<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 14, 1994
SECURITIES ACT FILE NO. 33-40332
INVESTMENT COMPANY ACT FILE NO. 811-6304
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 4 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 6 [X]
(CHECK APPROPRIATE BOX OR BOXES)
---------------
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD PLAINSBORO, 08536
NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------
COPIES TO:
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX):
[_] immediately upon filing pursuant to paragraph (b)
[X] on October 21, 1994 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(i)
[_] 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.
---------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE REGISTRANT'S MOST RECENT
FISCAL YEAR WAS FILED ON JULY 22, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-
1A ITEM NO. LOCATION
----------- --------
<C> <S> <C>
PART A
Item 1. Cover Page................. Cover Page
Item 2. Synopsis................... Prospectus Summary and Fee Table
Item 3. Condensed Financial
Information............... Not Applicable
Item 4. General Description of Investment Objective and Policies;
Registrant................ Additional Information
Item 5. Management of the Fund..... Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion of
Fund Performance.......... Not Applicable
Item 6. Capital Stock and Other
Securities................ Cover Page; Additional Information
Item 7. Purchase of Securities Cover Page; Fee Table; Merrill Lynch
Being Offered............. Select PricingSM System; Purchase
of Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase... Fee Table; Merrill Lynch Select
PricingSM System; Purchase of
Shares; Redemption of Shares
Item 9. Pending Legal Proceedings.. Not Applicable
PART B
Item 10. Cover Page................. Cover Page
Item 11. Table of Contents.......... Back Cover Page
Item 12. General Information and
History................... Not Applicable
Item 13. Investment Objectives and
Policies.................. Investment Objectives and Policies
Item 14. Management of the Fund..... Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities................ Management of the Fund
Item 16. Investment Advisory and Management of the Fund; Purchase of
Other Services............ Shares; General Information
Item 17. Brokerage Allocation and Portfolio Transactions and
Other Practices........... Brokerage; Financial Statements
Item 18. Capital Stock and Other
Securities................ General Information
Item 19. Purchase, Redemption and
Pricing of Securities Purchase of Shares; Redemption of
Being Offered............. Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status................. Distributions and Taxes
Item 21. Underwriters............... Purchase of Shares
Item 22. Calculation of Performance
Data...................... Performance Data
Item 23. Financial Statements....... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
October 21, 1994
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Adjustable Rate Securities Fund, Inc. (the "Fund") is a mutual
fund seeking high current income consistent with a policy of limiting the
degree of fluctuation in net asset value of Fund shares resulting from
movements in interest rates. The Fund seeks to achieve this objective by
investing primarily in a portfolio of adjustable rate securities, consisting
principally of mortgage-backed and asset-backed securities. The Fund does not,
however, attempt to maintain a constant net asset value per share. The Fund
may engage in various portfolio strategies to enhance income and to hedge its
portfolio against investment and interest rate risks, including the use of
interest rate transactions, options on portfolio securities, financial futures
contracts and options on such futures. There can be no assurance that the
investment objective of the Fund will be realized.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. As a
result of the implementation of the Select Pricing System, Class A shares of
the Fund outstanding prior to October 21, 1994, have been redesignated Class D
shares. The Class A shares offered by this Prospectus differ from the Class A
shares offered prior to October 21, 1994, in many respects, including sales
charges, exchange privilege and the classes of persons to whom such shares are
offered. See "Merrill Lynch Select PricingSM System" on page 5.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 [(609)
282-2800], or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50, except that for retirement plans
the minimum initial purchase is $100 and the minimum subsequent purchase is
$1. Merrill Lynch may charge its customers a processing fee (presently $4.85)
for confirming purchases and repurchases. Purchases and redemptions directly
through the Fund's Transfer Agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund dated October 21, 1994 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
PROSPECTUS SUMMARY AND FEE TABLE
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and in the Statement
of Additional Information.
THE FUND
Merrill Lynch Adjustable Rate Securities Fund, Inc. (the "Fund") is a
diversified management investment company.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek high current income
consistent with a policy of limiting the degree of fluctuation in the net asset
value of Fund shares from movements in interest rates. The Fund will seek to
achieve its objective by investing at least 65% of its total assets in
adjustable rate securities ("Adjustable Rate Securities"). Adjustable Rate
Securities bear interest at rates that adjust at periodic intervals in
conjunction with changes in market levels of interest rates. The Adjustable
Rate Securities in which the Fund will invest will consist principally of
mortgage-backed and asset-backed securities. Such securities will be issued or
guaranteed by agencies or instrumentalities of the United States or be rated AA
by Standard & Poor's Corporation ("Standard & Poor's") or Aa by Moody's
Investors Service, Inc. ("Moody's"). The Fund may engage in various portfolio
strategies to enhance income and to hedge its portfolio against investment and
interest rate risks, including the use of interest rate transactions, options
on portfolio securities, financial futures contracts and options on such
futures. There can be no assurance that the investment objective of the Fund
will be realized.
The Fund may invest up to 35% of its total assets in other types of mortgage
and asset related securities, and derivative securities relating thereto,
including fixed rate mortgage and asset related securities and stripped
securities. Such securities must be issued or guaranteed by agencies or
instrumentalities of the United States or be rated "investment grade" by
Standard & Poor's (currently AAA, AA, A and BBB) or Moody's (currently Aaa, Aa,
A and Baa). No more than 10% of the Fund's total assets will be invested in
securities rated in the lowest category of investment grade. The Fund may also
invest in debentures issued by the Federal National Mortgage Association. The
Fund also, under normal circumstances, may invest up to 35% of its total assets
in money market securities rated in the highest rating category by Standard &
Poor's or Moody's and, for temporary or defensive purposes, may invest up to
100% of its assets in such money market securities. See "Investment Objective
and Policies."
SPECIAL CONSIDERATIONS AND RISK FACTORS
The types of securities in which the Fund invests have certain unique
attributes that warrant special consideration or that present risks that may
not exist in other types of mutual fund investments. Some of these
considerations and risks pertain to the characteristics of mortgage-backed
securities ("MBSs") or asset-backed securities ("ABSs") generally, while others
are peculiar to Adjustable Rate Securities. One of the principal risks
regarding MBSs and, to a lesser extent, ABSs is the risk of prepayments.
Prepayment rates are affected by changes in prevailing interest rates and
numerous economic, geographic, social and other factors. The special
considerations and risks inherent in investments in MBSs and ABSs are discussed
under "Investment Objective and Policies--Special Considerations and Risk
Factors."
2
<PAGE>
THE MANAGER
The Fund's investment adviser is Merrill Lynch Asset Management, L.P. (the
"Manager" or "MLAM"). The Manager is owned and controlled by Merrill Lynch &
Co., Inc., a financial services holding company and the parent of Merrill
Lynch. The Manager, or an affiliate of the Manager, Fund Asset Management, L.P.
("FAM"), acts as the investment adviser for more than 100 other registered
investment companies. MLAM and FAM also offer portfolio management and
portfolio analysis services to individuals and institutions. As of August 31,
1994, the Manager and FAM had a total of approximately $165.7 billion in
investment company and other portfolio assets under management, including
accounts of certain affiliates of MLAM. See "Management of the Fund--Management
and Advisory Arrangements."
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share subject to the sales charges and ongoing fee
arrangements described below. See "Merrill Lynch Select PricingSM System" and
"Purchase of Shares".
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income.
Dividends from such net investment income will be declared daily prior to the
determination of net asset value on that day and paid monthly. All net realized
long-term and short-term capital gains, if any, will be distributed to the
Fund's shareholders at least annually. See "Additional Information--Dividends
and Distributions."
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once daily at
4:15 P.M. following the normal close of trading on the New York Stock Exchange
on each day during which the New York Stock Exchange is open for trading. See
"Additional Information--Determination of Net Asset Value."
3
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C(c) CLASS D(d)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 4.00%(e) None None 4.00%(e)
Sales Charge Imposed on
Dividend
Reinvestments......... None None None None
Deferred Sales Charge
(as a percentage of
original purchase None(f) 4.0% during the 1% for one None(f)
price or redemption first year, year
proceeds, whichever is decreasing 1.0%
lower)................ annually thereafter
to 0.0% after the
fourth year
Exchange Fee........... None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS)(G).........
Management Fees(h)..... 0.50% 0.50% 0.50% 0.50%
12b-1 Fees(i):
Account Maintenance
Fees.................. None 0.25% 0.25% 0.25%
Distribution Fees...... None 0.50% 0.55% None
(Class B shares
convert to Class D
shares
automatically after
approximately ten
years and cease
being subject to
distribution fees)
Other Expenses:
Custodial Fees......... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing
Costs(j).............. 0.08% 0.08% 0.08% 0.08%
Other.................. 0.12% 0.12% 0.12% 0.12%
----- ----- ----- -----
Total Other Expenses. 0.21% 0.21% 0.21% 0.21%
----- ----- ----- -----
Total Fund Operating
Expenses............... 0.71% 1.46% 1.51% 0.96%
===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including certain
retirement plans and investment programs. The Class A shares offered by
this Prospectus differ from the Class A shares offered prior to October
21, 1994. See "Purchase of Shares--Initial Sales Charge Alternatives--
Class A and Class D Shares"--page 29.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 30.
(c) Prior to the date of this Prospectus, the Fund has not offered Class C
shares to the public.
(d) Class A shares of the Fund outstanding prior to October 21, 1994, have
been redesignated Class D shares.
(e) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 29.
(f) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge will instead be subject to a CDSC of
1.0% of amounts redeemed within the first year after purchase.
(g) Information for Class B and Class D shares is stated for the fiscal year
ended May 31, 1994. Information under "Other Expenses" for Class A and
Class C shares is estimated for the fiscal year ending May 31, 1995.
(h) See "Management of the Fund--Management and Advisory Arrangements"--page
26.
(i) See "Purchase of Shares--Distribution Plans"--page 33.
(j) See "Management of the Fund--Transfer Agency Services"--page 26.
4
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including the maximum
$40 initial sales charge (Class A and Class D
shares only) and assuming (1) the Total Fund
Operating Expenses for each class set forth
above; (2) a 5% annual return throughout the
periods and (3) redemption at the end of the
period:
Class A...................................... $47 $62 $78 $125
Class B...................................... $55 $66 $80 $175
Class C...................................... $25 $48 $82 $180
Class D...................................... $49 $69 $91 $153
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Class A...................................... $47 $62 $78 $125
Class B...................................... $15 $46 $80 $175
Class C...................................... $15 $48 $82 $180
Class D...................................... $49 $69 $91 $153
</TABLE>
- --------
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATE OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who
hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charges permitted under the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. ("NASD") Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and redemptions.
Purchases and redemptions directly through the Fund's Transfer Agent are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. The shares of each class may be purchased at a price equal to
the next determined net asset value per share subject to the sales charges and
ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing System is used by more than 50
mutual funds advised by MLAM or an affiliate of MLAM, FAM. Funds advised by
MLAM or FAM are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on the Class D shares, will be imposed directly against those classes
and not against all assets of the Fund and,
5
<PAGE>
accordingly, such charges will not affect the net asset value of any other
class or have any impact on investors choosing another sales charge option.
Dividends paid by the Fund for each class of shares will be calculated in the
same manner at the same time and will differ only to the extent that account
maintenance and distribution fees and any incremental transfer agency costs
relating to a particular class are borne exclusively by that class. Each class
has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The distribution-
related revenues paid with respect to a class will not be used to finance the
distribution expenditures of another class. Sales personnel may receive
different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of
Shares".
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE/1/ FEE FEE FEATURE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales charge/2/,/3/ No No No
- -----------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.50% B shares convert to D
at a rate of 4.0% during the first shares automatically
year, decreasing 1.0% annually after approximately
to 0.0% ten years/4/
- -----------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
- -----------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales 0.25% No No
charge/3/
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 1.0% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have an eight year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Class A:
Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors
6
<PAGE>
and also will be issued upon reinvestment of dividends on outstanding
Class A shares. Eligible investors include certain retirement plans
and participants in certain investment programs. In addition, Class A
shares will be offered to directors and employees of Merrill Lynch &
Co., Inc. and its subsidiaries (the term "subsidiaries", when used
herein with respect to Merrill Lynch & Co., Inc., includes the
Manager, FAM and certain other entities directly or indirectly wholly-
owned and controlled by Merrill Lynch & Co., Inc.) and to members of
the Boards of MLAM-advised mutual funds. The maximum initial sales
charge is 4.00%, which is reduced for purchases of $25,000 and over.
