officer and Director is P.O. Box 9011,
Princeton, New Jersey 08543-9011.
RONALD W. FORBES (58)--Director(2)--1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany, since 1989; Consultant, Urban Institute, Washington, D.C. since
1995.
CYNTHIA A. MONTGOMERY (46)--Director(2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School
since 1989; Associate Professor, J.L. Kellogg
19
<PAGE>
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 (67)--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, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television from 1986 to 1997.
KEVIN A. RYAN (66)--Director(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director 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 (61)--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 Realty Trust, Inc.
(real estate holding company) and Alexander's Inc. (real estate company).
ARTHUR ZEIKEL (66)--Director(1)(2)--Chairman of MLAM and Fund Asset
Management, L.P. ("FAM") from 1997 to 1999; President of MLAM and FAM from 1977
to 1997; Chairman of Princeton Services from 1997 to 1999 and Director thereof
from 1993 to 1999; President of Princeton Services from 1993 to 1997; Executive
Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") from 1990 to 1999.
TERRY K. GLENN (58)--President(1)(2)--Executive Vice President of the
Investment Adviser and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of Merrill Lynch Funds Distributor
("MLFD" or the "Distributor"), a division of Princeton Funds Distributor, Inc.
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
NORMAN R. HARVEY (65)--Senior Vice President(1)(2)--Senior Vice President
of the Investment Adviser and FAM since 1982; Senior Vice President of Princeton
Services since 1993.
WALTER D. ROGERS (56)--Senior Vice President and Portfolio Investment
Adviser(1)(2)--First Vice President of the Investment Adviser since 1997; Vice
President of the Investment Adviser since 1987.
DONALD C. BURKE (38)--Vice President and Treasurer(1)(2)--Senior Vice
President and Treasurer of the Investment Adviser and MLAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President of
PFD since 1999; First Vice President of MLAM from 1997 to 1999; Vice President
of MLAM from 1990 to 1997.
THOMAS D. JONES, III (33)--Secretary(1)--Attorney with the Investment
Adviser since 1992; Lawyer in private practice from 1990 to 1992.
- ------------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of other
investment companies for which the Investment Adviser or FAM acts as
investment adviser or manager.
As of January 1, 1999, 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.
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Investment Adviser
(each a "non-affiliated Director") a fee of $2,000 per year plus $400 per
meeting attended. The Fund also compensates members of its Audit and Nominating
Committee (the "Committee"), which consists of all of the non-affiliated
Directors, with a fee of $900 per year. The Fund pays the Chairman of the
Committee an additional fee of $1,000 per year. The Fund
20
<PAGE>
reimburses each non-interested Director for his out-of-pocket expenses relating
to attendance at Board and Committee meetings.
The following table sets forth the compensation earned by non-affiliated
Directors from the Fund for the fiscal year ended November 30, 1998 and the
aggregate compensation paid to non-affiliated Directors from all registered
investment companies advised by MLAM and its affiliate FAM ("MLAM/FAM Advised
Funds"), for the calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
AGGREGATE PENSION OF FROM FUND AND
COMPENSATION RETIREMENT BENEFIT MLAM/FAM
FROM THE ACCRUED AS PART ADVISED FUNDS
DIRECTOR FUND OF FUND EXPENSE PAID TO DIRECTOR(1)
- ---------------------------------------- ------------ ------------------ -------------------
<S> <C> <C> <C>
Ronald W. Forbes........................ $4,500 None 198,567
Cynthia A. Montgomery................... $4,500 None 192,567
Charles C. Reilly....................... $5,500 None 362,858
Kevin A. Ryan........................... $4,500 None 192,567
Richard R. West......................... $4,500 None 326,125
</TABLE>
- ------------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows:
Mr. Forbes (37 registered investment companies consisting of 50 portfolios);
Ms. Montgomery (37 registered investment companies consisting of 50
portfolios); Mr. Reilly (56 registered investment companies consisting of 66
portfolios); Mr. Ryan (37 registered investment companies consisting of 50
portfolios); and Mr. West (58 registered investment companies consisting of
83 portfolios).
Directors of the Fund, members of the Boards of other MLAM/FAM advised
Funds, ML & Co. and its subsidiaries (the term "subsidiaries,"when used herein
with respect to ML & Co., includes MLAM, the Investment Adviser and certain
other entities directly or indirectly wholly owned and controlled by ML & Co.)
and their directors and employees, and any trust, pension, profit-sharing or
other benefit plan for such persons may purchase Class A shares of the Fund at
net asset value.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Management Services. The Investment Adviser provides the Fund with
investment advisory and management services. Subject to the supervision of the
Board of Directors, the Investment Adviser is responsible for the actual
management of the Fund's portfolio and constantly reviews the Fund's holdings in
light of its own research analysis and that from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser. The Investment Adviser performs certain of
the other administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser 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 Investment Adviser 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 Investment Adviser or its affiliates during the same period
may increase the demand for securities being purchased or the supply of
securities being sold there may be an adverse effect on price.
Management Fee. The Fund has entered into a management agreement with the
Investment Adviser (the "Management Agreement"). As discussed in the Prospectus,
the Investment Adviser receives for its services to the Fund monthly
compensation at the annual rate of 0.60% of the Fund's average daily net assets.
The table
21
<PAGE>
below sets forth information about the total investment advisory fees paid by
the Fund to the Investment Adviser for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30, INVESTMENT ADVISORY FEE
- ------------------------------------------------------------ -----------------------
<S> <C>
1998........................................................ $ 2,230,556
1997........................................................ $ 2,188,667
1996........................................................ $ 2,463,017
</TABLE>
Payment of Fund Expenses. The Management Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the Fund
connected with investment and economic research, trading and investment
management of the Fund, as well as the fees of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of 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; Commission fees; expenses of registering or
qualifying 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 Investment Adviser and the Fund reimburses the Investment Adviser for its
costs in connection with such services on a semi-annual basis. As required by
the Distribution Agreements, the Distributor will pay certain of the 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--Deferred Sales Charge Alternatives--Class B and
Class C Shares."
Organization of the Investment Adviser. The Investment Adviser is a
limited partnership, the partners of which are ML & Co. and Princeton Services.
ML & Co. and Princeton Services are "controlling persons" of the Investment
Adviser as defined under the Investment Company Act because of their ownership
of its voting securities or their power to exercise a controlling influence over
its management or policies. Similarly, the following entities may be considered
"controlling persons" of MLAM U.K.: Merrill Lynch Europe PLC (MLAM U.K.'s
parent), a subsidiary of Merrill Lynch International Holdings, Inc., a
subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.
The Investment Adviser 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 Investment Adviser, pursuant to which the
Investment Adviser pays MLAM U.K. a fee for providing investment advisory
services to the Investment Adviser with respect to the Fund in an amount to be
determined from time to time by the Investment Adviser and MLAM U.K. but in no
event in excess of the amount that the Investment Adviser actually receives for
providing services to the Fund pursuant to the Management Agreement. For the
fiscal years ended November 30, 1998 and 1997, the Investment Adviser paid
no fees to MLAM U.K. pursuant to this agreement.
Duration and Termination. Unless earlier terminated as described below,
the Management Agreement 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.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's transfer agent pursuant to
a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of
$11.00 per Class A or Class D account and $14.00 per Class B or Class C account
and is entitled to reimbursement for certain transaction charges and
out-of-pocket expenses incurred by the Transfer
22
<PAGE>
Agent under the Transfer Agency Agreement. Additionally, a $.20 monthly closed
account charge will be assessed on all accounts which close during the calendar
year. Application of the fee will commence the month following the month the
account is closed. At the end of the calendar year, no further fee will be due.
For purposes of the Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a record keeping system, provided the record keeping system is
maintained by a subsidiary of ML & Co.
Distribution Expenses. The Fund has entered into four 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.
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
Investment Adviser (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser pre-clear
any personal securities investment (with limited exceptions, such as government
securities). The pre-clearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to all employees of
the Investment Adviser include a ban on acquiring any securities in a "hot"
initial public offering and a prohibition from profiting on short-term trading
in securities. In addition, no employee may purchase or sell any security that
at the time is being purchased or sold (as the case may be), or to the knowledge
of the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or
30 days depending upon the transaction).
23
<PAGE>
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus for certain information as to the purchase of Fund shares.
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing System: shares of Class A and Class D shares are sold to investors
choosing the initial sales charge alternatives and shares of Class B and Class C
are sold to investors choosing the deferred sales charge alternatives. Each
Class A, Class B, Class C and Class D share of the Fund represents identical
interests in the investment portfolio of the Fund, and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the ongoing
account maintenance fees and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
plan adopted with respect to such class pursuant to which the account
maintenance and/or distribution fees are paid (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan). 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 CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees 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 Merrill Lynch Select Pricing(Service Mark) System is used by more than
50 registered investment companies advised by the Investment Adviser or its
affiliate, FAM. Funds advised by the Investment Adviser or FAM that use the
Merrill Lynch Select Pricing(Service Mark) System are referred to herein as
"Select Pricing Funds."
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. 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 $5.35) to confirm a sale of shares to
such customers. Purchases made directly through the Transfer Agent are not
subject to the processing fee.
Dividends paid by the Fund for each class of shares are calculated in the
same manner at the same time and 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."
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase
Class A shares should purchase Class A shares rather than Class D shares because
there is an account maintenance fee imposed on Class D shares. Investors
qualifying for significantly reduced initial sales charges may find the initial
sales charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the 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 Select Pricing 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 charge 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
24
<PAGE>
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.
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 of 1940, but does not include
purchases of any such company which has not been in existence for at least six
months or which has no purpose other than the purchase of shares of the Fund or
shares of other registered investment companies at a discount; provided,
however, that it shall not include purchases by any group of individuals whose
sole organizational nexus is that the participants therein are credit
cardholders of a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment adviser.
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
who currently own Class A shares, including participants in the Merrill Lynch
Blueprint(Service Mark) 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 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 Select Pricing Funds. Also eligible to purchase Class A shares at
net asset value are participants in certain investment programs including
TMA(Service Mark) 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/FAM advised Funds. 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 are met. In addition, Class A shares of
the Fund and certain other Select Pricing Funds are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions are met, to shareholders of Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
pursuant to a tender offer conducted by such funds in shares of the Fund and
certain other Select Pricing Funds.
Investors are advised that only Class A and Class D shares may be available
for purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
25
<PAGE>
CLASS A AND CLASS D SALES CHARGE INFORMATION
<TABLE>
<CAPTION>
CLASS A SHARES
- ------------------------------------------------------------------------------------------------------------------------
GROSS SALES SALES CHARGES SALES CHARGES CDSCS RECEIVED ON
CHARGES RETAINED BY PAID TO REDEMPTION OF
FOR THE FISCAL YEAR ENDED NOVEMBER 30, COLLECTED DISTRIBUTOR MERRILL LYNCH LOAD-WAIVED SHARES
- ------------------------------------------------- ----------- ------------- ------------- -------------------
<S> <C> <C> <C> <C>
1998............................................. $ 3,430 $ 236 $ 3,194 0
1997............................................. $ 4,317 $ 311 $ 4,006 0
1996............................................. $ 6,768 $ 610 $ 6,158 0
<CAPTION>
CLASS D SHARES
- ------------------------------------------------------------------------------------------------------------------------
GROSS SALES SALES CHARGES SALES CHARGES CDSCS RECEIVED ON
CHARGES RETAINED BY PAID TO REDEMPTION OF
FOR THE FISCAL YEAR ENDED NOVEMBER 30, COLLECTED DISTRIBUTOR MERRILL LYNCH LOAD-WAIVED SHARES
- ------------------------------------------------- ----------- ------------- ------------- -------------------
<S> <C> <C> <C> <C>
1998............................................. $ 6,363 $ 592 $ 5,771 0
1997............................................. $12,792 $ 1,670 $11,122 0
1996............................................. $17,277 $ 1,510 $15,767 0
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
REDUCED INITIAL SALES CHARGES
Reinvested Dividends and Capital Gains. 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.
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 Select Pricing Funds. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available only
to investors whose accounts are maintained at the Fund's Transfer Agent. The
Letter of Intent is not available to employee benefit plans for which Merrill
Lynch provides plan participant record keeping services. The Letter of Intent is
not a binding obligation to purchase any amount of Class A or 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 Intent may be included under a subsequent Letter of
Intent 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 Select Pricing Funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intent, 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 Intent
(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
26
<PAGE>
Letter of Intent 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 Intent will
be deducted from the total purchases made under such Letter. An exchange from
the Summit Cash Reserves Fund ("Summit") into the Fund that creates a sales
charge will count toward completing a new or existing Letter of Intent from the
Fund.
Merrill Lynch Blueprint(Service Mark) Program. Class D shares of the Fund
are offered to participants in the Merrill Lynch Blueprint(Service Mark) Program
("Blueprint"). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
Blueprint is directed to small investors, group IRAs and participants in certain
affinity groups such as credit unions, trade associations and benefit plans.
Investors placing orders to purchase Class A or Class D shares of the Fund
through Blueprint will acquire the Class A or Class D shares at net asset value
plus a sales charge calculated in accordance with the Blueprint sales charge
schedule (I.E., up to $300 at 4.25%, from $300.01 to $5,000 at 3.25% plus $3.00
and $5,000.01 or more at the standard sales charge rates disclosed in the
Prospectus). In addition, Class A or Class D shares of the Fund are being
offered at net asset value plus a sales charge of 0.50% for corporate or group
IRA programs placing orders to purchase their Class A or Class D shares through
Blueprint. Services, including the exchange privilege, available to Class A and
Class D investors through Blueprint, however, may differ from those available to
other investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value with a waiver of
the front-end sales charge to Blueprint participants through the Merrill Lynch
Directed IRA Rollover Program ("IRA Rollover Program") available from Merrill
Lynch Business Financial Services, a business unit of Merrill Lynch. The IRA
Rollover Program is available to custodian rollover assets from employer
sponsored retirement and savings plans (as defined below) whose trustee and/or
plan sponsor has entered into an IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(Service Mark)
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMA(Service Mark) Managed Trusts. Class A shares are also offered to
TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services at net asset value.
Employee Access(Service Mark) Accounts. Provided applicable threshold
requirements are met, either Class A or Class D shares are offered at net asset
value to Employee Access(Service Mark) Accounts available through authorized
employers. The initial minimum for such accounts is $500, except that the
initial minimum for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
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.
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.
Purchase Privileges of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM/FAM advised Funds, ML & Co., and its subsidiaries and
their directors and employees and any trust, pension, profit-sharing or other
benefit plan for such persons, may purchase Class A shares of the Fund at net
asset value. Under such programs, the Fund realizes economies of scale and
reduction of sales-related expenses by virture of familiarity with the Fund.
Employees and directors or trustees wishing to purchase shares of the Fund must
satisfy the Fund's suitability standards.
27
<PAGE>
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the Financial Consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor must establish that such redemption had been
made within 60 days prior to the investment in the Fund and the proceeds from
the redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value, without
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 the shares of
such other fund were 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.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: first, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from a redemption of shares of
such other mutual funds and that such shares have been outstanding for a period
of no less than 6 months; and second, such purchase of Class D shares must be
made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Investment
Adviser who purchased such closed-end fund shares prior to October 21, 1994 (the
date the Merrill Lynch Select Pricing(Service Mark) System commenced
operations) and wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in Eligible Class A shares, if the
conditions set forth below are satisfied. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994 and wish to
reinvest the net proceeds from a sale of their closed-end fund shares are
offered Class A shares (if eligible to buy Class A shares) or Class D shares of
the Fund and other Select Pricing 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 Eligible 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
28
<PAGE>
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund that
might result from an acquisition of assets having net unrealized appreciation
that 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 that (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).
Reductions in or exceptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
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 Select Pricing 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. See "Pricing of Shares--Determination of Net Asset Value" below.
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 that do not qualify for
the reduction in initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be offset to
the extent any return is realized on the additional funds initially invested in
Class B or Class C shares. In addition, Class B shares will be converted into
Class D shares of the Fund after a conversion period of approximately ten years,
and thereafter investors will be subject to lower ongoing fees.
CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES
Class B shares that 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. In determining whether a CDSC is applicable to a
redemption, the calculation will be determined in the manner that results in the
lowest applicable rate being charged. 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. 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. 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.
29
<PAGE>
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
YEAR SINCE CDSC AS A PERCENTAGE
PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ------------ --------------------
<S> <C>
0-1.......................................................................... 4.0%
1-2.......................................................................... 3.0%
2-3.......................................................................... 2.0%
3-4.......................................................................... 1.0%
4 and thereafter............................................................. None
</TABLE>
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 upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
As discussed in the prospectus under "Merrill Lynch Select Pricing(Service
Mark) System--Class B Shares", while Class B shares redeemed within four years
of purchase and subject to a CDSC under most circumstances, the charge may be
reduced or waived in certain instances. These include certain post-retirement
withdrawals from an IRA or other retirement plan or redemption of Class B shares
in certain circumstances following the death of a Class B shareholder. In the
case of such withdrawal, reduction or waiver applies to: (a) any partial or
complete redemptions in connection with a distribution following retirement
under a tax-deferred retirement plan or attaining age 59 1/2 in the case of an
IRA or other retirement plan, or part of a series of equal periodic payments
(not less frequently than annually) made for life (or life expectancy), or any
redemption resulting from the tax free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or disability
(as defined in the Internal Revenue Code of 1986, as amended (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.
The charge may also be also reduced or waived in other instances, such as:
(c) 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(Service Mark) Program; (d) 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 held in such account at
the time of redemption and for any Class B shares that were acquired and held at
the time of the redemption in an Employee Access(Service Mark) Account available
through employers providing eligible 401(k) plans; (e) 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; (f) any Class B shares purchased within
qualifying Employee Access(Service Mark) Accounts; (g) redemptions in connection
with participation in certain fee-based programs (see "Shareholder
Services--Fee-Based Programs"); or (h) withdrawals through the Merrill Lynch
Systematic Withdrawal Plan up to 10% per year of the shareholder's Class B
account value at the time the plan is established.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class B shares with a waiver of the CDSC
upon redemption, 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. Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the first share of any Select Pricing 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.