Purchases of $1,000,000 or more may not be subject to an initial sales
charge but, if the initial sales charge is waived, such purchases will
be subject to a CDSC of 1.0% if the shares are redeemed within one
year after purchase. Sales charges also are reduced under a right of
accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares".
Class B:
Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%,
an ongoing distribution fee of 0.50% of the Fund's average net assets
attributable to the Class B shares and a CDSC if they are redeemed
within four years of purchase. Approximately ten years after issuance,
Class B shares will convert automatically into Class D shares of the
Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares
automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net
asset values of the shares of the two classes on the conversion date,
without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also
will convert automatically to Class D shares. The conversion period
for dividend reinvestment shares and for certain retirement plans is
modified as described under "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares".
Class C:
Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.55% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a CDSC if they are redeemed within one year of purchase. Although
Class C shares are subject to a 1.0% CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D:
Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchases will be subject to a CDSC of 1.0% if the shares are
7
<PAGE>
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares. Class D shares also will be issued upon conversion
of Class B shares as described above under "Class B". See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Class A, Class B, Class C and
Class D share holdings will count toward a right of accumulation which may
qualify the investor for reduced initial sales charges on new initial sales
charge purchases. In addition, the ongoing Class B and Class C account
maintenance and distribution fees will cause Class B and Class C shares to have
higher expense ratios, pay lower dividends and have lower total returns than
the initial sales charge shares. The ongoing Class D account maintenance fees
will cause Class D shares to have a higher expense ratio, pay lower dividends
and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately ten years, and
thereafter investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forgo the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges".
8
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements and the independent
auditors' report thereon for the fiscal year ended May 31, 1994 are included
in the Statement of Additional Information. Class A shares of the Fund
outstanding as of October 21, 1994, were redesignated Class D shares on such
date, and the Fund has commenced offering shares of a new Class A having
different characteristics. Financial information is not presented for the new
Class A or for Class C shares since no shares of those classes are publicly
issued before the date of this Prospectus. Further information about the
performance of the Fund is contained in the Fund's most recent annual report
to shareholders which may be obtained, without charge, by calling or by
writing the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from the
information provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A(1) CLASS B
--------------------------- -----------------------------
FOR THE FOR THE
PERIOD FOR THE YEAR PERIOD
FOR THE YEAR AUGUST 2, ENDED AUGUST 2,
ENDED MAY 31, 1991+ TO MAY 31, 1991+ TO
---------------- MAY 31, ------------------ MAY 31,
Increase (Decrease) in 1994 1993 1992 1994 1993 1992
Net Asset Value: ------- ------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 9.76 $ 9.92 $ 10.00 $ 9.76 $ 9.92 $ 10.00
------- ------- ------- -------- -------- --------
Investment income--net.. .37 .45 .56 .32 .40 .52
Realized and unrealized
loss on investments--
net.................... (.24) (.16) (.08) (.24) (.16) (.08)
------- ------- ------- -------- -------- --------
Total from investment
operations............. .13 .29 .48 .08 .24 .44
------- ------- ------- -------- -------- --------
Less dividends:
Investment income--net. (.36) (.45) (.56) (.31) (.40) (.52)
------- ------- ------- -------- -------- --------
Net asset value, end of
period................. $ 9.53 $ 9.76 $ 9.92 $ 9.53 $ 9.76 $ 9.92
======= ======= ======= ======== ======== ========
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 1.28% 2.99% 4.75%# 0.77% 2.48% 4.33%#
======= ======= ======= ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of reim-
bursement and excluding
account maintenance and
distribution fees...... .71% .66% .62%* .71% .65% .61%*
======= ======= ======= ======== ======== ========
Expenses, net of reim-
bursement.............. .96% .91% .87%* 1.46% 1.40% 1.36%*
======= ======= ======= ======== ======== ========
Expenses................ .96% .91% .96%* 1.46% 1.40% 1.47%*
======= ======= ======= ======== ======== ========
Investment income--net.. 3.69% 4.79% 6.54%* 3.20% 4.15% 6.07%*
======= ======= ======= ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $23,043 $51,398 $80,411 $374,376 $689,593 $887,110
======= ======= ======= ======== ======== ========
Portfolio turnover...... 60.38% 104.71% 94.72% 60.38% 104.71% 94.72%
======= ======= ======= ======== ======== ========
</TABLE>
- --------
(1) As of October 21, 1994, the Class A shares for which information is
presented here were redesignated Class D shares.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+Commencement of Operations.
#Aggregate total investment return.
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek high current income
consistent with a policy of limiting the degree of fluctuation in the net asset
value of Fund shares from movements in interest rates. The Fund will seek to
achieve its objective by investing at least 65% of its total assets in
adjustable rate securities ("Adjustable Rate Securities"). Adjustable Rate
Securities bear interest at rates that adjust at periodic intervals in
conjunction with changes in market levels of interest rates. The Adjustable
Rate Securities in which the Fund will invest will consist principally of
mortgage-backed and asset-backed securities. Such securities will be issued or
guaranteed by agencies or instrumentalities of the United States or be rated AA
by Standard & Poor's Corporation ("Standard & Poor's") or Aa by Moody's
Investors Service, Inc. ("Moody's"). The investment objective and policies set
forth in the first two sentences of this paragraph are fundamental policies and
may not be changed without shareholder approval.
The Fund may invest up to 35% of its total assets in other types of mortgage
and asset related securities, and derivative securities relating thereto,
including fixed rate mortgage and asset related securities and stripped
securities. Such securities must be issued or guaranteed by agencies or
instrumentalities of the United States or be rated "investment grade" by
Standard & Poor's or Moody's. Securities rated investment grade are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Standard & Poor's (currently AAA, AA, A and BBB) or
Moody's (currently Aaa, Aa, A and Baa). No more than 10% of the Fund's total
assets will be invested in securities rated in the lowest category of
investment grade. The Fund may also invest in debentures issued by the Federal
National Mortgage Association. The Fund also, under normal circumstances, may
invest up to 35% of its total assets in money market securities rated in the
highest rating category by Standard & Poor's or Moody's and, for temporary or
defensive purposes, may invest up to 100% of its assets in such money market
securities.
The Fund will invest at least 65% of its total assets in Adjustable Rate
Securities. The distinguishing feature of Adjustable Rate Securities is that
interest payments made thereon will vary in relation to a specified index,
typically at a spread over such index. Merrill Lynch Asset Management, L.P.,
the Fund's manager (the "Manager"), believes that because of the
characteristics of Adjustable Rate Securities, a portfolio of such securities
is likely to generate current income in excess of a portfolio of money market
securities but with less volatility in market value (and consequently, the
Fund's net asset value) than fixed rate mortgage-backed or asset-backed
securities and other fixed rate debt obligations of comparable maturity. At the
same time, however, the Fund's net asset value will be more volatile than that
of a portfolio of money market securities. Additionally, if interest rates
decrease, the Fund may experience a lower total return than a fund investing in
fixed-rate long-term debt, such as U.S. Treasury bonds.
The Adjustable Rate Securities in which the Fund will invest will consist
principally of mortgage-backed securities (herein sometimes referred to as
"MBSs") and asset-backed securities (herein sometimes referred to as "ABSs").
MBSs are securities that directly or indirectly represent an interest in, or
are backed by and payable from, mortgage loans secured by real property. ABSs
generally consist of structures similar to MBSs, except that the underlying
asset pools are comprised of credit card, automobile or other types of
receivables, or of commercial loans (receivables and commercial loans are
together referred to herein as "financial assets"). MBSs and ABSs are issued in
structured financings wherein the sponsor securitizes the underlying mortgage
loans or financial assets in order to liquify the underlying assets or to
achieve certain other financial goals. The special considerations and risks
inherent in investments in MBSs and ABSs are discussed more fully below. See
"Investment Objective and Policies--Special Considerations and Risk Factors."
10
<PAGE>
The Adjustable Rate Securities in which the Fund may invest may also include
debentures of the Federal National Mortgage Association which bear interest at
an adjustable rate. See "Investment Objective and Policies--Description of
Other Securities" for a description of such debentures.
TYPES OF ISSUERS/QUALITY STANDARDS
The Fund intends to invest primarily in mortgage-backed and asset-backed
securities. The MBSs in which the Fund may invest will primarily be either
guaranteed by the Government National Mortgage Association ("GNMA"), or issued
by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"). Certain of the ABSs in which the Fund will
invest will be guaranteed by the Small Business Administration ("SBA").
Certain of the MBSs and ABSs in which the Fund may invest will be issued by
private issuers. Privately issued MBSs and ABSs may take a form similar to
pass-through MBSs issued by agencies or instrumentalities of the United States,
described below, or may be structured in a manner similar to other types of
ABSs or MBSs, also described below. Private issuers include originators of or
investors in mortgage loans and receivables such as savings and loan
associations, savings banks, commercial banks, investment banks, finance
companies and special purpose finance subsidiaries of any of the above. With
respect to the Adjustable Rate Securities comprising at least 65% of the Fund's
total assets, securities issued by private issuers must be rated at least AA by
Standard & Poor's or Aa by Moody's or, if unrated, be of comparable quality as
determined by the Manager. The rating may be based, in part, on certain types
of credit enhancements issued in respect of those securities. Such credit
enhancements may include insurance policies, bank letters of credit, guarantees
by third parties or protections afforded by the structure of a particular
transaction (e.g., the use of reserve funds, over-collateralization or the
issuance of subordinated securities as protection for more senior securities
being purchased by the Fund). In purchasing securities for the Fund, the
Manager will take into account not only the creditworthiness of the issuer of
the securities, but also the creditworthiness of the provider of any external
credit enhancement of the securities.
Up to 35% of the Fund's total assets may be invested in securities rated in
rating categories below AA by Standard & Poor's or Aa by Moody's. Any such
rated securities will be rated investment grade by Standard & Poor's or
Moody's. Securities rated investment grade are obligations rated at the time of
purchase within the four highest quality ratings as determined by either
Standard & Poor's (currently AAA, AA, A and BBB) or Moody's (currently Aaa, Aa,
A and Baa). The Fund may also invest in unrated securities which possess
characteristics which are, in the opinion of the Manager, similar to those of
securities rated at least BBB or Baa. Securities rated BBB by Standard & Poor's
or Baa by Moody's and comparable unrated securities may be subject to greater
market price fluctuations and are considered more speculative than more highly
rated securities with respect to the capacity to pay interest and repay
principal in accordance with the terms of the security. In purchasing such
securities, the Fund will rely on the Manager's judgment, analysis and
experience in evaluating the creditworthiness of the issuer of such securities.
The Manager will take into consideration, among other things, the underwriting
standards of the originator of the underlying loans, applicable loan-to-value
ratios, regional pressures affecting the housing market, the type of property
underlying the loans, and the general sensitivity of the securities to economic
conditions and trends. Similarly, if an issue of securities rated at the time
of purchase in one of the two highest rating categories by Standard & Poor's or
Moody's ceases to be rated, or its rating is reduced, the Manager will consider
such factors as price, credit risk, market conditions and interest rates to
determine whether to continue to hold the securities in the Fund's portfolio.
No more than 10% of the Fund's total assets will be invested in securities
rated in
11
<PAGE>
the lowest category of investment grade or in comparable unrated securities. A
description of applicable ratings is contained in the Appendix to the Statement
of Additional Information.
GNMA, FNMA and FHLMC are agencies or instrumentalities of the United States,
and MBSs issued or guaranteed by them are generally considered to be of higher
quality than privately issued securities rated AA or Aa. GNMA MBSs are
guaranteed by GNMA and consist of pass-through interests in pools of mortgage
loans guaranteed or insured by agencies or instrumentalities of the United
States. FNMA and FHLMC MBSs are issued by FNMA and FHLMC, respectively, and
most often represent pass-through interests in pools of similarly insured or
guaranteed mortgage loans or pools of conventional mortgage loans or
participations therein. GNMA, FNMA and FHLMC "pass-through" MBSs are so-named
because they represent undivided interests in the underlying mortgage pools and
a pro rata share of both regular interest and principal payments (net of fees
assessed by GNMA, FNMA and FHLMC and any applicable loan servicing fees), as
well as unscheduled early prepayments on the underlying mortgage pool, are
passed through monthly to the holder of the MBSs (i.e., the Fund). As described
more fully below, FNMA and FHLMC also may issue types of mortgage-backed
securities other than pass-through MBSs.
Timely payment of principal and interest on GNMA MBSs is guaranteed by GNMA,
a wholly owned corporate instrumentality of the United States within the
Department of Housing and Urban Development, which guarantee is backed by the
full faith and credit of the United States. FNMA, a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, guarantees timely payment of principal and
interest on FNMA MBSs. FHLMC, a corporate instrumentality of the United States,
guarantees (i) the timely payment of interest on all FHLMC MBSs, (ii) the
ultimate collection of principal with respect to some FHLMC MBSs, and (iii) the
timely payment of principal with respect to other FHLMC MBSs. Neither the
obligations of FNMA nor those of FHLMC are backed by the full faith and credit
of the United States. Nevertheless, because of the relationship of each such
entity to the United States, it is widely believed that MBSs issued by such
entities are high quality securities with minimal credit risk.
The SBA is an independent agency of the United States, and ABSs guaranteed by
the SBA carry a guarantee of both principal and interest. The guarantee given
by the SBA is backed by the full faith and credit of the United States.
Set forth below is a description of the mortgage and asset related securities
in which the Fund may invest. The Fund may invest in other similar types of
mortgage and asset related securities, including those which may be developed
in the future, without shareholder approval.
DESCRIPTION OF ADJUSTABLE RATE SECURITIES
As stated above, the Fund will invest primarily in Adjustable Rate
Securities. The interest paid on Adjustable Rate Securities and, therefore, the
current income earned by the Fund by investing in such securities, will be a
function primarily of the indexes upon which adjustments are based and the
applicable spread relating to such securities. Examples of indexes which may be
used are (i) one, three and five year U.S. Treasury securities adjusted to a
constant maturity index, (ii) U.S. Treasury bills of three or six months, (iii)
the daily Bank Prime Loan Rate made available by the Federal Reserve Board,
(iv) the cost of funds of member institutions for the Federal Home Loan Bank of
San Francisco ("COFI"), and (v) the offered quotations to leading banks in the
London interbank market for Eurodollar deposits of a specified duration
("LIBOR").
12
<PAGE>
The interest rates paid on Adjustable Rate Securities are generally
readjusted periodically to an increment over the chosen interest rate index.
Such readjustments occur at intervals ranging from one to thirty-six months.
The degree of volatility in the market value of the Fund's portfolio and of the
net asset value of Fund shares will be a function primarily of the length of
the adjustment period and the degree of volatility in the applicable indexes.
It will also be a function of the maximum increase or decrease of the interest
rate adjustment on any one adjustment date, in any one year and over the life
of the securities. These maximum increases and decreases are typically referred
to as "caps" and "floors," respectively. The Fund does not seek to maintain an
overall average cap or floor, although the Manager will consider caps or floors
in selecting Adjustable Rate Securities for the Fund.
While the Fund does not attempt to maintain a constant net asset value per
share, during periods in which short-term interest rates move within the caps
and floors of the Fund's portfolio the fluctuation in the market value of the
Adjustable Rate Securities portfolio is expected to be relatively limited,
since the interest
rate on the portfolio will adjust to market rates within a short period of
time. In periods of substantial short-term volatility in short-term interest
rates, the value of the portfolio may fluctuate more substantially since the
caps and floors of the Adjustable Rate Securities in the portfolio may not
permit the interest rate to adjust to the full extent of the movements in
short-term rates during any one adjustment period. In the event of dramatic
increases in interest rates, the lifetime caps on the Adjustable Rate
Securities may prevent such securities from adjusting to prevailing rates over
the term of the loan. In this circumstance, the market value of the Adjustable
Rate Securities may be substantially reduced with a corresponding decline in
the Fund's net asset value.
Mortgaged-Backed Securities. The Fund will invest in pass-through mortgage-
backed securities which are collateralized by a pool of adjustable rate
mortgages ("ARMs") on single-family or multi-family residences. ARMs typically
provide for a fixed initial interest rate for either the first three, six, 12,
13 or 36 scheduled monthly payments. Thereafter, the payment of interest on the
remaining principal amount of the ARM is at a rate which is adjusted on a
periodic basis at a spread over the average market rate of interest over the
adjustment period, a specified short-term debt instrument or cost of funds
rate. Thus, interest payments on ARMs (and, consequently, on adjustable rate
MBSs) will increase or decrease with fluctuations in the specified index,
subject to any applicable caps and floors. Principal payments on the loan are
generally amortized over the stated term of the ARM and there is no penalty for
prepayment of principal.
In addition, the Fund will invest in collateralized mortgage obligations
("CMOs") paying adjustable rates of interest. CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by pass-through MBSs guaranteed by GNMA, or
issued by FNMA or FHLMC. They may, however, also be collateralized by whole
loans or by pass-through MBSs of private issuers. The collateral for CMOs is
hereinafter referred to as "CMO Collateral." The term CMO as used herein also
includes multi-class pass-through securities, which are equity interests in a
trust composed of CMO Collateral. CMOs may be issued by agencies or
instrumentalities of the United States, including FNMA and FHLMC, or by the
types of private issuers described above. The issuer of a series of CMOs may
elect to be treated as a Real Estate Mortgage Investment Conduit ("REMIC").
The funds for payment on the CMOs are derived from payments of principal and
interest on the underlying CMO Collateral, and, to the extent provided in a
particular transaction, any reinvestment income therefrom. In the case of
adjustable rate CMOs, payments are made generally in the manner described above
with respect to Adjustable Rate Securities generally. The interest on some
CMOs, however, may vary inversely with the rate of a specified index. Thus, for
example, the return to the Fund on a CMO that varies
13
<PAGE>
inversely with LIBOR will increase as the LIBOR rate decreases, and vice versa.
Since the interest paid on inverse floating rate CMOs is generally set at some
multiple of an index such as LIBOR, an increase in the index rate will
typically result in an even greater decrease in the interest paid on the CMOs.
See "Indexed and Inverse Securities" below.
Most CMOs are structured with multiple classes. Each class is issued at a
fixed or, as in the case of adjustable rate CMOs, a floating coupon rate, and
has a specified maturity or final distribution date. The interest rate paid on
CMOs with a floating coupon rate may adjust regardless of whether the mortgage
loans or underlying CMO Collateral pay a fixed or a floating rate. Principal
prepayments on the CMO Collateral may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semiannual basis. The principal of and interest on the CMO Collateral may be
allocated among the several classes of a CMO in many ways. In one structure,
payments of principal, including any principal prepayments, on the CMO
Collateral are applied to the classes of the CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full. In
other structures, certain CMO classes may pay concurrently or one or more
classes may have a priority with respect to payments on the underlying CMO
Collateral up to a specified amount.
Asset-Backed Securities. The Fund will invest in various types of Adjustable
Rate Securities in the form of ABSs. The securitization techniques used in the
context of ABSs are similar to those used for MBSs. Thus, through the use of
trusts and special purpose corporations, various types of receivables,
primarily home equity loans and automobile and credit card receivables, are
securitized in pass-through structures similar to the mortgage pass-through
structures described above or in a pay-through structure similar to the CMO
structure. ABSs are typically bought or sold from or to the same entities that
act as primary dealers in U.S. Government securities.
The Fund's investments in Adjustable Rate Securities consisting of ABSs may
include pass-through securities collateralized by SBA guaranteed loans whose
interest rates adjust in much the same fashion as described above with respect
to ARMs. Such loans generally include commercial loans such as working capital
loans and equipment loans. The underlying loans are originally made by private
lenders and are guaranteed in part by the SBA. It is the guaranteed portion of
such loans that constitute the underlying financial assets in these ABSs.
In general, the collateral supporting ABSs is of shorter maturity than
mortgage loans and may be less likely to experience substantial prepayments. As
with MBSs, ABSs are often backed by a pool of assets representing the
obligations of a number of different parties. Currently, pass-through
securities collateralized by SBA guaranteed loans and home equity loans are the
most prevelant ABSs which are Adjustable Rate Securities. The market for ABSs
is currently smaller and less developed than that for MBSs, and consequently,
it is anticipated that the majority of Adjustable Rate Securities held by the
Fund will be MBSs.
ABSs are relatively new and untested instruments and may be subject to
greater risk of default during periods of economic downturn than other
securities, including MBSs, satisfying the quality standards of the Fund,
resulting in possible losses to the Fund. Also, the secondary market for ABSs
may not be as liquid as the market for other securities, including MBSs, which
may result in the Fund experiencing difficulty in valuing such securities.
Investments in ABSs that cannot be disposed of promptly within seven days and
in the usual course of business without taking a reduced price will be
considered illiquid and limited to an
14
<PAGE>
amount which, together with other illiquid investments, does not exceed 10% of
the value of the Fund's net assets.
Indexed and Inverse Securities. As described above, the Fund may invest in
Adjustable Rate Securities whose potential investment return is based on the
change in particular measurements of value or rate (an "index"). As an
illustration, the Fund may invest in an Adjustable Rate Security that pays
interest and returns principal based on the change in an index of interest
rates such as LIBOR. Interest and principal payable on a security may also be
based on relative changes among particular indices. In addition, the Fund may
invest in Adjustable Rate Securities whose potential investment return is
inversely based on the change in particular indices. For example, the Fund may
invest in securities that pay a higher rate of interest and principal when a
particular index decreases and pay a lower rate of interest and principal when
the value of the index increases. To the extent that the Fund invests in such
types of securities, it will be subject to the risks associated with changes in
the particular indices, which may include reduced or eliminated interest
payments and losses of invested principal.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Fund believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow the Fund to seek
potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.
DESCRIPTION OF OTHER SECURITIES
The Fund may invest up to 35% of its total assets in mortgage or asset
related securities other than Adjustable Rate Securities, either alone or in
combination with money market securities. Other securities in which the Fund
may invest consist principally of fixed rate MBSs and ABSs, stripped
securities, and fixed rate debt securities of FNMA which are not MBSs.
Fixed rate MBSs in which the Fund may invest consist primarily of fixed rate
pass-through securities and fixed rate CMOs. As in the case of Adjustable Rate
Securities, these fixed rate securities may be issued either by agencies or
instrumentalities of the United States or by the types of private issuers
described above. Similarly, the basic structures with respect to fixed rate
MBSs are the same as those described above with respect to Adjustable Rate
Securities. The principal difference between fixed rate securities and
Adjustable Rate Securities is that the interest rate on the former type of
securities is set at a predetermined amount and does not vary according to
changes in any index. As in the case of Adjustable Rate Securities, fixed rate
ABSs reflect basically the same structures as fixed rate MBSs.
Stripped mortgage-backed securities ("SMBSs") are derivative multiclass
mortgage-backed securities. Such securities are typically issued by the same
types of issuers as are MBSs generally. The structure of SMBSs, however, is
different. SMBS arrangements commonly involve two classes of securities that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common variety of SMBS is where one class (the
principal-only or PO class) receives some of the interest and most of the
principal from the underlying assets, while the other class (the interest-only
or IO class) receives most of the interest and the remainder of the principal.
In the most extreme case, the IO class receives all of the interest, while the
PO class receives all of the principal. While the Fund may purchase securities
of a PO
15
<PAGE>
class, it is more likely to purchase the securities of an IO class. The yield
to maturity of an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying assets, and a rate
of principal payments in excess of that considered in pricing the securities
will have a material adverse effect on an IO security's yield to maturity. If
the underlying mortgage assets experience greater than anticipated payments of
principal, the Fund may fail to recoup fully its initial investment in IOs. In
addition, there are certain types of IOs which represent the interest portion
of a particular class as opposed to the interest portion of the entire pool.