Merrill Lynch Blueprint(Service Mark) Program. Class B shares are offered
to certain participants in Blueprint. Blueprint is directed to small investors,
group IRAs and participants in certain affinity groups such as trade
30
<PAGE>
associations, credit unions and benefit plans. Class B shares of the Fund are
offered through Blueprint only to members of certain affinity groups. The CDSC
is waived in connection with purchase orders placed through Blueprint. Services,
including the exchange privilege, available to Class B investors through
Blueprint, however, may differ from those available to other Class B investors.
Orders for purchases and redemptions of Class B 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 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(Service Mark)
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of average daily net assets but are not
subject to the distribution fee that is borne by Class B shares. Automatic
conversion of Class B shares into Class D shares will occur at least once each
month (on the "Conversion Date") on the basis of the relative net asset value 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 the 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.
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing Funds will convert approximately ten
years after the 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 on to the holding
period for the shares acquired. The conversion period also may be modified for
investors that participate in certain fee-based programs. See "Shareholder
Services--Fee-Based Programs."
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.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the CDSC
normally imposed or purchases of Class B shares ("Class B Retirement Plans").
When the first share of any Select Pricing Fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between Select Pricing Funds and the Class B Retirement Plan was
established), all Class B shares of all Select Pricing 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.
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.
31
<PAGE>
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. 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. 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.
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. 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.
Class B and Class C Sales Charge Information
<TABLE>
<CAPTION>
CLASS B SHARES*
- ------------------------------------------------------------------------------------
CDCSS RECEIVED CDCSS PAID TO
FOR THE FISCAL YEAR ENDED NOVEMBER 30, BY DISTRIBUTOR MERRILL LYNCH
- -------------------------------------------------- -------------- -------------
<S> <C> <C>
1998.............................................. $ 91,017 $ 91,017
1997.............................................. $348,548 $ 348,548
1996.............................................. $754,651 $ 754,651
</TABLE>
- ------------------
* Additional Class B CDSCs payable to the Distributor with respect to the fiscal
years ended November 30, 1997 and 1998 may have been waived or converted to a
contingent obligation in connection with a shareholder's participation in
certain fee-based programs.
<TABLE>
<CAPTION>
CLASS C SHARES
- ------------------------------------------------------------------------------------
CDCSC RECEIVED CDCSC PAID TO
FOR THE FISCAL YEAR ENDED NOVEMBER 30, BY DISTRIBUTOR MERRILL LYNCH
- -------------------------------------------------- -------------- -------------
<S> <C> <C>
1998.............................................. $ 1,827 $ 1,827
1997.............................................. $ 1,002 $ 1,002
1996.............................................. $ 1,659 $ 1,659
</TABLE>
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the ongoing 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 the dealers' 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. See "Distribution Plans" below. Imposition of the CDSC and the
distribution fee on Class B and Class C shares is limited by the NASD
asset-based sales charge rule. See "Limitations on the Payment of Deferred Sales
Charges" below.
DISTRIBUTION PLANS
Reference is made to "Fees and Expenses" 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.
The Distribution Plans for Class B, Class C and Class D shares each
provides 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 with respect to Class B, Class C and Class D shares. Each of those
classes has exclusive voting rights with respect to the Distribution Plan
adopted with respect to such class
32
<PAGE>
pursuant to which account maintenance and/or distribution fees are paid (except
that Class B shareholders may vote upon any material changes to expenses charged
under the Class D Distribution Plan).
The Distribution Plans for Class B and Class C shares each provides 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.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. 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 each
related class of shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection and nomination of
Independent Directors shall be committed to the discretion of the Independent
Directors then in office. In approving each Distribution Plan in accordance with
Rule 12b-1, the Independent Directors concluded that there is reasonable
likelihood that each Distribution Plan will benefit the Fund and its related
class of shareholders. Each Distribution Plan can be terminated at any time,
without penalty, by the vote of a majority of the Independent Directors or by
the vote of the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in the Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of the Distribution Plan or such report, the first two years in an easily
accessible place.
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 and/or distribution fees paid to the
Distributor. Payments under the Distribution Plans are based on 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 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,
distribution fees, the CDSCs and certain other related revenues, and expenses
consist of financial consultant compensation, branch office and regional
operation center selling and transaction processing expenses, advertising, sales
promotion and marketing expenses, corporate overhead and interest expense. On
the direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs and the expenses consist of
financial consultant compensation.
As of December 31, 1997, the last date for which fully allocated accrual
data is available, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual revenues by
approximately $2,339,000 (.69% of Class B net assets at that date). As of
November 30, 1998, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $12,799,789 (3.91%
of Class B net assets at that date). As of December 31, 1998, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for the
period since the commencement of operations of Class C shares exceeded the fully
allocated revenues by approximately $56,000 (0.66% of Class C net assets at that
date). As of November 30, 1998, direct cash revenues for the period since the
commencement of operations of Class C shares exceeded direct cash expenses by
$73,282 (0.92% of Class C net assets at that date).
33
<PAGE>
For the fiscal year ended November 30, 1998, the Fund paid the Distributor
$2,367,413 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately
$313.9 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, 1998, the Fund paid the
Distributor $50,011 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately
$6.2 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, 1998, the Fund paid the
Distributor $21,678 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately
$8.6 million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance 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,
1998 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. Class C Shares have no Distributor's voluntary maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF NOVEMBER 30, 1998
--------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
ALLOWABLE MAXIMUM AMOUNTS DISTRIBUTION
ELIGIBLE INTEREST ON AMOUNT PREVIOUSLY AGGREGATE FEE AT
GROSS AGGREGATE UNPAID PAYABLE TO PAID TO UNPAID CURRENT NET
SALES(1) SALES CHARGES(2) BALANCE(3) DISTRIBUTOR(4) DISTRIBUTOR(4) BALANCE ASSET LEVEL(5)
-------- ---------------- ----------- -------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Under NASD Rule as
Adopted.................. $657,380 $ 41,067 $19,100 $ 60,167 $ 17,707 $42,460 $1,638
Under Distributor's
Voluntary Waiver......... $657,380 $ 41,067 $ 3,287 $ 44,354 $ 17,707 $26,647 $1,638
CLASS C SHARES
Under NASD Rule as
Adopted.................. $ 8,016 $ 501 $ 99 $ 600 $ 90 $ 510 $ 44
</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.
(Footnotes continued on next page)
34
<PAGE>
(Footnotes continued from previous page)
(2) Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of Summit
can only be purchased by exchange from another fund (the "redeemed fund").
Upon such an exchange, the maximum allowable sales charge payment to the
redeemed fund is reduced in accordance with the amount of the redemption.
This amount is then added to the maximum allowable sales charge payment with
respect to Summit. Upon an exchange out of Summit, the remaining balance of
this amount is deducted from the maximum allowable sales charge payment to
Summit and added to the maximum allowable sales charge payment to the fund
into which the exchange is made.
(3) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(4) 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. See "What are the Fund's fees and
expenses?" in the Prospectus. This figure may include CDSCs that were
deferred when a shareholder redeemed shares prior to the expiration of the
applicable CDSC period and invested the proceeds, without the imposition of
a sales charge, in Class A shares in conjunction with the shareholder's
participation in the Merrill Lynch Mutual Fund Advisor (Merrill Lynch
MFA(Service Mark)) Program (the "MFA Program"). The CDSC is booked as a
contingent obligation that may be payable if the shareholder terminates
participation in the MFA Program.
(5) 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 (with respect to Class B shares) or
the NASD maximum (with respect to Class B and Class C shares).
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus for certain information as to the redemption and repurchase of
Fund 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 that 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 any such time.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the NYSE is restricted as determined by the Commission or
during which the NYSE is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists as defined by the
Commission as a result of which disposal of portfolio securities or
determination of the net asset value of the Fund is not reasonably practicable,
and for such other periods as the Commission may by order permit for the
protection of shareholders of the Fund.
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 that
would cause the Fund to be deemed a personal holding company within the meaning
of the Code.
REDEMPTION
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc. 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with the
Transfer Agent may be accomplished by a written letter requesting redemption.
35
<PAGE>
Proper notice of redemption in the case of shares for which certificates have
been issued may be accomplished by a written letter as noted above accompanied
by certificates for the shares to be redeemed. Redemption requests should not be
sent to the Fund. The redemption request in either event requires the
signature(s) of all persons in whose name(s) the shares are registered, signed
exactly as such name(s) appear(s) on the Transfer Agent's register. The
signature(s) on the redemption requests must be guaranteed by an "eligible
guarantor institution" as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), 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, payments will be mailed within seven
days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment (E.G., cash, Federal funds or certified check
drawn on a United States bank). 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, Federal funds or certified check drawn on a United States
bank) has been collected for the purchase of such Fund shares, which will not
exceed 10 days.
REPURCHASE
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer prior to fifteen minutes after
the regular close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern 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. Dealers have the responsibility of submitting such
repurchase requests to the Fund not later than 30 minutes after the close of
business on the NYSE, in order to obtain that day's closing price.