The sensitivity of this type of IO to interest rate fluctuations may be
increased because of the characteristics of the principal portion to which they
relate. As a result of the above factors, the Fund generally will purchase IOs
only as a component of so-called "synthetic" securities. This means that
purchases of IOs will be matched with certain purchases of other securities
such as inverse floating rate CMOs or fixed rate securities; as interest rates
fall, presenting a greater risk of unanticipated prepayments of principal, the
negative effect on the Fund because of its holdings of IOs should be diminished
somewhat because of the increased yield on the inverse floating rate CMOs or
the increased appreciation on the fixed rate securities. IOs and POs are
considered by the staff of the Securities and Exchange Commission to be
illiquid securities and, consequently, the Fund will not invest in IOs or POs
in an amount which, taken together with the Fund's other investments in
illiquid securities, exceeds 10% of the Fund's net assets.
The Fund may also purchase debentures issued by FNMA. FNMA debentures are
unsecured general obligations of FNMA. FNMA's obligations have traditionally
been treated as "U.S. Agency" debt in the marketplace and are eligible for
investment by many supervised financial institutions without regard to legal
limits generally imposed on investment securities. However, the debentures
(together with interest thereon) are not guaranteed by the United States and do
not constitute a debt or obligation of the United States or of any agency or
instrumentality thereof other than FNMA. The debentures generally are issued in
book-entry form and are offered through a nationwide group of securities
dealers and dealer banks. FNMA does not generally sell its debentures directly
to investors. The debentures typically bear interest at fixed rates per annum,
payable semiannually in arrears and computed on the basis of a 360-day year of
twelve 30-day months.
DESCRIPTION OF MONEY MARKET SECURITIES
The money market securities in which the Fund may invest consist of United
States Government securities, United States Government agency or
instrumentality securities, domestic bank or savings institution certificates
of deposit and bankers' acceptances, short-term debt securities such as
commercial paper and other corporate debt, and repurchase agreements. These
investments must have a maturity not in excess of one year from the date of
purchase.
The Fund has established the following standards with respect to money market
securities in which the Fund invests. Commercial paper investments at the time
of purchase must be rated "A-1" by Standard & Poor's or "Prime-1" by Moody's
or, if not rated, be issued by companies having such a rating with respect to
comparable short-term debt securities. Investments in corporate bonds and
debentures (which must have maturities at the date of purchase of one year or
less) will be limited to securities of issuers which, at the time of purchase,
have a rating with respect to comparable short-term debt of A-1 by Standard &
Poor's or Prime-1 by Moody's. The Fund may not invest in any security issued by
a commercial bank or a savings institution unless the bank or institution is
organized and operating in the United States, has total assets of at least one
billion dollars and is a member of the Federal Deposit Insurance Corporation.
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SPECIAL CONSIDERATIONS AND RISK FACTORS
The types of securities in which the Fund invests have certain unique
attributes that warrant special consideration or that present risks that may
not exist in other types of mutual fund investments. Some of these
considerations and risks pertain to the characteristics of MBSs or ABSs
generally, while others are peculiar to Adjustable Rate Securities. One of the
principal risks regarding MBSs and, to a lesser extent, ABSs is the risk of
prepayments. From time to time, prepayment rates on MBSs have been high. The
rate of principal prepayments on MBSs will depend on the rates of principal
payments on the related mortgages. In general, when prevailing mortgage
interest rates decline significantly below the interest rates on the mortgages,
the prepayment rate on the mortgages is likely to increase, although a number
of other factors may also influence the prepayment rate, such as the
acceleration of mortgage payments due to transfers of mortgaged properties,
liquidations due to default and refinancings of existing loans. No assurance
can be given as to the rate and timing of principal prepayments on mortgage
loans underlying MBSs. High prepayment rates may have an adverse effect on the
value of MBS securities and in particular SMBSs, such as IOs.
Payments of principal of and interest on MBSs and ABSs are made more
frequently than are payments on conventional debt securities. In addition,
holders of MBSs and of certain ABSs (such as ABSs backed by home equity loans)
may receive unscheduled payments of principal at any time representing
prepayments on the underlying mortgage loans or financial assets. Such
prepayments may usually be made by the related obligor without penalty.
Prepayment rates are affected by changes in prevailing interest rates and
numerous other economic, geographic, social and other factors. (ABSs backed by
other than home equity loans do not generally prepay in response to changes in
interest rates, but may be subject to prepayments in response to other
factors.) Changes in the rate of prepayments will generally affect the yield to
maturity of the security. Moreover, when the holder of the security attempts to
reinvest prepayments or even the scheduled payments of principal and interest,
it may receive a rate of interest which is higher or lower than the rate on the
MBS or ABS originally held. Another consideration is that to the extent that
MBSs or ABSs are purchased at a premium, mortgage foreclosures and principal
prepayments may result in loss to the extent of premium paid. On the other
hand, where such securities are bought at a discount, both scheduled payments
of principal and unscheduled prepayments will increase current and total
returns and will accelerate the recognition of income which, when distributed
to shareholders, will be taxable as ordinary income. The Manager will consider
remaining maturities or estimated average lives of MBSs and ABSs in selecting
them for the Fund. Finally, ABSs may present certain risks not present in MBSs.
While ABSs are a growing sector of the financial markets, they are relatively
new instruments and may be subject to a greater risk of default during periods
of economic downturn than are MBSs. Additionally, assets underlying ABSs such
as credit-card receivables are generally unsecured, and debtors are entitled to
the protection of various state and Federal consumer protection laws. Some of
those laws give a right of set-off, which may reduce the balance owed. Also,
the market for ABSs may not be as liquid as that for MBSs.
Adjustable Rate Securities have several characteristics that should be
considered before investing in the Fund. As indicated above, the interest rate
reset features of Adjustable Rate Securities held by the Fund will reduce the
effect on the net asset value of Fund shares caused by changes in market
interest rates. See "Investment Objective and Policies--Description of
Adjustable Rate Securities." However, the market value of Adjustable Rate
Securities and, therefore, the Fund's net asset value, may vary to the extent
that the current interest rate on such securities differs from market interest
rates during periods between the interest reset dates. These variations in
value occur inversely to changes in the market interest rates. Thus, if market
interest rates rise above the current rates on the securities, the value of the
securities will decrease; conversely, if market interest rates fall below the
current rate on the securities, the value of the securities will rise. If
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investors in the Fund sold their shares during periods of rising rates before
an adjustment occurred, such investors may suffer some loss. The longer the
adjustment intervals on Adjustable Rate Securities held by the Fund, the
greater the potential for fluctuations in the Fund's net asset value.
Investors in the Fund will receive increased income as a result of upward
adjustments of the interest rates on Adjustable Rate Securities held by the
Fund in response to market interest rates. However, the Fund and its
shareholders will not benefit from increases in market interest rates once such
rates rise to the point where they cause the rates on such Adjustable Rate
Securities to reach their maximum adjustment date, annual or lifetime caps. In
addition, because of their interest rate adjustment feature, Adjustable Rate
Securities are not an effective means of "locking-in" attractive interest rates
for periods in excess of the adjustment period. Also a consideration, in the
case of privately issued MBSs where the underlying mortgage assets carry no
agency or instrumentality guarantee, is that the mortgagors on the loans
underlying Adjustable Rate Securities are often qualified for such loans on the
basis of the original payment amounts. The mortgagors' income may not be
sufficient to enable them to continue making their loan payments as such
payments increase, resulting in a greater likelihood of default. The Fund seeks
to guard against this risk, however, through the Fund's quality standards,
discussed above.
Conversely, any benefits to the Fund and its shareholders from an increase in
the Fund's net asset value caused by falling market interest rates is reduced
by the potential for increased prepayments and a decline in the interest rates
paid on Adjustable Rate Securities held by the Fund. When market rates decline
significantly, the prepayment rate on Adjustable Rate Securities is likely to
increase as borrowers refinance with fixed rate mortgage loans, thereby
decreasing the capital appreciation potential of Adjustable Rate Securities. In
this regard, the Fund is not designed for investors seeking capital
appreciation.
As described above under "Description of Adjustable Rate Securities--Indexed
and Inverse Securities," the Fund may invest in Adjustable Rate Securities
whose potential investment return is inversely based on the change in
particular indices. Such securities may have the effect of providing a degree
of investment leverage because they may increase or decrease in value at a rate
that is a multiple of the changes in applicable indices. As a result, the
market values of such securities will generally be more volatile than the
market values of fixed-rate securities.
Under normal circumstances, it is anticipated that the Fund's annual
portfolio turnover rate will be less than 200%. High portfolio turnover
involves correspondingly greater transaction costs in the form of dealer
spreads and brokerage commissions, which are borne directly by the Fund.
PORTFOLIO STRATEGIES INVOLVING INTEREST RATE TRANSACTIONS, OPTIONS AND FUTURES
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in interest rates. The Fund has authority to engage
in interest rate transactions in order to hedge against interest rate
movements, purchase call and put options on securities, write (i.e., sell)
covered call and put options on its portfolio securities, and engage in hedging
transactions in financial futures, and related options on such futures. Each of
these portfolio strategies is described below.
Although certain risks are involved in interest rate, options and futures
transactions, the Manager believes that, because the Fund will (i) write only
covered options on portfolio securities, and (ii) engage in other transactions
only for hedging purposes, these portfolio strategies will not subject the Fund
to the risks
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frequently associated with the speculative use of such 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 interest rates occur. Reference is made to the Statement of
Additional Information for further information concerning these strategies.
Interest Rate Hedging Transactions. In order to hedge the value of the Fund's
portfolio against interest rate fluctuations, the Fund may enter into various
hedging transactions, such as interest rate swaps and the purchase or sale of
interest rate caps and floors. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in
the price of securities the Fund anticipates purchasing at a later date. The
Fund intends to use these transactions as a hedge and not as a speculative
investment.
The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate floor.
In an interest rate swap the Fund exchanges with another party their
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The net amount of the excess,
if any, of the Fund's obligations over its entitlement with respect to each
interest rate swap will be accrued on a daily basis and an amount of cash, cash
equivalents or high grade liquid debt securities having an aggregate net asset
value at least equal to the accrued excess will be maintained in a segregated
account by the Fund's custodian.
The Fund will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other
party thereto is rated in one of the highest two rating categories of at least
one nationally recognized statistical rating organization at the time of
entering into such transaction or whose creditworthiness is believed by the
Manager to be equivalent to such rating. If there is a default by the other
party to such a transaction, the Fund will have contractual remedies pursuant
to the agreements related to the transaction. The Manager believes that the
swap market is relatively liquid. Caps and floors, however, are less liquid
than swaps. The Fund will not enter into a cap or floor transaction in an
amount which, together with other illiquid investments of the Fund, exceeds 10%
of the Fund's net assets.
Call Options on Portfolio Securities. The Fund may purchase call options on
any of the types of securities in which it may invest. A purchased call option
gives the Fund the right to buy, and obligates the seller to sell, the
underlying security at the exercise price at any time during the option period.
The Fund also is authorized to write (i.e., sell) covered call options on the
securities in which it may invest and to enter into closing purchase
transactions with respect to certain of such options. A covered call option is
an option where the Fund, in return for a premium, gives another party a right
to buy specified securities owned by the Fund at a specified future date and
price set at the time of the contract. The principal reason for writing call
options is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. By writing covered call
options, the Fund gives up the opportunity, while the option is in effect, to
profit from any price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the underlying security
will be limited while the option is in effect unless
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the Fund effects a closing purchase transaction. A closing purchase
transaction cancels out the Fund's position as the writer of an option by
means of an offsetting purchase of an identical option prior to the expiration
of the option it has written. Covered call options also serve as a partial
hedge against the price of the underlying security declining.
Put Options on Portfolio Securities. The Fund is authorized to purchase put
options to hedge against a decline in the value of its securities. By buying a
put option the Fund has a right to sell the underlying security at the
exercise price, thus limiting the Fund's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset
by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option
it has purchased. The Fund also has authority to write (i.e., sell) put
options on the types of securities which may be held by the Fund, provided
that such put options are covered, meaning that such options are secured by
segregated, high quality liquid debt securities. The Fund will receive a
premium for writing a put option, which increases the Fund's return. In
selling puts, there is a risk that the Fund may be required to buy the
underlying security at a disadvantageous price.
Financial Futures and Options Thereon. The Fund is authorized to engage in
transactions in financial futures contracts ("futures contracts"), and related
options on such futures contracts as a hedge against adverse changes in the
market value of its portfolio securities and interest rates. A futures
contract is an agreement between two parties which obligates the purchaser of
the futures contract to buy and the seller of a futures contract to sell a
security for a set price on a future date or, in the case of an index futures
contract, to make and accept a cash settlement based upon the difference in
value of the index between the time the contract was entered into and the time
of its settlement. Transactions by the Fund in futures contracts and financial
futures are subject to limitations as described below under "Restrictions on
the Use of Futures Transactions."
The Fund may sell financial futures contracts in anticipation of an increase
in the general level of interest rates. Generally, as interest rates rise, the
market values of securities which may be held by the Fund will fall, thus
reducing the net asset value of the Fund. However, as interest rates rise, the
value of the Fund's short position in the futures contract will also tend to
increase, thus offsetting all or a portion of the depreciation in the market
value of the Fund's investments which are being hedged. While the Fund will
incur commission expenses in selling and closing out futures positions, these
commissions are generally less than the transaction expenses which the Fund
would have incurred had the Fund sold portfolio securities in order to reduce
its exposure to increases in interest rates. The Fund also may purchase
financial futures contracts in anticipation of a decline in interest rates
when it is not fully invested in a particular market in which it intends to
make investments to gain market exposure that may in part or entirely offset
an increase in the cost of securities it intends to purchase. It is
anticipated that, in a substantial majority of these transactions, the Fund
will purchase securities upon termination of the futures contract.
The Fund also has authority to purchase and write call and put options on
futures contracts in connection with its hedging activities. Generally, these
strategies are utilized under the same market and market sector conditions
(i.e., conditions relating to specific types of investments) in which the Fund
enters into futures transactions. The Fund may purchase put options or write
call options on futures contracts rather than selling the underlying futures
contract in anticipation of a decrease in the market value of a security or
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an increase in interest rates. Similarly, the Fund may purchase call options,
or write put options on futures contracts, as a substitute for the purchase of
such futures to hedge against the increased cost resulting from an increase in
the market value or a decline in interest rates of securities which the Fund
intends to purchase.
The Fund may engage in options and futures transactions on exchanges and
options in the over-the-counter markets ("OTC options"). In general, exchange-
traded contracts are third-party contracts (i.e., performance of the parties'
obligations is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller.
See "Restrictions on OTC Options" below for information as to restrictions on
the use of OTC options.
Restrictions on the Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission ("CFTC") applicable to the Fund provide that the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool," as defined under such regulations if the Fund
adheres to certain restrictions. In particular, the Fund may purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts and options.
When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of variation margin held in the account of its
broker, equals the market value of the futures contract, thereby ensuring that
the use of such futures is unleveraged.
An order has been obtained from the Securities and Exchange Commission (the
"Commission") which exempts the Fund from certain provisions of the Investment
Company Act of 1940 in connection with transactions involving futures contracts
and options thereon.
Restrictions on OTC Options. The Fund will engage in OTC options only with
member banks of the Federal Reserve System and primary dealers in U.S.
Government securities or with affiliates of such banks or dealers which have
capital of at least $50 million or whose obligations are guaranteed by an
entity having capital of at least $50 million.
The 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, except to the extent set forth in the Statement of Additional
Information, the Fund has adopted an investment policy pursuant to which it
will not purchase or sell OTC options (including OTC options on futures
contracts) if, as a result of such transaction, the sum of the market value of
OTC options currently outstanding which are held by the Fund, the market value
of the underlying securities covered by OTC options currently outstanding which
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceed 10% of the net assets of the Fund, taken at market
value, together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable.
Risk Factors in Interest Rate Transactions and Options and Futures
Transactions. The use of interest rate transactions is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. Interest rate
transactions involve the risk of
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an imperfect correlation between the index used in the hedging transaction and
that pertaining to the securities which are the subject of such transaction. If
the Manager is incorrect in its forecasts of market values, interest rates and
other applicable factors, the investment performance of the Fund would diminish
compared with what it would have been if these investment techniques were not
used. In addition, interest rate transactions that may be entered into by the
Fund do not involve the delivery of securities or other underlying assets or
principal. Accordingly, the risk of loss with respect to interest rate swaps is
limited to the net amount of interest payments that the Fund is contractually
obligated to make. If the MBS or other security underlying an interest rate
swap is prepaid and the Fund continues to be obligated to make payments to the
other party to the swap, the Fund would have to make such payments from another
source. If the other party to an interest rate swap defaults, the Fund's risk
of loss consists of the net amount of interest payments that the Fund
contractually is entitled to receive. In the case of a purchase by the Fund of
an interest rate cap or floor, the amount of loss is limited to the fee paid.
Utilization of options and futures transactions to hedge the portfolio
involves the risk of imperfect correlation in movements in the price of options
and futures and movements in the prices of the securities which are the subject
of the hedge. If the price of the options or futures moves more or less than
the price of the subject of the hedge, the Fund will experience a gain or loss
which will not be completely offset by movements in the price of the subject of
the hedge. This risk particularly applies to the Fund's use of futures and
options thereon since it will generally use such instruments as a so-called
"cross-hedge," which means that the security that is the subject of the futures
contract is different from the security being hedged by the contract. The Fund
will not purchase puts, calls, straddles, spreads or any combination thereof if
by reason thereof the premiums paid for the aggregate investments in such
classes of securities exceed 5% of the Fund's total assets at the time of
purchase.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures. However, there can be no
assurance that a liquid secondary market will exist at any specific time. Thus,
it may not be possible to close an options or futures position. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability to effectively hedge its portfolio. There is also the risk of
loss by the Fund of margin deposits or collateral in the event of bankruptcy of
a broker with whom the Fund has an open position in an option, a futures
contract or an option related to a futures contract.
OTHER INVESTMENT POLICIES AND PRACTICES
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements and purchase and sale contracts.
Repurchase agreements and purchase and sale contracts may be entered into only
with a member bank of the Federal Reserve System or primary dealer in U.S.
Government securities 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 results in
a fixed rate of return insulated from market fluctuations during such period.
The Fund may not invest in repurchase agreements maturing in more than seven
days if, as a result, more than 10% of the Fund's net assets would be invested
in illiquid securities, including such repurchase agreements. In the event of
default by the seller under a repurchase agreement, the Fund may suffer time
delays and incur costs or possible losses in connection with the disposal of
the collateral.
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Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the United States
Government which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. During the
period of this loan, the Fund receives the income on the loaned securities and
either receives the income on the collateral or other compensation (i.e.,
negotiated loan premium or fee) for entering into the loan and thereby
increases its yield. In the event that the borrower defaults on its obligation
to return borrowed securities, because of insolvency or otherwise, the Fund
could experience delays and costs in gaining access to the collateral and
could suffer a loss to the extent that the value of the collateral falls below
the market value of the borrowed securities.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements with the same parties with whom it may enter into repurchase
agreements. Under a reverse repurchase agreement, the Fund sells securities
and agrees to repurchase them at a mutually agreed date and price. At the time
the Fund enters into a reverse repurchase agreement, it will establish and
maintain a segregated account with its approved custodian containing cash,
cash equivalents or liquid high grade debt securities having a value not less
than the repurchase price (including accrued interest). Reverse repurchase
agreements involve the risk that the market value of the securities retained
in lieu of sale by the Fund may decline below the price of the securities the
Fund has sold but is obligated to repurchase. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, such buyer or its trustee or receiver may receive an
extension of time to determine whether to enforce the Fund's obligations to
repurchase the securities and the Fund's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such decision.
When-Issued Securities, Delayed Delivery Transactions and Dollar Rolls. The
Fund may purchase or sell securities on a delayed delivery basis or a when-
issued basis at fixed purchase terms. These transactions arise when securities
are purchased or sold by the Fund with payment and delivery taking place in
the future. The purchase will be recorded on the date the Fund enters into the
commitment and the value of the obligation will thereafter be reflected in the
calculation of the Fund's net asset value. The value of the obligation on the
delivery date may be more or less than its purchase price. A separate account
of the Fund will be established with its custodian consisting of cash, cash
equivalents or high grade liquid debt securities having a market value at all
times at least equal to the amount of the forward commitment.
The Fund also may enter into "dollar rolls." A dollar roll is where the Fund
sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Fund forgoes principal and interest paid on the mortgage-backed
securities. The Fund is compensated by the difference between the current
sales price and the lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of dollar
roll for which there is a segregated account with liquid high grade debt
securities. Money market securities held by the Fund in such an account will
not be subject to the general limitation that, other than for temporary or
defensive purposes, the Fund will invest no more than 35% of its total assets
in money market securities. Dollar rolls in which the Fund may invest will be
limited to covered rolls.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of 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
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a majority of the Fund's outstanding voting securities, as defined in the 1940
Act. Among the more significant restrictions, the Fund may not:
--with respect to at least 75% of its total assets, invest in the
securities of any one issuer if, immediately after and as a result of such
investment, the value of the holdings of the Fund in the securities of such
issuer exceeds 5% of the Fund's total assets, taken at market value, except
that such restriction shall not apply to securities issued or guaranteed by
the United States Government or any of its agencies or instrumentalities;
--borrow amounts in excess of 33 1/3% of its total assets taken at market
value (including the amount borrowed), and then only from banks as a
temporary measure for the purpose of meeting redemption requests,
distribution requirements under the Internal Revenue Code of 1986, as
amended, settlement of securities transactions, or for extraordinary or
emergency purposes; provided, however, that for purposes of this
restriction, transactions involving "cover" or for which segregated
accounts have been established as described under "Portfolio Strategies
Involving Interest Rate Transactions, Options and Futures" and "Other
Investment Policies and Practices" shall not be considered a borrowing; or
--invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers in any particular
industry; provided that, for these purposes, neither investments in
mortgage-backed securities nor investments in asset-backed securities are
deemed to be investments in a single industry.
Other fundamental policies include policies which limit investments in
securities which cannot be readily resold because of legal or contractual
restrictions or which are not otherwise readily marketable, if, regarding all
such securities, more than 10% of the Fund's net assets, taken at market value,
would be invested in such securities. While the Fund will not purchase illiquid
securities in an amount exceeding 10% of its net assets, the Fund may purchase,
without regard to that limitation, securities that are not registered under the
Securities Act of 1933 (the "Securities Act"), but that can be offered and sold
to "qualified institutional buyers" under Rule 144A under the Securities Act,
provided that the Fund's Board of Directors continuously determines, based on
the trading markets for the specific Rule 144A security, that it is liquid. The
Board of Directors may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of restricted securities. The
Board of Directors, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
The Board of Directors carefully monitors the Fund's investments in
securities purchased pursuant to Rule 144A, focusing on such factors, among
others, as valuation, liquidity and availability of information. The Fund's
investments in securities purchased pursuant to Rule 144A could have the effect
of increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
The Board of Directors of the Fund, at a meeting held on August 3, 1994,
approved certain changes to the fundamental and non-fundamental investment
restrictions of the Fund. These changes were proposed in connection with the
creation of a set of standard fundamental and non-fundamental investment
restrictions that would be adopted, subject to shareholder approval, by all of
the non-money market mutual funds advised by MLAM or FAM. The proposed uniform
investment restrictions are designed to provide each of these funds, including
the Fund, with as much investment flexibility as possible under the Investment
Company Act and applicable state securities regulations, help promote
operational efficiencies and facilitate monitoring
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of compliance. The investment objectives and policies of the Fund will be
unaffected by the adoption of the proposed investment restrictions.
The full text of the proposed investment restrictions is set forth under
"Investment Objective and Policies--Proposed Uniform Investment Restrictions"
in the Statement of Additional Information. Shareholders of the Fund are
currently considering whether to approve the proposed revised investment
restrictions. If such shareholder approval is obtained, the Fund's current
investment restrictions will be replaced by the proposed restrictions, and the
Fund's Prospectus and Statement of Additional Information will be supplemented
to reflect such change.
MANAGEMENT OF THE FUND
DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of whom
are not "interested persons" of the Fund as defined in the 1940 Act. The
Directors are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors of investment
companies by the 1940 Act.