The 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 that 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 $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through the Transfer Agent on
accounts held at the Transfer Agent are not subject to the processing fee. The
Fund reserves the right to reject any order for repurchase, which right of
rejection might adversely affect shareholders seeking redemption through the
repurchase procedure. However, a shareholder whose order for repurchase is
rejected by the Fund may redeem Fund shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares of the Fund
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or the Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
36
<PAGE>
PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday as of 15 minutes after the close of business on
the NYSE on each day the NYSE is open for trading. The NYSE generally closes at
4:00 p.m., Eastern time. 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 NYSE is not open for trading on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Net asset value per share is computed by dividing the market value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the
Investment Adviser and Distributor are accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily 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 Class D shares reflecting the daily expense accruals of
the distribution fees and higher transfer agency fees applicable with respect to
Class B and Class C shares of the Fund. It is expected, however, that the per
share net asset value of the four classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differentials between the classes. The Fund employs Merrill Lynch Securities
Pricing(Service Mark) Service ("MLSPS"), an affiliate of the Investment Adviser,
to provide certain securities prices for the Fund. The Fund did not pay any fees
to MLSPS for the fiscal year ended November 30, 1998.
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 for long positions and at
the last available ask price for short positions. 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 Directors as the primary market.
Long positions in securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. Short positions
in securities traded in the OTC market are valued at the last available ask
price in the OTC market prior to the time of valuation. 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 financial 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 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 Directors.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Directors.
37
<PAGE>
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, 1998, is calculated as set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net Assets.......................................... $41,976,251 $327,589,198 $7,954,246 $11,540,996
----------- ------------ ---------- -----------
----------- ------------ ---------- -----------
Number of Shares Outstanding........................ 2,154,163 16,864,386 410,544 592,072
----------- ------------ ---------- -----------
----------- ------------ ---------- -----------
Net Asset Value Per Share (net
assets divided by number of
shares outstanding)............................... $ 19.49 $ 19.42 $ 19.37 $ 19.49
Sales Charge (for Class A and
Class D shares: 4.00% of offering
price (4.17% of net asset value
per share))*...................................... 0.81 ** ** 0.81
----------- ------------ ---------- -----------
Offering Price...................................... $ 20.30 $ 19.42 $ 19.37 $ 20.30
----------- ------------ ---------- -----------
----------- ------------ ---------- -----------
</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--Merrill Lynch
Select Pricing(Service Mark) System" and "Deferred Sales Charge
Alternatives--Contingent Deferred Sales Charges--Class B Shares" and
"Contingent Deferred Sales Charges--Class C Shares" herein.
PORTFOLIO TRANSACTIONS AND BROKERAGE
TRANSACTIONS IN PORTFOLIO SECURITIES
Subject to policies established by the Board of Directors, the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The Fund has no obligation to deal
with any dealer or group of dealers in the execution of transactions in
portfolio securities of the Fund. Where possible, the Fund deals directly with
the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Fund to obtain the best results in conducting portfolio
transactions for the Fund, taking into account such factors as price (including
the applicable dealer spread or commission), the size, type and difficulty of
the transaction involved, the firm's general execution and operations facilities
and the firm's risk in positioning the securities involved. The portfolio
securities of the Fund generally are traded on a principal basis and normally do
not involve either brokerage commissions or transfer taxes. The cost of
portfolio securities transactions of the Fund primarily consists of dealer or
underwriter spreads. While reasonable competitive spreads or commissions are
sought, the Fund will not necessarily be paying the lowest spread or commission
available. Transactions with respect to the securities of small and emerging
growth companies in which the Fund may invest may involve specialized services
on the part of the broker or dealer and thereby entail higher commissions or
spreads than would be the case with transactions involving more widely trading
securities.
Subject to obtaining the best price and execution, broker-dealers who
provide supplemental investment research (such as assessments and analyses of
the business or prospects of a company, industry or economic sector) to the
Investment Adviser may receive orders for transactions by the Fund. Information
so received will be in addition to and not in lieu of the services required to
be performed by the Investment Adviser under its Management Agreement and the
expense of the Investment Adviser will not necessarily be reduced as a result of
the receipt of such supplemental information. If in the judgment of the
Investment Adviser the Fund will be benefitted by supplemental research
services, the Investment Adviser is authorized to pay brokerage commissions to a
broker-dealer furnishing such services which are in excess of commissions which
another broker-dealer may have charged for effecting the same transaction.
Supplemental investment research obtained from such broker-dealers might be used
by the Investment Adviser in servicing all of its accounts and all such research
might not be used by the Investment Adviser in connection with the Fund.
Consistent with the Conduct Rules of the NASD and policies established by the
Directors of the Fund, the Investment Adviser may consider sales of shares of
the Fund as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund.
38
<PAGE>
For the fiscal year ended November 30, 1998, brokerage commissions paid to
Merrill Lynch aggregated $31,045 which comprised 13.09% of the Fund's aggregate
brokerage commissions paid and involved 11.55% of the Fund's aggregate dollar
amount of transactions involving the payment of commissions effected through
Merrill Lynch during the year. Aggregate brokerage commissions paid by the Fund
are set forth in the following table:
<TABLE>
<CAPTION>
BROKERAGE
COMMISSIONS
FISCAL YEAR ENDED NOVEMBER 30, PAID
- ---------------------------------------------------------------------------- -----------
<S> <C>
1998........................................................................ $ 237,183
1997........................................................................ $ 218,531
1996........................................................................ $ 251,065
</TABLE>
Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such persons are prohibited from dealing with
the Fund as principal in the purchase and sale of securities unless a permissive
order allowing such transactions is obtained from the Commission. Since
transactions in the OTC market usually involve transactions with dealers acting
as principal for their own accounts, affiliated persons of the Fund, including
Merrill Lynch and any of its affiliates, will not serve as the Fund's dealer in
such transactions. However, affiliated persons of the Fund may serve as its
broker in listed or OTC 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. In addition, the Fund may
not purchase securities during the existence of any underwriting syndicate for
such securities of which Merrill Lynch is a member or in a private placement in
which Merrill Lynch serves as placement agent except pursuant to procedures
adopted by the Board of Directors of the Fund that either comply with rules
adopted by the Commission or with interpretations of the Commission staff.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment Company Act in
order to seek to recapture underwriting and dealer spreads from affiliated
entities. The Directors have considered all factors deemed relevant and have
made a determination not to seek such recapture at this time. The Directors will
reconsider this matter from time to time.
Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i) has
obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided to
the Fund. Securities may be held by, or be appropriate investments for, the Fund
as well as other funds or investment advisory clients of the Investment Adviser
or FAM.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or an affiliate when
one or more clients of the Investment Adviser or an affiliate are selling the
same security. If purchases or sales of securities arise for consideration at or
about the same time that would involve the Fund or other clients or funds for
which the Investment Adviser or an affiliate acts as manager, transactions in
such securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or an affiliate 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.
39
<PAGE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in its shares of the
Fund. Full details as to each of such services and copies of the various plans
and instructions as to how to participate in the various services or plans, or
how to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch. Certain of these services are available only to 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 ordinary income
dividends, and capital gains distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate confirmations for each purchase or sale transaction other than
automatic investment purchases and the reinvestment of ordinary income dividends
and capital gains distributions. A shareholder with an account held at the
Transfer Agent may make additions to his or her Investment Account at any time
by mailing a check directly to the Transfer Agent. A shareholder may also
maintain an account through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders may transfer their Fund shares from Merrill Lynch to another
securities dealer that has entered into a selected dealer agreement with Merrill
Lynch. All shareholder services will be available for the transferred shares.
After the transfer, the shareholder may purchase additional shares of funds
owned before the transfer and all future trading of these assets must be
coordinated by the new firm. If a shareholder wishes to transfer his or her
shares to a securities dealer that has not entered into a selected dealer
agreement with Merrill Lynch, the shareholder must either (i) redeem his or her
shares, paying any applicable CDSC or (ii) continue to maintain an Investment
Account at the Transfer Agent for those shares. The shareholder may also request
the new securities dealer to maintain the shares in an account at the Transfer
Agent registered in the name of the securities dealer for the benefit of the
shareholder whether the securities dealer has entered into a selected dealer
agreement with Merrill Lynch or not.
Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from Merrill Lynch to another
securities dealer should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares, paying any applicable CDSC, so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated for exchange by
holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege and any shares utilized in an exchange must have been held by
the shareholder for at least 15 days. Before effecting an exchange, shareholders
should obtain a currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is treated as a sale
of the exchanged shares and a purchase of the acquired shares for Federal income
tax purposes.
Exchanges of Class A and Class D Shares. Under the Merrill Lynch Select
Pricing(Service Mark) System, Class A shareholders may exchange Class A shares
of the Fund for Class A shares of a second Select Pricing 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 Select Pricing Fund, but does
not hold Class A shares of the second fund in his or her account at the time of
the exchange and is not otherwise eligible to
40
<PAGE>
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 Select Pricing 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 D shares are
exchangeable with shares of the same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds or
Class A shares of Summit, a series of Financial Institution Series Trust, a
money market 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,
Class A or Class D shares acquired through dividend reinvestment shall be deemed
to have been sold with a sales charge equal to the sales charge previously paid
on the Class A or Class D shares on which the dividend was paid. Based on this
formula, Class A and Class D shares generally may be exchanged into the Class A
or Class D shares, respectively, of the other funds with a reduced sales charge
or without a sales charge.
Exchanges of Class B and Class C Shares. Each Select Pricing Fund with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offers to exchange its Class B or Class C shares for Class B or Class C shares,
respectively, of another Select Pricing Fund or for Class B shares of Summit
("new Class B or Class C Shares") 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 or Class C 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 CDSC 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 or Class C 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.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares
are exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class C
shares of Select Pricing Funds and, in the event of such an exchange, the period
of time that Class B shares of Summit are held will count toward satisfaction of
the holding period requirement for purposes of reducing any CDSC and toward
satisfaction of any Conversion Period with respect to Class B shares. Class B
shares of Summit will be subject to a distribution fee at an annual rate of
0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain Merrill Lynch fee-based
programs for which alternative exchange arrangements may exist. Please see your
Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who have exchanged Select
Pricing Fund shares for shares of such other money market funds and subsequently
wish to exchange those money market fund shares for shares of the Fund will be
subject to the CDSC schedule
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applicable to such Fund shares, if any. The holding period for the money market
fund shares will not count toward satisfaction of the holding period requirement
for reduction of the CDSC imposed on such shares, if any, and, with respect to
Class B shares, toward satisfaction of the Conversion Period. However, the
holding period for Class B or Class C shares received in exchange for such money
market fund shares will be aggregated with the holding period for the original
shares for purposes of reducing the CDSC or satisfying the Conversion Period.
Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund on
the basis of relative net asset values in connection with commencement of
participation in the MFA program, I.E., no CDSC will apply. The one year holding
period does not apply to shares acquired through reinvestment of dividends. Upon
termination of participation in the MFA program. Class A shares will be
re-exchanged for the class of shares originally held. For purposes of computing
any CDSC that may be payable upon redemption of Class B or Class C shares so
reacquired, or the Conversion Period for Class B shares so reacquired, the
holding period for the Class A shares will be "tacked" to the holding period for
the Class B or Class C shares originally held. The Fund's exchange privilege is
also modified with respect to purchases of Class A and Class D shares by
non-retirement plan investors under the MFA program. First, the initial
allocation of assets is made under the MFA program. Then, any subsequent
exchange under the MFA program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on the basis
of the relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge previously paid
on the shares of the other Select Pricing Fund and the sales charge payable on
the shares of the Fund being acquired in the exchange under the MFA program.
Exercise of the Exchange Privilege. To exercise the exchange privilege,
shareholders should contact their Merrill Lynch Financial Consultant, who will
advise the Fund of the exchange. Shareholders of the Fund, and shareholders of
the other MLAM-advised mutual funds with shares for which certificates have not
been issued, may exercise the exchange privilege by wire through their
securities dealers. The Fund reserves the right to require a properly completed
Exchange Application. This exchange privilege may be modified or terminated in
accordance with the rules of the Commission. The Fund reserves the right to
limit the number of times an investor may exercise the exchange privilege.
Certain funds may suspend the continuous offering of their shares 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. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(1-800-MER-FUND) or 1-(800)-637-3863.
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RETIREMENT PLANS
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.
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
retirment 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.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) or
Class B, Class C, or Class D shares at the applicable public offering price.
These purchases may be made 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
Fund's Automatic Investment Plan. The Fund would be authorized, on a regular
basis, to provide systematic additions to the Investment Account of such
shareholder through charges of $50 or more to the regular bank account of the
shareholder by either pre-authorized checks or automated clearing house debits.
For investors who buy shares of the Fund through Blueprint, no minimum charge to
the investor's bank account is required. Alternatively, an investor that
maintains a CMA(Registered) or CBA(Registered) account may arrange to have
periodic investments of amounts of $100 or more ($1 or more for retirement
accounts), made in the fund through the CMA(Registered) or
CBA(Registered) Automatic Investment Program from his or her CMA(Registered) or
CBA(Registered) account or from certain related accounts.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested, without sales charge, in additional
full and fractional shares of the Fund. Such reinvestment will be at the net
asset value of shares of the Fund as of the close of business on the NYSE on the
monthly payment date for such dividends. No CDSC will be imposed upon redemption
of shares issued as a result of the automatic reinvestment of dividends.
Shareholders may, at any time, by written notification to Merrill Lynch if
the shareholder's account is maintained with Merrill Lynch, or by written
notification or by telephone (1-800-MER-FUND) to the Transfer Agent, if the
shareholder's account is maintained with the Transfer Agent, elect to have
subsequent dividends paid in cash, rather than reinvested, in which event
payment will be mailed on or about the payment date (provided that, in the event
that a payment on an account maintained at the Transfer Agent would amount to
$10.00 or less, a shareholder will not receive such payment in cash and such
payment will be automatically reinvested in additional shares). Cash payments
can also be directly deposited to the shareholder's bank account. No CDSC will
be imposed on redemptions of shares issued as a result of the automatic
reinvestment of dividends. Commencing ten days after the receipt by the Transfer
Agent of such notice, those instructions will be effected. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed dividend or
redemption checks.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account of Class A, Class B, Class C or Class D shares by check or
through automatic payment by direct deposit to his or her bank account on either
a monthly or quarterly basis as provided below. Quarterly withdrawals are
available for shareholders that have acquired 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 shares having a value of $10,000
or more.
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At the time of each withdrawal payment, sufficient 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 the dollar amount and
the class of shares to be redeemed. With respect to shareholders who hold
accounts directly at the Transfer Agent, redemptions will be made at net asset
value as determined 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., Eastern time) on the 24th day of each month or the 24th
day of the last month of each quarter, whichever is applicable. With respect to
shareholders who hold accounts with their broker-dealer, redemptions will be
made at net asset value as determined 15 minutes after the close of business on
the NYSE on the first, second, third, or fourth Monday of each month or the
first, second, third, or fourth Monday of the last month of each quarter,
whichever is applicable. If the NYSE is not open for business on such date, the
shares will be redeemed at the close of business on the following business day.
The check for the withdrawal payment will be made, on the next business day
following redemption. When a shareholder is making systematic withdrawals,
dividends and distributions on all shares in the Investment Account are
reinvested automatically in shares of the Fund. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Transfer Agent or the Distributor.
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Contingent Deferred Sales
Charges--Class B Shares" and "--Contingent Deferred Sales Charges--Class C
Shares." Where the systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class D shares, a
shareholder must make a new election to join the systematic withdrawal plan with
respect to the Class D shares. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Conversion of Class B Shares to Class D Shares." If an investor
wishes to change the amount being withdrawn in a systematic withdrawal plan the
investor should contact his or her Merrill Lynch Financial Consultant.
Withdrawal payments should not be considered as dividends. 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 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 shares of the Fund from
investors that maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Automatic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a
CMA(Registered), CBA(Registered) Account or Retirement Account may elect to have
shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis
through the CMA(Registered) or CBA(Registered) Systematic Redemption Program.
The minimum fixed dollar amount redeemable is $50. The proceeds of systematic
redemptions will be posted to the shareholder's account three business days
after the date the shares are redeemed. All redemptions are made at net asset
value. A shareholder may elect to have his or her shares redeemed on the first,
second, third or fourth Monday of each month, in the case of monthly
redemptions, or of every other month, in the case of bimonthly redemptions. For
quarterly, semiannual or annual redemptions, the shareholder may select the
month in which the shares are to be redeemed and may designate whether the
redemption is to be made on the first, second, third, or fourth Monday of the
month. If the Monday selected is not a business day, the redemption will be
processed at net asset value on the next business day. The CMA(Registered) or
CBA(Registered) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automated Investment
Program. For more information on the CMA(Registered) or
CBA(Registered) Systematic Redemption Program, eligible shareholders should
contact their Financial Consultant.
Capital gains and ordinary income received in each of the retirement 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.
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DIVIDENDS AND TAXES
All or a portion of the Fund's net investment income will be declared and
paid as dividends quarterly. The Fund may at times pay out less than the entire
amount of net investment income earned in any particular period and may at times
pay out such accumulated undistributed income in addition to net investment
income earned in any particular period in order to permit the Fund to maintain a
more stable level of distributions. As a result, the distribution paid by the
Fund for any particular period may be more or less than the amount of net
investment income earned by the Fund during such period. However, it is the
Fund's intention to distribute during any fiscal year all its net investment
income. Shares will accrue dividends as long as they are issued and outstanding.
Shares are issued and outstanding as of the settlement date of a purchase order
to the settlement date of a redemption order. All net realized capital gains, if
any, will be distributed to the Fund's shareholders at least annually. From time
to time, the Fund may declare a special dividend 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 Dividend Reinvestment Plan" for information concerning the
manner in which dividends may be reinvested automatically in shares of the Fund.
Shareholders may elect in writing to receive any such dividends in cash.