The Directors are:
Arthur Zeikel*--President and Chief Investment Officer of Merrill Lynch
Asset Management, L.P. ("MLAM" or the "Manager"); President and Chief
Investment Officer of Fund Asset Management, L.P. ("FAM"); President and
Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice
President of Merrill Lynch & Co., Inc. ("ML&Co."); Executive Vice President
of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch");
and Director of Merrill Lynch Funds Distributor, Inc. ("MLFD").
Joe Grills--Member of the Committee of Investment of Employee Benefit
Assets of the Financial Executives Institute ("CIEBA"); Member of CIEBA's
Executive Committee; Member of the Investment Advisory Committee of the
State of New York Common Retirement Fund; Director, Duke Management Company
and Winthrop Financial Associates (real estate management).
Walter Mintz--Special Limited Partner of Cumberland Associates
(investment partnership) since 1982.
Melvin R. Seiden--President of Silbanc Properties, Ltd. (real estate,
investment and consulting).
Stephen B. Swensrud--Principal of Fernwood Associates (financial
consultants); Director, Hitchiner Manufacturing Company.
Harry Woolf--Member of the editorial board of Interdisciplinary Science
Reviews; Director, Alex. Brown Mutual Funds, Advanced Technology
Laboratories, Family Health International and SpaceLabs Medical (medical
equipment manufacturing and marketing).
- --------
* Interested person, as defined by the 1940 Act, of the Fund.
25
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Fund's investment manager is Merrill Lynch Asset Management, L.P. (the
"Manager" or "MLAM"). The Manager is owned and controlled by ML&Co., a
financial services holding company and the parent of Merrill Lynch. The
Manager, or an affiliate of the Manager, Fund Asset Management, L.P. ("FAM"),
acts as the investment adviser to more than 100 other registered investment
companies. MLAM and FAM also offer portfolio management and portfolio analysis
services to individuals and institutions. As of August 31, 1994, the Manager
and FAM had a total of approximately $165.7 billion in investment company and
other portfolio assets under management, including accounts of certain
affiliates of MLAM.
Subject to the direction of the Directors, the Manager 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 responsibilities for making decisions to buy, sell or hold a
particular security rest with the Manager. The Manager performs certain of the
other administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the Fund.
Pursuant to the management agreement between the Manager and the Fund (the
"Management Agreement"), the Manager receives from the Fund a monthly fee based
upon the average daily net assets of the Fund at an annual rate of 0.50%. For
the fiscal year ended May 31, 1994, the fee payable by the Fund to the Manager
was $2,710,336 (based on average net assets of approximately $542.1 million).
The Management Agreement obligates the Fund to pay certain expenses incurred in
the Fund's operations, including, among other things, the management fee, legal
and audit fees, unaffiliated Directors' fees and expenses, registration fees,
custodian and transfer agency fees, accounting and pricing costs, and certain
of the costs of printing proxies, shareholder reports, prospectuses and
statements of additional information. Accounting services are provided to the
Fund by the Manager and the Fund reimburses the Manager for its costs in
connection with such services on a semi-annual basis. For the fiscal year ended
May 31, 1994, the amount of such reimbursement was $226,047. For the fiscal
year ended May 31, 1994, the ratio of total expenses to average net assets was
.96% for the former Class A shares (now redesignated Class D shares) and 1.46%
for the Class B shares. For the fiscal year ended May 31, 1994, the ratio of
expenses net of reimbursement and excluding account maintenance and
distribution fees for both former Class A shares (now redesignated Class D
shares) and Class B shares was .71%. None of the new Class A, Class C or Class
D shares had been issued during that year.
Gregory Mark Maunz, Vice President of the Fund, is primarily responsible for
the day-to-day management of the Fund's portfolio. Mr. Maunz has been Vice
President of the Manager since 1985 and a Portfolio Manager for the Manager
since 1984.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of Merrill Lynch & Co., Inc., 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 Fund pays
the Transfer Agent an annual fee of $11.00 per Class A or Class D shareholder
account and $14.00 per Class B or Class C shareholder account and the Transfer
Agent is entitled to reimbursement for out-of-pocket expenses incurred by it
under the Transfer Agency Agreement. For the fiscal year ended
26
<PAGE>
May 31, 1994, the Fund paid $480,353 to the Transfer Agent pursuant to the
Transfer Agency Agreement. At August 31, 1994, the Fund had 861 of the former
Class A shareholder accounts (now redesignated Class D shareholder accounts),
19,923 Class B shareholder accounts, no Class C shareholder accounts and no
Class D shareholder accounts. At this level of accounts, the annual fee
payable to the Transfer Agent would aggregate approximately $288,393 plus
miscellaneous and out-of-pocket expenses.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both the Manager and Merrill Lynch, acts as the distributor of shares of the
Fund.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
Pricing SM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to 4:15 p.m., New York time, which
includes orders received after the determination of net asset value on the
previous day, the applicable offering price will be based on the net asset
value as of 4:15 p.m., New York time, on the day the orders are placed with
the Distributor, provided the orders are received by the Distributor prior to
4:30 p.m., New York time, on that day. If the purchase orders are not received
prior to 4:30 p.m., New York time, such orders shall be deemed received on the
next business day. The Fund or the Distributor may suspend the continuous
offering of the Fund's shares of any class at any time in response to
conditions in the securities markets or otherwise and may thereafter resume
such offering from time to time. Any order may be rejected by the Distributor
or the Fund. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. Merrill Lynch may
charge its customers a processing fee (presently $4.85) to confirm a sale of
shares to such customers. Purchases directly through the Transfer Agent are
not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares
of Class B and Class C are sold to investors choosing the deferred sales
charge alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the
investment thereafter being subject to a contingent deferred sales charge and
ongoing distribution fees. A discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill
Lynch Select Pricing System is set forth under "Merrill Lynch Select Pricing
System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed
27
<PAGE>
on Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each
class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid. See "Distribution Plans" below. Each class
has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the Fund. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised
that only Class A and Class D shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.50% B shares convert to D
at a rate of 4.0% during the first shares automatically
year, decreasing 1.0% annually after approximately
to 0.0% ten years(4)
- -------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
- -------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales charge(3) 0.25% No No
</TABLE>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have an eight year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will the tacked onto the
holding period for the shares acquired.
28
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D 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.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE SELECTED
SALES AS DEALERS AS
CHARGE AS PERCENTAGE* OF PERCENTAGE OF
PERCENTAGE OF THE NET AMOUNT THE OFFERING
AMOUNT OF PURCHASE OFFERING PRICE INVESTED PRICE
------------------ -------------- -------------- -------------
<S> <C> <C> <C>
Less than $25,000................... 4.00% 4.17% 3.75%
$25,000 but less than $50,000....... 3.75 3.40 3.50
$50,000 but less than $100,000...... 3.25 3.36 3.00
$100,000 but less than $250,000..... 2.50 2.56 2.25
$250,000 but less than $1,000,000... 1.50 1.52 1.25
$1,000,000 and over................. 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994. If the sales charge
is waived, such purchases will be subject to a CDSC of 1.0% if the shares
are redeemed within one year after purchase. Class A purchases of $5
million or more in a single transaction made prior to October 21, 1994 may
be subject to a CDSC of 0.25% of the dollar amount of the purchase if the
shares are redeemed within one year of purchase in lieu of paying an
initial sales charge. The charge will be assessed on an amount equal to the
lesser of the proceeds of redemption or the cost of the shares being
redeemed. A sales charge of 0.75% will be charged on purchases of
$1,000,000 or more of Class A or Class D shares by certain 401(k) plans.
The Distributor may reallow discounts to 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.
As noted above, as a result of the implementation of the Merrill Lynch
Select Pricing SM System, Class A shares of the Fund outstanding prior to
October 21, 1994, have been redesignated Class D shares. The Class A shares
offered by this Prospectus differ from the Class A shares offered prior to
October 21, 1994, in many respects, including sales charges, exchange
privilege and the classes of persons to whom such shares are offered. During
the fiscal year ended May 31, 1994, the Fund sold 1,365,792 of its former
Class A shares (now redesignated Class D shares) for aggregate net proceeds to
the Fund of $13,269,165. The gross sales charges for the sale of its former
Class A shares (now redesignated Class D shares) for that period were $61,480,
of which $49,708 was received by Merrill Lynch and $11,772 was received by the
Distributor.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares in a
shareholder account, are entitled to purchase additional Class A shares in
that account. Certain employer sponsored retirement or savings plans,
including 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
29
<PAGE>
of assets advised by MLAM or any of its affiliates. Class A shares are
available at net asset value to corporate warranty insurance reserve fund
programs provided that the program has $3 million or more initially invested
in MLAM-advised mutual funds. Also eligible to purchase Class A shares at net
asset value are participants in certain investment programs including TMA SM
Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services and certain purchases made in connection with the Merrill
Lynch Mutual Fund Adviser program. In addition, Class A shares will be offered
at net asset value to Merrill Lynch & Co., Inc. and its subsidiaries and their
directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired shares
of certain MLAM-advised closed-end funds who wish to reinvest the net proceeds
from a sale of their closed-end fund shares of common stock in shares of the
Fund also may purchase Class A or Class D shares of the Fund if certain
conditions set forth in the Statement of Additional Information are met. For
example, Class A shares of the Fund and certain other MLAM-advised mutual
funds are offered at net asset value to shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock of Merrill Lynch Senior Floating Rate
Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value to an investor who has a
business relationship with a Merrill Lynch financial consultant, if certain
conditions set forth in the Statement of Additional Information are met. Class
D shares may be offered at net asset value in connection with the acquisition
of assets of other investment companies.
Additional information concerning these reduced initial sales charges
including information regarding investments by Employee Sponsored Retirement
or Savings Plans is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately ten years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class
B Shares to Class D Shares" below. Both Class B and Class C shares are subject
to an account maintenance fee of 0.25% of net assets and Class B shares are
subject to a
30
<PAGE>
distribution fee of 0.50% of net assets and Class C shares are subject to a
distribution fee of 0.55% of net assets as discussed below under "Distribution
Plans".
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares from its own funds. Payments by the Fund to
the Distributor of the distribution fee under the Distribution Plan relating to
Class B shares may be used in whole or in part by the Distributor for this
purpose. The combination of the CDSC and the ongoing distribution fee
facilitates the ability of the Fund to sell the Class B and Class C shares
without a sales charge being deducted at the time of purchase. Approximately
ten years after issuance, Class B shares will convert automatically into Class
D shares of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual funds
into which exchanges may be made convert into Class D shares automatically
after approximately eight years. If Class B shares of the Fund are exchanged
for Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and the
holding period for the shares exchanged will be tacked onto the holding period
for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities. Class B shareholders of the Fund exercising the
exchange privilege described under "Shareholder Services--Exchange Privilege"
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares acquired as a
result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B
CDSC AS A
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------- -----------------
<S> <C>
0-1...................................................... 4.0%
1-2...................................................... 3.0%
2-3...................................................... 2.0%
3-4...................................................... 1.0%
4 and thereafter......................................... 0.0%
</TABLE>
31
<PAGE>
Class B shares purchased prior to October 21, 1994 were subject to a 3.00%
CDSC during the first three years, decreasing 1.00% annually to 0.00% after the
third year.