Dividends are taxable to shareholders as described below whether they are
invested in shares of the Fund or received in cash. The per share dividends on
Class B and Class C shares will be lower than the per share dividends 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 on Class D shares will be
lower than the per share dividends on Class A shares as a result of the account
maintenance fees applicable with respect to the Class D shares. See
"Determination of Net Asset Value."
TAXES
The Fund 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 long as it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C and Class D shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
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) distribute at least 90%
of its dividend, interest and certain other taxable income each year; (iii) at
the end of each fiscal quarter maintain at least 50% of the value of its total
assets in cash, government securities, securities of other RICs, and other
securities of issuers which represent, with respect to each issuer, no more than
5% of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer; and (iv) at the end of each fiscal quarter have no
more than 25% of its assets invested in the securities (other than those of the
government or other RICs) of any one issuer or of two or more issuers which the
Fund controls and which are engaged in the same, similar or related trades and
businesses.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of the Fund's taxable income
and capital gains will be distributed to avoid entirely the imposition of the
tax. In such event, the Fund will be liable for the tax only on the amount by
which it does not meet the foregoing distribution requirements.
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
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ordinary income. Any net capital gains (i.e., the excess of net capital gains
from the sale of assets held for more than 12 months over net short-term capital
losses, and including gains from certain transactions in futures and options)
("capital gain dividends") distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares.
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 stock of public utilities) may be eligible for the
dividends received deduction allowed to corporations under the Code, if certain
requirements are met. For this purpose, the Fund will allocate dividends
eligible for the dividends received deduction between the Class A, Class B,
Class C and Class D shareholders according to a method (which it believes is
consistent with the Securities and Exchange Commission exemptive order
permitting the issuance and sale of multiple classes of stock) that is based
upon the gross income that is allocable to the Class A, Class B, Class C and
Class D shareholders during the taxable year, or such other method as the
Internal Revenue Service may prescribe.
Generally not later than 60 days after the close of its taxable year, the
Fund will provide its shareholders with a written notice designating the amounts
of any ordinary income dividends or capital gain dividends. The maximum capital
gains rate for individuals is 20%. The maximum capital gains rate for corporate
shareholders currently is the same as the maximum tax rate for ordinary income.
If the Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a date in such a
month, then such dividend will be treated for tax purposes as being paid on
December 31, and will be taxable to its shareholders on December 31 of the year
in which the dividend was declared.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
shareholder is not otherwise subject to backup withholding taxes.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States withholding tax under existing provisions of the Code applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
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, and the shareholder and the Fund satisfying
certain holding period requirements, 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.
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Upon a sale or exchange of its shares, a shareholder will realize a taxable
gain or loss depending on its basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will be
treated as short-term capital loss if the shares were held for not more than
12 months and long-term capital gain taxable at the maximum rate of 20% if such
shares were held for more than 12 months. In the case of a corporation, any such
capital gain will be treated as long-term capital gain, taxable at the same
rates as ordinary income, if such shares were held for more than 12 months.
Generally, any loss realized on a sale or exchange will be disallowed to
the extent shares disposed of are replaced (whether through the automatic
reinvestment of dividends or otherwise) within a period of 61 days beginning 30
days before and ending 30 days after the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss. Any loss realized by a shareholder on the sale of shares of the Fund held
by the shareholder for six months or less will be treated for tax purposes as
long-term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). If a shareholder exercises his exchange privilege within
90 days of acquiring Class A shares of the Fund to acquire shares in a second
fund ("New Fund"), then the loss he can recognize on the exchange will be
reduced (or the gain increased) to the extent the charge paid to the Fund
reduces any charge he would have owed upon purchase of the shares of the New
Fund in the absence of the exchange privilege. Instead, such charge will be
treated as an amount paid for the New Fund shares.
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.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell options or 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 option
or futures contract will be treated as sold for its fair market value on the
last day of the taxable year. Unless such contract is a forward foreign exchange
contract, or is a non-equity option or a regulated futures contract for a
non-U.S. currency for which the Fund elects to have gain or loss treated as
ordinary gain or loss under Code Section 988 (as described below), gain or loss
from Section 1256 contracts will be 60% long-term and 40% short-term capital
gain or loss. The mark-to-market rules outlined above, however, will not apply
to certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's transactions in options and futures contracts. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures.
Similarly, Code Section 1091, which deals with "wash sales," may cause the Fund
to postpone recognition of certain losses for tax purposes; Code Section 1258,
which deals with "conversion transactions," may apply to recharacterize certain
capital gains as ordinary income for tax purposes, and Code Section 1259, which
deals with "constructive sales" of appreciated financial positions (e.g.,
stock), may treat the Fund as having recognized income before the time that such
income is economically recognized by the Fund.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
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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 income dividends, and any distributions made before
the losses were realized but in the same taxable year would be treated as a
return of capital to shareholders, thereby reducing each shareholder's basis in
his Fund shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect, and does
not address state and local taxation. 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 gains on the sale or exchange of shares in the Fund may also
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, as well as yield, in advertisements or information
furnished to present or prospective shareholders. Total return and yield figures
are based on the Fund's historical performance and are not intended to indicate
future performance. Average annual total return and yield are determined
separately for Class A, Class B, Class C and Class D shares in accordance with a
formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and
Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data for various periods other than those
noted below. Such data will be computed as described above, except that (1) as
required by the periods of the quotations, actual annual, annualized or
aggregate data, rather than average annual data, may be quoted and (2) the
maximum applicable sales charges will not be included with respect to annual or
annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average 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.
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" the
total return data quoted by the Fund in advertisements directed to such
investors may take into account the reduced, and not the maximum, sales charge
or may not take into
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<PAGE>
account the waiver of 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. The Fund's total return may be expressed
either as a percentage or as a dollar amount in order to illustrate such total
return on a hypothetical $1,000 investment in the Fund at the beginning of each
specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period.
The Fund's total return and yield will vary depending on market conditions,
the securities comprising the Fund's portfolio, the Fund's operating expenses
and the amount of realized and unrealized net capital gains or losses during the
period. The value of an investment in the Fund will fluctuate and 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 Index, the Value Line Composite Index or the Dow Jones Industrial
Average, other market indices, 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 or other
industry publications. When comparing its performance to a market index, the
Fund may refer to various statistical measures derived from the historic
performances of the Fund and the index, such as standard deviation and beta.
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.
Set forth below is total return and yield information for 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
----------------------------------------- -----------------------------------------
REDEEMABLE VALUE OF REDEEMABLE VALUE OF
EXPRESSED AS A A HYPOTHETICAL EXPRESSED AS A A HYPOTHETICAL
PERCENTAGE BASED ON A $1,000 INVESTMENT PERCENTAGE BASED ON A $1,000 INVESTMENT
HYPOTHETICAL $1,000 AT THE END OF HYPOTHETICAL $1,000 AT THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
- ------ --------------------- ------------------- --------------------- -------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended November 30, 1998.... 21.41 % $1,214.10 21.40 % $1,214.00
Five Years Ended November 30,
1998.............................. 13.65 % $1,895.80 13.69 % $1,899.10
Inception (December 28, 1990) to
November 30, 1998................. 13.96 % $2,816.40 13.66 % $2,758.30
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended November 30,
1998.............................. 26.47 % $1,264.70 25.40 % $1,254.00
1997.............................. 19.65 % $1,196.50 18.77 % $1,187.70
1996.............................. 17.94 % $1,179.40 17.07 % $1,170.70
1995.............................. 16.34 % $1,163.40 15.38 % $1,153.80
1994.............................. (4.89)% $ 951.10 (5.60)% $ 944.00
1993.............................. 21.80 % $1,218.00 20.86 % $1,208.60
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>
Inception (December 28, 1990) to
November 30, 1998................. 181.64 % $2,816.40 175.83 % $2,758.30
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
----------------------------------------- -----------------------------------------
REDEEMABLE VALUE OF REDEEMABLE VALUE OF
EXPRESSED AS A A HYPOTHETICAL EXPRESSED AS A A HYPOTHETICAL
PERCENTAGE BASED ON A $1,000 INVESTMENT PERCENTAGE BASED ON A $1,000 INVESTMENT
HYPOTHETICAL $1,000 AT THE END OF HYPOTHETICAL $1,000 AT THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
- --------------------------------------------------------- ------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year Ended November 30, 1998.... 24.34 % $1,243.40 21.05 % $1,210.50
Inception (October 21, 1994) to
November 30, 1998................. 17.81 % $1,961.10 17.31 % $1,927.10
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended November 30,
1998.............................. 25.34 % $1,253.40 26.09 % $1,260.90
1997.............................. 18.66 % $1,186.60 19.35 % $1,193.50
1996.............................. 17.03 % $1,170.30 17.45 % $1,174.50
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>
Inception (October 21, 1994) to
November 30, 1998................. 96.11 % $1,961.10 92.71 % $1,927.10
</TABLE>
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 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 relating the distribution of
such shares and the account maintenance fee and have exclusive voting rights
with respect to matters relating to such account maintenance and/or distribution
expenditures. 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.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540 has
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., 4 Metro Tech Center, 18th Floor, Brooklyn,
NY 11245, 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
50
<PAGE>
the United States and with certain foreign banks and securities depositories.
The Custodian is responsible for safeguarding and controlling the Fund's cash
and securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See "How to Buy, Sell,
Transfer and Exchange Shares" in the Prospectus.
LEGAL COUNSEL
Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New York
10022, is counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on 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.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
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 and the Investment
Company Act of 1940, to which reference is hereby made.
To the knowledge of the Fund, the following entity owned beneficially 5% or
more of any class of the Fund's shares as of March 1, 1999: Merrill Lynch Trust
Company, Trustee FBO MLSIP Investment Account, Attn: Robert Arimenta Jr., P.O.
Box 30532, New Brunswick, NJ 08989 owned 11.5% of the Fund's outstanding
Class A shares.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated by reference in
this Statement of Additional Information from its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 Ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
51
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE INC.'S ("MOODY'S") CORPORATE RATINGS
<TABLE>
<S> <C>
Aaa Bonds that 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 that 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 that 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 that 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 that 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 that 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 that 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 that 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 that are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
</TABLE>
NOTE. Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier I 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.
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
A-1
<PAGE>
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.
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.
A-2
<PAGE>
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<S> <C>
aaa An issue that 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 that 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 that 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 that 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 that 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 that 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 that 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 that is rated "ca" is speculative in a high degree and is likely to be in arrears on
dividends with little likelihood of eventual payment.
c This is the lowest rated class of preferred or preference stock. Issues so rated can be
regarded as having extremely poor prospects of ever attaining any real investment standing.
</TABLE>
NOTE: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'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
A-3
<PAGE>
relative position of, the obligation in the event of bankruptcy, reorganization
or other arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the
highest-rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this
category than for debt in higher-rated categories.
Debt rated BB, B, CCC, CC and C are regarded as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and
C the highest degree of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it
faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and principal payment. The BB rating category
is also used for debt subordinated to senior debt that is assigned an actual or implied BBB-rating.
B Debt rated B has a greater vulnerability to default but presently has the capacity to meet interest
payments and principal repayments. Adverse business, financial or economic conditions would likely impair
capacity or willingness to pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and is dependent upon favorable
business, financial and economic conditions to meet timely payments of interest and repayments of
principal. In the event of adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or B-rating.
CC The rating CC is typically applied to debt subordinated to senior debt which is assigned an actual or
implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or
implied CCC-debt rating. The C rating may be used to cover a situation where a bankruptcy petition has
been filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being paid.
D Debt rated D is in default. The D rating is assigned on the day an interest or principal payment is
missed. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
</TABLE>
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
A-4
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
<TABLE>
<S> <C>
A Issues assigned this highest rating are regarded as having the greatest capacity for timely
payment. Issues in this category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety.
A-l 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-l."
A-3 Issues carrying this designation have a satisfactory capacity for timely payment. They are
however, somewhat more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations.
B Issues rated "B" are regarded as having only adequate capacity for timely payment. However,
such capacity may be damaged by changing conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful capacity for payment.
D This rating indicates that the issue is either in default or is expected to be in default upon
maturity.
</TABLE>
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the bond rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
A-5
<PAGE>
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment--capacity and willingness of the issuer to
meet the timely payment of preferred stock dividends and any
applicable sinking fund requirements in accordance with the terms
of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors'
rights.
<TABLE>
<S> <C>
AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred stock issue
and indicates an extremely strong capacity to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed income security. The
capacity to pay preferred stock obligations is very strong, although not as overwhelming as for
issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred stock obligations,
although it is somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the "A" category.
BB, Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as predominantly B,
B, speculative with respect to the issuer's capacity to pay preferred stock obligations. "BB"
CCC 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.
</TABLE>
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or minus (--): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information.
A-6
<PAGE>
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<PAGE>
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<PAGE>
Code #11280-03-99
- -----------------
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1(a) -- Articles of Incorporation of Registrant.(1)
(b) -- Articles of Amendment.(7)
(c) -- Articles Supplementary.(7)
2 -- Amended and Restated By-Laws of Registrant.(6)
3 -- Instruments defining rights of Shareholders. (Incorporated by reference to Exhibits 1 and 2 above).
4(a) -- Management Agreement between Registrant and Merrill Lynch Asset Management, L.P.(3)
(b) -- Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P. and Merrill Lynch Asset
Management U.K. Limited.(9)
5(a) -- Class A Shares Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.(6)
(b) -- Class B Shares Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.(3)
(c) -- Class C Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.(6)
(d) -- Class D Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.(6)
6 -- None.
7 -- Custody Agreement between Registrant and The Chase Manhattan Bank, N.A.(3)
8(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement between
Registrant and Financial Data Services, Inc.(3)
(b) -- License Agreement relating to Use of Name between Merrill Lynch & Co., Inc. and Registrant.(3)
9 -- Opinion and consent of Shereff, Friedman, Hoffman & Goodman, LLP, counsel for Registrant.(2)
10 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
11 -- None.
12 -- Certificate of Merrill Lynch Asset Management, L.P.(2)
13(a) -- Amended and Restated Class B Distribution Plan of the Registrant and Class B Distribution Plan
Sub-Agreement.(5)
(b) -- Class C Distribution Plan and Class C Distribution Plan Sub-Agreement.(6)
(c) -- Class D Distribution Plan and Class D Distribution Plan Sub-Agreement.(6)
14(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
(e) -- Powers of Attorney for Officers and Directors
Arthur Zeikel(4)
Ronald W. Forbes(4)
Cynthia A. Montgomery(6)
Charles C. Reilly(4)
Kevin A. Ryan(4)
Richard R. West(4)
Donald C. Burke
15 -- Rule 18f-3 Plan of Registrant.(8)
</TABLE>
(Footnotes on next page)
C-1
<PAGE>
(Footnotes from previous page)
- ------------------
<TABLE>
<S> <C>
(1) Incorporated by reference to Exhibit 1 to the Registrant's initial
Registration Statement on Form N-1A (File No. 33-37103).
(2) Incorporated by reference to the corresponding exhibit numbers to
Post-Effective Amendment No. 2 to the Registrant's Registration Statement on
Form N-1A (File No. 33-37103), as set forth below:
EXHIBIT INCORPORATED BY REFERENCE
NUMBER TO EXHIBIT NUMBER
------ -------------------------
9 10
12 13
(3) Incorporated by reference to the corresponding exhibit numbers to
Post-Effective Amendment No. 1 to the Registrant's Registration Statement on
Form N-1A (File No. 33-37103), as set forth below:
EXHIBIT INCORPORATED BY REFERENCE
NUMBER TO EXHIBIT NUMBER
------ -------------------------
4(a) 5
5(b) 6(b)
7 8
8(a) 9(a)
8(b) 9(b)
(4) Incorporated by reference to Exhibit 17 to Post-Effective Amendment No. 3 to
the Registrant's Registration Statement on Form N-1A (File No. 33-37103).
(5) Incorporated by reference to Exhibit 15(a) to Post-Effective Amendment
No. 5 to the Registrant's Registration Statement on Form N-1A (File
No. 33-37103).
(6) Incorporated by reference to the corresponding exhibit numbers to
Post-Effective Amendment No. 6 to the Registrant's Registration Statement on
Form N-1A (File No. 33-37103), as set forth below:
EXHIBIT INCORPORATED BY REFERENCE
NUMBER TO EXHIBIT NUMBER
------ -------------------------
2 2
5(a) 6(a)
5(c) 6(c)
5(d) 6(d)
13(b) 15(b)
13(c) 15(c)
14(e) 17(a)
(7) Incorporated by reference to the identically numbered exhibits to
Post-Effective Amendment No. 7 to the Registrant's Registration Statement on
Form N-1A (File No. 33-37103).
(8) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to Registration Statement on Form N-1A of Merrill Lynch Multi-State
Municipal Series Trust on January 25, 1996 (File Nos. 2-99473 and 811-4375).
(9) Incorporated by reference to Exhibit 5(b) to Post-Effective Amendment
No. 10 to the Registrant's Registration Statement on Form N-1A (File No.
33-7103).
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 25. INDEMNIFICATION
Reference is made to Article VI of the Registrant's Articles of
Incorporation, as amended to date, Article VI of the 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 within
the scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the General Laws of the State of Maryland; provided, however,
that the person seeking indemnification shall provide to the Registrant a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Registrant has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Registrant at the
time the advance is proposed to be made, that there is reason to believe that
the person seeking indemnification will ultimately be found to be entitled to
indemnification.