For the fiscal year ended May 31, 1994, the Distributor received CDSCs of
$2,010,325 with respect to the redemption of Class B shares, all of which was
paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate being
charged. Therefore, it will be assumed that the redemption is first of shares
held for over three years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the three-
year period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to the charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plans or following the death or disability (as
defined in the Internal Revenue Code) of a shareholder. The Class B CDSC is
waived on redemptions of shares by certain eligible 401(a) and eligible 401(k)
plans. The Class B CDSC is also waived for any Class B shares which are
purchased by an eligible 401(k) or eligible 401(a) plan and are rolled over
into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in
such account at the time of redemption. The Class B CDSC also is waived for any
Class B shares which are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. Additional
information concerning the waiver of the contingent deferred sales charge is
set forth in the Statement of Additional Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares
32
<PAGE>
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately ten years
(the "Conversion Period"), Class B shares will be converted automatically into
Class D shares of the Fund. Class D shares are subject to an ongoing account
maintenance fee of 0.25% of net assets but are not subject to the distribution
fee that is borne by Class B shares. Automatic conversion of Class B shares
into Class D shares will occur at least once each month (on the "Conversion
Date") on the basis of the relative net asset values of the shares of the two
classes on the Conversion Date, without the imposition of any sales load, fee
or other charge. Conversion of Class B shares to Class D shares will not be
deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The
33
<PAGE>
Class B and Class C Distribution Plans provide for the payment of account
maintenance fees and distribution fees, and the Class D Distribution Plan
provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rates of 0.50%
for Class B and 0.55% for Class C, of the average daily net assets of the Fund
attributable to the shares of the relevant class in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
shareholder and distribution services, and bearing certain distribution-related
expenses of the Fund, including payments to financial consultants for selling
Class B and Class C shares of the Fund. The Distribution Plans relating to
Class B and Class C shares are designed to permit an investor to purchase Class
B and Class C shares through dealers without the assessment of an initial sales
charge and at the same time permit the dealer to compensate its financial
consultants in connection with the sale of the Class B and Class C shares. In
this regard, the purpose and function of the ongoing distribution fees and the
CDSC are the same as those of the initial sales charge with respect to the
Class A and Class D shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B and Class C
shares.
Prior to July 7, 1993, the Fund paid the Distributor an ongoing distribution
fee, accrued daily and paid monthly, at the annual rate of 0.75% of average
daily net assets of the Class B shares of the Fund under a distribution plan
previously adopted by the Fund (the "Prior Plan") to compensate the Distributor
and Merrill Lynch for providing account maintenance and distribution-related
activities and services to Class B shareholders. The fee rate payable and the
services provided under the Prior Plan are identical to the aggregate fee rate
payable and the services provided under the Distribution Plan, the difference
being that the account maintenance and distribution services have been
unbundled.
For the fiscal year ended May 31, 1994, the Fund paid the Distributor
$3,808,315 pursuant to the Prior Plan and the Distribution Plan (based on
average net assets subject to the Prior Plan and the Distribution Plan of
$507.8 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. The Fund did not begin to offer Class C shares publicly until
after the date of this Prospectus. Accordingly, no payments have been made
pursuant to the Class C Distribution Plan prior to the date of this Prospectus.
The 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. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional
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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. At December 31, 1993, the fully allocated
accrual expenses incurred by the Distributor and Merrill Lynch for the period
since the commencement of the offering of Class B shares exceeded fully
allocated accrual revenues for such period by approximately $4,722,000 (1.02%
of Class B net assets at that date). As of December 31, 1993, direct cash
revenues for the period since commencement of the offering of Class B shares
exceeded direct cash expenses by $9,309,111 (2.02% of Class B net assets at
that date). As of May 31, 1994, direct cash revenues for the period since
commencement of the offering of Class B shares exceeded direct cash expenses by
$10,970,382 (2.93% of Class B net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and contingent deferred sales charges payable by the
Fund to (1) 6.25% of eligible gross sales of Class B shares 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 contingent deferred sales charge). 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 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 the 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.
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REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset
value per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Fund's Transfer Agent, Financial Data Services, Inc., Attn:
Transfer Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida
32232-5289. Proper notice of redemption in the case of shares deposited with
the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written letter as noted
above accompanied by certificates for the shares to be redeemed. Redemption
requests delivered other than by mail should be delivered to Financial Data
Services, Inc., Transfer Agency Mutual Fund Operations, 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484. Redemption requests should not be sent
to the Fund. A redemption request requires the signature(s) of all persons in
whose name(s) the shares are registered, signed exactly as his (their) name(s)
appear(s) on the Transfer Agent's register or on the certificate, as the case
may be. The signature(s) on the redemption request must be guaranteed by a
national bank or other bank which is a member of the Federal Reserve System
(not a savings bank) or by a member firm of any national or regional securities
exchange. 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 has been collected for the purchase of such Fund shares, which may
take up to 10 days.
REPURCHASE
The Fund will also repurchase shares through a shareholder's listed
securities dealer. The Fund will normally accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the normal close of business
on the New York Stock Exchange on the day received and is received by the Fund
from such dealer not later than 4:30 P.M., New York time, on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 4:30 P.M., New York time, in order to obtain that day's
closing price.
The repurchase arrangements are for the convenience of shareholders and do
not involve a charge by the Fund (other than any applicable CDSC); securities
firms which do not have selected dealer agreements
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with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill
Lynch may charge its customers a processing fee (presently $4.85) to confirm a
repurchase of shares. Redemptions directly through the Fund's Transfer Agent
are not subject to the processing fee. The Fund reserves the right to reject
any order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. However, a
shareholder whose order for repurchase is rejected by the Fund may redeem
shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a one-
time privilege to reinstate their accounts by purchasing Class A or Class D
shares of the Fund at net asset value without a sales charge up to the dollar
amount redeemed. The reinstatement privilege may be exercised by sending a
notice of exercise along with a check for the amount to be reinstated to the
Transfer Agent within 30 days after the date the request for redemption was
accepted by the Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds. The reinstatement privilege is a one-time privilege and may be
exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various
services or plans, or to change options with respect thereto, can be obtained
from the Fund by calling the telephone number on the cover page hereof or from
the Distributor or Merrill Lynch. Included in such services are the following:
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestments of ordinary income dividends and long-term capital gain
distributions. Shareholders may make additions to their Investment Account at
any time by mailing a check directly to the Transfer Agent. Shareholders may
also maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically, without charge,
at the Transfer Agent. Shareholders considering transferring their Class A or
Class D shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A or Class D
shares are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such
37
<PAGE>
shares at the Transfer Agent may request their new brokerage firm to maintain
such shares in an account registered in the name of the brokerage firm for the
benefit of the shareholder at the Transfer Agent. Shareholders considering
transferring a tax deferred retirement account such as an individual retirement
account from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable contingent deferred sales
charge) so that the cash proceeds can be transferred to the account at the new
firm, or such shareholder must continue to maintain a retirement account at
Merrill Lynch for those shares.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. There is currently no limitation
on the number of times a shareholder may exercise the exchange privilege. The
exchange privilege may be modified or terminated in accordance with the rules
of the Securities and Exchange Commission.
Under the Merrill Lynch Select Pricing System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class D
shares also may be exchanged for Class A shares of a second MLAM-advised mutual
fund at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares will be exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC
that might otherwise be due upon redemption of the shares of the Fund. For
purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for
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reduction of any CDSC imposed on such shares, if any, and, with respect to
Class B shares, toward satisfaction of the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of Class
A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("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 MLAM-advised mutual fund for Class A or Class D shares of the Fund
will be made solely on the basis of the relative net asset values of the shares
being exchanged. Therefore, there will not be a charge for any difference
between the sales charge previously paid on the shares of the other MLAM-
advised mutual fund and the sales charge payable on the shares of the Fund
being acquired in the exchange under the MFA program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically in
full and fractional shares of the Fund, without sales charges, at the net asset
value per share next determined on the payable date of such dividends or
distributions. A shareholder may, at any time, by written notification or
telephone call (1-800-MER-FUND) to the Transfer Agent, elect to have subsequent
dividends or both dividends and capital gains distributions, paid in cash,
rather than reinvested, in which event payment will be mailed on or about the
payment date. Cash payments can also be directly deposited to the shareholder's
bank account. No CDSC will be imposed on redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his Investment Account in the form of payments by check or
through automatic payment by direct deposit to his bank account on either a
monthly or quarterly basis. A Class A or Class D shareholder whose shares are
held within a CMA(R), CBA(R) or Retirement Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the Systematic Redemption Program, subject to certain conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be made
to an investor's Investment Account by prearranged charges of $50 or more to
his regular bank account. Investors who maintain CMA(R) accounts may arrange to
have periodic investments made in the Fund in their CMA(R) account or in
certain related accounts in amounts of $100 or more through the CMA(R)
Automated Investment Program.
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TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C and Class D shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to a shareholder as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to a shareholder as long-term capital
gains, regardless of the length of time the shareholder has owned Fund 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).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, will not be eligible for the dividends-received deduction allowed to
corporations under the Code. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities 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. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that the investor is
not otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's
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basis in the Class B shares converted, and the holding period of the acquired
Class D shares will include the holding period for the converted Class B
shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent the sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon the purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for the
new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Fund may make investments that produce taxable income that is not matched
by a corresponding receipt of cash or an offsetting loss deduction. Such
investments would include dollar rolls and obligations that have original issue
discount (such as SMBSs), accrete discount or are subordinated in the mortgage-
backed securities structure. Such taxable income would be treated as income
earned by the Fund and would be subject to the distribution requirements of the
Code. Because such income may not be matched by a corresponding receipt of cash
by the Fund or an offsetting loss deduction, the Fund may be required to borrow
money or dispose of other securities to be able to make distributions to
shareholders. The Fund intends to make sufficient and timely distributions to
shareholders so as to qualify for RIC status at all times.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax. In general, state law does not consider income
derived from MBSs to be income attributable to U.S. Government obligations.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed separately for Class A, Class B, Class C and Class D
shares in accordance with formulas specified by the Securities and Exchange
Commission.
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Average annual total return quotations for the specified period will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any 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 shares and Class C shares and the maximum sales charge in the
case of Class A shares and Class D shares. Dividends paid by the Fund with
respect to all shares to the extent any dividends are paid, will be calculated
in the same manner at the same time on the same day and will be in the same
amount, except that account maintenance fees, distribution charges and any
incremental transfer agency costs relating to each class of shares will be
borne exclusively by that class. The Fund will include performance data for all
classes of shares of the Fund in any advertisement or information including
performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the effect on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time. In advertisements distributed to investors whose
purchases are subject to waiver of the CDSC in the case of Class B and Class C
shares (such as investors in certain retirement plans) or to reduce sales
charges in the case of Class A and Class D shares, performance data may take
into account the reduced, and not the maximum, sales charges or may not take
into account the contingent deferred sales charge and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
contingent deferred sales charge, a lower amount of expenses may be deducted.
See "Purchase of Shares." The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate 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)
net income based on the yield of each security earned during the period by (b)
the average daily number of shares outstanding during that period that were
entitled to receive dividends multiplied by (c) the maximum offering price per
share on the last day of the period.
Total return and yield figures are based on the Fund's historical performance
and are not intended to indicate future performance. The Fund's total return
and yield will vary depending on market conditions, the securities comprising
the Fund's portfolio, the Fund's operating expenses and the amount of realized
and unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when redeemed,
may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to performance data
published by Lipper Analytical Services, Inc., CDA Investment Technology, Inc.,
Morningstar Publications, Inc., Money
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Magazine, U.S. News and World Report, Business Week, Forbes, Fortune, or other
industry publications. In addition, from time to time the Fund may include the
Fund's risk-adjusted performance ratings assigned by Morningstar Publications,
Inc. in advertising or supplemental sales literature. As with other performance
data, performance comparisons should not be considered representative of the
Fund's relative performance for any future period.
PORTFOLIO TRANSACTIONS
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. The securities
in which the Fund invests are normally purchased directly from the issuer or
from an underwriter or dealer in such securities. 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 net results in
conducting portfolio transactions, taking into account such factors as price
(including the applicable dealer spread), the size, type and difficulty of the
transactions involved, the firm's general execution and operations facilities,
and the firm's risk in positioning the securities involved and the provision of
supplemental investment research by the firm. While reasonably competitive
spreads or commissions are sought, the Fund will not necessarily be paying the
lowest spread or commission available. The portfolio securities of the Fund
generally are traded on a net 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.
Under the 1940 Act, persons affiliated with the Fund, including Merrill Lynch,
are prohibited from dealing with the Fund as a principal in the purchase and
sale of securities unless such trading is permitted by an exemptive order
issued by the Securities and Exchange Commission. In addition, the Fund may not
purchase securities for the Fund from any underwriting syndicate of which
Merrill Lynch is a member except pursuant to procedures approved by the
Directors of the Fund which comply with rules adopted by the Securities and
Exchange Commission. Affiliated persons of the Fund may serve as its broker in
over-the-counter transactions conducted for the Fund on an agency basis only.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such actions, for defensive or other reasons, appear
advisable to the Manager. While it is not possible to predict turnover rates
with any certainty, at present it is anticipated that the Fund's annual
portfolio turnover rate, under normal circumstances, will be less than 200%.