C-2
<PAGE>
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, as amended (the "Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus
and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM") also acts as
the investment adviser for the following open-end registered 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 Convertible 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
Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Growth Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch Global Resources
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Technology
Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value,
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 Real Estate Fund, Inc.,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income
Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley
Funds (advised by Hotchkis and Wiley, a division of MLAM); and for the following
closed-end registered investment companies:
C-3
<PAGE>
Merrill Lynch High Income Municipal Bond Fund, Inc., and Merrill Lynch Senior
Floating Rate Fund, Inc. MLAM also acts as a sub-adviser to Merrill Lynch World
Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio, two
investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered 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 Corporate High Yield
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 registered investment companies: Apex Municipal Fund, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate
High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II,
Inc., Debt Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Funds, Inc., MuniEnhanced Fund, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc., MuniHoldings
California Insured Fund III, Inc., Muniholdings California Insured Fund IV,
Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured Fund II,
MuniHoldings Florida Insured Fund III, MuniHoldings Florida Insured Fund IV,
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings Insured Fund,
Inc., MuniHoldings Insured Fund II, Inc., MuniHoldings Michigan Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund II, Inc., MuniHoldings New Jersey Insured Fund, III, MuniHoldings
New York Fund, Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New
York Insured Fund II, Inc., MuniHoldings New York Insured Fund III, Inc.,
MuniHoldings Pennsylvania Insured Fund, 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., and
Worldwide DollarVest Fund, Inc.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2665. 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 ("MLFD"), a division of Princeton Funds Distributor, Inc. is P.O.
Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch and
Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center, North Tower,
250 Vesey Street, New York, New York 10281-1201. The address of the Fund's
transfer agent Financial Data Services, Inc. ("FDS") is 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since August 31,
1996 for his or her or its own account or in the capacity of director, officer,
employee, partner or trustee. In addition, Mr. Glenn is President and Mr. Burke
is Vice President and Treasurer of all or substantially all of the investment
companies described in the first two paragraphs of this Item 26, and Messrs.
Giordano, Kirstein and Monagle are directors or officers of one or more of such
companies.
C-4
<PAGE>
Officers and partners of MLAM are set forth as follows:
<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
Merrill Lynch Investment Limited Partner Investment Advisory Management, Inc.
Princeton Services General Partner General Partner of FAM
Jeffrey M. Peek President President of FAM; President and Director of Princeton
Services; Executive Vice President of ML & Co.
Terry K. Glenn Executive Vice Executive Vice President of FAM; Executive Vice President
President and Director of Princeton Services; President and Director
of Princeton Funds Distributor, Inc.; Director of FDS;
President of Princeton Administrators
Mark A. Desario Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Linda L. Federeci Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Vincent R. Giordano Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Michael J. Hennewinkel Senior Vice Senior Vice President of FAM; Senior Vice Secretary
President, General President of Princeton Services
Counsel and Secretary
Philip L. Kirstein Senior Vice President Senior Vice President of FAM; Senior Vice President,
General Counsel, Director and Secretary of Princeton
Services.
Ronald M. Kloss Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Debra Landsman-Yaros Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services; Vice President of Princeton Funds
Distributor, Inc.
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
Brian A. Murdock Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services; Director of Princeton Funds
Distributor, Inc.
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------------- --------------------- ----------------------------------------------------------
<S> <C> <C>
Donald C. Burke Senior Vice Senior Vice President and Treasurer of FAM; Senior Vice
President, Treasurer President and Treasurer of Princeton Services; Vice
and Director of President and Treasurer of Princeton Funds Distributor,
Taxation Inc. ("PFD"); First Vice President of MLAM from 1997 to
1999; Vice President of MLAM from 1990 to 1997
Michael G. Clark Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services; Director of PFD; First Vice President
of MLAM from 1997 to 1999; Vice President of MLAM from
1996 to 1997
Gregory D. Upah Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Ronald L. Welburn 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: The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc. Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc.,
Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc.,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill
Lynch Consults International Portfolio, Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund Inc., Merrill Lynch Global
Allocation Fund Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch
Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Series Fund,
Inc., Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch Short-Term
Global Income Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc., Merrill
Lynch World Income Fund, Inc., The Municipal Fund Accumulation Program, Inc.,
Senior Floating Rate Fund, Inc. and Worldwide DollarVest Fund, Inc. The address
of each of these registered 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 August 31,
1996, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert and Richard are officers
of one or more of the registered investment companies listed in the first two
paragraphs of this Item 26:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------------- --------------------- ----------------------------------------------------------
<S> <C> <C>
Terry K. Glenn Director and Chairman Executive Vice President of MLAM; Executive Vice President and
Director of Princeton Services; President and Director of PFD; Director of
FDS; President of Princeton Administrators
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------------- --------------------- ----------------------------------------------------------
<S> <C> <C>
Alan J. Albert Senior Managing Vice President of the Manager
Director
Nicholas C.D. Hall President Director of Merrill Lynch Europe PLC; General Counsel of
Merrill Lynch International Private Banking Group
Donald C. Burke Treasurer Senior Vice President of FAM, Treasurer and Director of Taxation
of MLAM; Senior Vice President and Treasurer of Princeton Services;
Vice President of PFD; First Vice President of MLAM from 1997 to 1999;
Vice President of MLAM from 1990 to 1997
Carol Ann Langham Company Secretary None
Debra Anne Searle Assistant Company None
Secretary
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) MLFD, a division of Princeton Funds Distributor, Inc., acts as the
principal underwriter for the Registrant and for each of the open-end registered
investment companies referred to in the first two paragraphs of Item 26 except
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., and The Municipal Fund Accumulation Program,
Inc. MLFD also acts as principal underwriter for the following closed-end
registered investment companies: Merrill Lynch High Income Municipal Bond Fund,
Inc., Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior
Floating Rate Fund, Inc. A separate division of Princeton Funds Distributor,
Inc. acts as the principal underwriter of a number of other investment
companies.
(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. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION AND OFFICES POSITION AND OFFICES
NAME WITH THE DISTRIBUTOR WITH REGISTRANT
- ------------------------ ---------------------------- ------------------------
<S> <C> <C>
Terry K. Glenn President and Director Executive Vice President
Michael G. Clark Director and Treasurer None
Thomas J. Verage Director None
Robert W. Crook Senior Vice President None
Michael J. Brady Vice President None
William M. Breen Vice President None
James T. Fatseas Vice President None
Debra W. Landsman-Yaros Vice President None
Michelle T. Lau Vice President None
Donald C. Burke Vice President and Treasurer Treasurer
Salvatore Venezia Vice President None
William Wasel Vice President None
Robert Harris Secretary None
</TABLE>
(c) Not Applicable.
C-7
<PAGE>
ITEM 28. 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, Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484.
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--Merrill
Lynch Asset Management" 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 contract.
ITEM 30. UNDERTAKINGS.
None.
C-8
<PAGE>
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 REGISTRATION STATEMENT UNDER
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 30TH DAY OF MARCH, 1999.
MERRILL LYNCH GLOBAL UTILITY FUND, INC.
(REGISTRANT)
By: /s/ Terry K. Glenn
-------------------------------------
Terry K. Glenn
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE 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
- ------------------------------------------ ---------------------------------------------- -----------------
<S> <C> <C>
/s/ Terry K. Glenn President (Principal Executive Officer) March 30, 1999
- ------------------------------------------
Terry K. Glenn
* Treasurer (Principal Financial and
- ------------------------------------------ Accounting Officer)
Gerald M. Richard
* Director
- ------------------------------------------
Ronald W. Forbes
* Director
- ------------------------------------------
Charles C. Reilly
* Director
- ------------------------------------------
Kevin A. Ryan
* Director
- ------------------------------------------
Richard R. West
* Director
- ------------------------------------------
Arthur Zeikel
* This amendment has been signed by each
of the persons so indicated by the
undersigned as Attorney-in-Fact.
*By: /s/ Terry K. Glenn, March 30, 1999
----------------------------------
Terry K. Glenn,
Attorney-in-Fact
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
10 -- Consent of Deloitte & Touche LLP, independent auditors for Registrant.
14(a) -- Financial Data Schedule for Class A Shares.
14(b) -- Financial Data Schedule for Class B Shares.
14(c) -- Financial Data Schedule for Class C Shares.
14(d) -- Financial Data Schedule for Class D Shares.
14(e) -- Power of Attorney for Donald C. Burke.
</TABLE>
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose name
appears below hereby nominates, constitutes and appoints Arthur Zeikel and
Terry K. Glenn (with full power to each of them to act alone) his true and
lawful attorney-in-fact and agent, for him and on his behalf and in his place
and stead in any and all capacities to make, execute and sign all amendments
and supplements to the Registration Statement on Form N-1A under the
Securities Act of 1933 and the Investment Company Act of 1940 of MERRILL LYNCH
GLOBAL UTILITY FUND, INC. (the "Corporation"), and to file the same with the
Securities and Exchange Commission, and any other regulatory authority having
jurisdiction over the offer and sale of shares of common stock, par value
$0.10 per share, of the Corporation, and any and all exhibits and other
documents requisite in connection therewith, granting unto said attorneys and
each of them, full power and authority to perform each and every act and thing
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as the undersigned himself might or could do.
IN WITNESS WHEREOF, THE UNDERSIGNED HAS HEREUNTO SET HIS
HAND THIS 29TH DAY OF MARCH, 1999.
/s/ Donald C. Burke
- -------------------
Donald C. Burke
Treasurer
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Global Utility Fund,Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 12 to Registration Statement No. 33-37103 of our report dated January 21,
1999 appearing in the annual report to shareholders of Merrill Lynch Global
Utility Fund, Inc. for the year ended November 30, 1998, and to the reference to
us under the caption "Financial Highlights" in the Prospectus, which is a part
of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
March 29, 1999
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