For the fiscal year ended May 31, 1994, the Fund's portfolio turnover rate was
60.38%. (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by
the monthly average of the value of the portfolio securities owned by the Fund
during the particular fiscal 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.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
All or a portion of the Fund's net investment income will be declared as
dividends daily prior to the determination of net asset value on that day and
paid monthly. The Fund may at times pay out less than the
43
<PAGE>
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
long-term and short-term capital gains, if any, will be distributed to the
Fund's shareholders at least annually.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and higher
transfer agency fees applicable with respect to that class. See "Additional
Information--Determination of Net Asset Value." Dividends and distributions may
be reinvested automatically in shares of the Fund at net asset value.
Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed under "Taxes" whether they are reinvested in shares
of the Fund or received in cash.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined by
the Manager once daily at 4:15 P.M. following the normal close of trading on
the New York Stock Exchange on each day during which the New York Stock
Exchange is open for trading. The net asset value per share is computed by
dividing the value of the securities held by the Fund plus any cash or other
assets (including interest and dividends accrued but not yet received) minus
all liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
management fees and any account maintenance and/or distribution fees payable to
the Distributor, are accrued daily. The Fund employs Merrill Lynch Securities
Pricing Service ("MLSPS"), an affiliate of the Manager, to provide mortgage-
backed securities prices for the Fund. Such arrangements went into effect
following the close of the Fund's most recent fiscal year end and therefore no
payments were made to MLSPS during such fiscal year.
The per share net asset value of Class A shares will generally be higher than
the per share net asset value of shares of the other classes, reflecting the
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C shares
and the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge immediately after the payment of dividends or
distributions, which will differ by approximately the amount of the expense
accrual differentials between the classes.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on April 19, 1991. It has an
authorized capital of 600,000,000 shares of common stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D Common Stock. Class A and Class C each consist of 100,000,000 shares
and Class B and Class D each consist of 200,000,000 shares. Shares of Class A,
Class B, Class C and Class D Common stock represent an interest in the same
assets of the Fund and are identical in all respects except
44
<PAGE>
that Class B, Class C and Class D shares bear certain expenses related to the
account maintenance associated with such shares, and Class B and Class C shares
bear certain expenses related to the distribution of such shares. Each class
has exclusive voting rights with respect to matters relating to account
maintenance and distribution expenditures, as applicable. See "Purchase of
Shares." The Fund has received an order from the Securities and Exchange
Commission (the "Commission") permitting the issuance and sale of multiple
classes of common stock. The Directors of the Fund may classify and reclassify
the shares of the Fund into additional classes of common stock at a future
date. See "Shareholder Services--Exchange Privilege."
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 1940 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 shareholders of the Fund as
required by Maryland corporate law. Voting rights for Directors are not
cumulative. Shares issued are fully paid and non-assessable and have no
preemptive or conversion rights. Shares have the conversion rights described in
this Prospectus. Each share of Common Stock 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, except that, as noted above, expenses related to the distribution
of the Class B, Class C and Class D shares bear certain additional expenses.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
Attn.: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or Financial Data Services,
Inc. at 800-637-3863.
45
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
46
<PAGE>
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.--AUTHORIZATION FORM (PART
1)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM
PROGRAM APPLICATION BY CALLING (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class
C shares [_] Class D shares
of Merrill Lynch Adjustable Rate Securities Fund, Inc., and establish an
Investment Account as described in the Prospectus. In the event that I am not
eligible to purchase Class A shares, I understand that Class D shares will be
purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data Services,
Inc. as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of
paper if necessary.)
1. ............................. 4. .............................
2. ............................. 5. .............................
3. ............................. 6. .............................
Name......................................................................
First Name Initial Last Name
Name of Co-Owner (if any).................................................
First Name Initial Last Name
Address...................................................................
............................................ Date...................
Occupation...........................(Zip Code)
Name and Address of Employer ...
................................
................................
Signature of Owner
Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with rights of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital
Gains
Select One:
Select One:
[_] Reinvest
[_] Reinvest
[_] Cash
[_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] CHECK
OR [_] DIRECT DEPOSIT TO BANK ACCOUNT
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Adjustable Rate Securities Fund,
Inc. Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) [_] CHECKING [_] SAVINGS
Name on your account .....................................................
Bank Name ................................................................
Bank Number ................. Account Number .......................
Bank Address .............................................................
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Signature of Depositor ...................................................
Signature of Depositor .......................... Date..............
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- -------------------------------------------------------------------------------
47
<PAGE>
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.--AUTHORIZATION FORM (PART
1) -- (CONTINUED)
3. SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
................................ ................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Dear Sir/Madam:
.............., 19......
Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Adjustable Rate Securities Fund, Inc. or any other investment company
with an initial sales charge or deferred sales charge for which Merrill Lynch
Funds Distributor, Inc. acts as distributor over the next 13 month period
which will equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund's prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc. my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Adjustable Rate Securities Fund, Inc. held as
security.
By ............................. ................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both
must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name........................ (2) Name........................
Account Number.................. Account Number..................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp. We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
- - - our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
Plan. We guarantee the shareholder's
- - - signature.
This form when completed should be ................................
mailed to: Dealer Name and Address
Merrill Lynch Adjustable Rate By................................
Securities Fund, Inc. Authorized Signature or Dealer
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund
Operations [ ][ ][ ] [ ][ ][ ][ ]
P.O. Box 45289 Branch-Code F/C No.
Jacksonville, FL 32232-5289 .......................
F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer A/C No.
48
<PAGE>
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.--AUTHORIZATION FORM (PART
2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Name of Owner................. [_____________________]
Name of Co-Owner (if any)..... Social Security No. or
Taxpayer Identification
Number
Address....................... Account Number ...............
(if existing account)
..............................
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A or [_] Class D shares in Merrill Lynch Adjustable
Rate Securities Fund, Inc., at cost or current offering price. Withdrawals to
be made either (check one) [_] Monthly on the 24th day of each month, or
[_] Quarterly on the 24th day of March, June, September and December. If the
24th falls on a weekend or holiday, the next succeeding business day will be
utilized. Begin systematic withdrawal on . . . . . . . . . .(month) or as soon
as possible thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [_] $
or [_] % of the current value of [_] Class A or [_] Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of.....................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (Please Print).................................................
Address ..................................................................
.....................................................................
Signature of Owner................................ Date..................
Signature of Co-Owner (if any).......................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND (IF
NECESSARY) DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE IN ERROR
TO MY ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I
PROVIDE WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account......................................................
Bank Name.................................................................
Bank Number................... Account Number.......................
Bank Address..............................................................
..........................................................................
Signature of Depositor............................ Date.............
Signature of Depositor....................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
49
<PAGE>
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account described below each month
to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares[_] Class D shares
of Merrill Lynch Adjustable Rate Securities Fund, Inc., subject to the terms
set forth below. In the event that I am not eligible to purchase Class A
shares, I understand that Class D shares will be purchased.
AUTHORIZATION TO HONOR ACH DEBITS
FINANCIAL DATA SERVICES, INC. DRAWN BY FINANCIAL DATA SERVICES,
INC.
You are hereby authorized to draw an
ACH debit each month on my bank
account for investment in Merrill
Lynch Adjustable Rate Securities
Fund, Inc. as indicated below:
Amount of each check or ACH debit To..........................Bank
$............................
(Investor's Bank)
Account Number .............. Bank Address....................
Please date and invest ACH debits on City.... State.... Zip Code....
the 20th of each month beginning
As a convenience to me, I hereby
..................................... request and authorize you to pay and
charge to my account ACH debits
............... (month) drawn on my account by and payable
to Financial Data Services, Inc., I
or as soon thereafter as possible. agree that your rights in respect of
each such debit shall be the same as
I agree that you are drawing these if it were a check drawn on you and
ACH debits voluntarily at my request signed personally by me. This
and that you shall not be liable for authority is to remain in effect
any loss arising from any delay in until revoked by me in writing.
preparing or failure to prepare any Until you receive such notice, you
such debit. If I change banks or shall be fully protected in honoring
desire to terminate or suspend this any such debit. I further agree that
program, I agree to notify you if any such debit be dishonored,
promptly in writing. I hereby whether with or without cause and
authorize you to take any action to whether intentionally or
correct erroneous ACH debits of my inadvertently, you shall be under no
bank account or purchases of fund liability.
shares including liquidating shares
of the Fund and crediting my bank ....... ................
account. I further agree that if a
debit is not honored upon Date Signature of
presentation, Financial Data Depositor
Services, Inc. is authorized to
discontinue immediately the Automatic ....... ................
Investment Plan and to liquidate
sufficient shares held in my account Bank Signature of Depositor
to offset the purchase made with the Account
dishonored debit. Number
(If joint account,
....... ................ both must sign)
Date Signature of
Depositor
.................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
50
<PAGE>
Manager
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Custodian
The Bank of New York
90 Washington Street 12th Floor
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address: Attn: TAMFO
P.O. Box 45289
Jacksonville, Florida 32232-5289
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary and Fee Table.......................................... 2
Merrill Lynch Select PricingSM System.................................... 5
Financial Highlights...................................................... 9
Investment Objective and Policies......................................... 10
Types of Issuers/Quality Standards....................................... 11
Description of Adjustable Rate Securities................................ 12
Description of Other Securities.......................................... 15
Description of Money Market Securities................................... 16
Special Considerations and Risk Factors.................................. 17
Portfolio Strategies Involving Interest Rate Transactions, Options and
Futures................................................................. 18
Other Investment Policies and Practices.................................. 22
Investment Restrictions.................................................. 23
Management of the Fund.................................................... 25
Directors................................................................ 25
Management and Advisory Arrangements..................................... 26
Transfer Agency Services................................................. 26
Purchase of Shares........................................................ 27
Initial Sales Charge Alternatives--Class A and Class D Shares............ 29
Deferred Sales Charge Alternatives--Class B and Class C Shares........... 30
Distribution Plans....................................................... 33
Limitations on the Payment of Deferred Sales Charges..................... 35
Redemption of Shares...................................................... 36
Redemption............................................................... 36
Repurchase............................................................... 36
Reinstatement Privilege--Class A and Class D Shares...................... 37
Shareholder Services...................................................... 37
Investment Account....................................................... 37
Exchange Privilege....................................................... 38
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 39
Systematic Withdrawal.................................................... 39
Automatic Investment Plans............................................... 39
Taxes..................................................................... 40
Performance Data.......................................................... 41
Portfolio Transactions.................................................... 43
Portfolio Turnover....................................................... 43
Additional Information.................................................... 43
Dividends and Distributions.............................................. 43
Determination of Net Asset Value......................................... 44
Organization of the Fund................................................. 44
Shareholder Inquiries.................................................... 45
Shareholder Reports...................................................... 45
Authorization Form........................................................ 47
</TABLE>
Code #13937--1094
Prospectus
(ART)
- ----------------------------------
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
October 21, 1994
Distributor: Merrill Lynch Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
The investment objective of Merrill Lynch Adjustable Rate Securities Fund,
Inc. (the "Fund") is to seek high current income consistent with a policy of
limiting the degree of fluctuation in the net asset value of Fund shares from
movements in interest rates. The Fund does not attempt to maintain a constant
net asset value per share. The Fund seeks to achieve this objective by
investing at least 65% of its total assets in adjustable rate securities,
consisting principally of mortgage-backed and asset-backed securities. The Fund
may employ a variety of portfolio strategies to enhance income and to hedge
against changes in interest rates. There can be no assurance that the
investment objective of the Fund will be realized.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the Prospectus of the Fund, dated October
21, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is October 21, 1994
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek high current income
consistent with a policy of limiting the degree of fluctuation in the net asset
value of Fund shares from movements in interest rates. The Fund will seek to
achieve its objective by investing at least 65% of its total assets in
adjustable rate securities ("Adjustable Rate Securities"), consisting
principally of mortgage-backed and asset-backed securities. Adjustable Rate
Securities bear interest at rates that adjust at periodic intervals in
conjunction with changes in market levels of interest. Such securities will be
issued or guaranteed by agencies or instrumentalities of the United States or
rated AA by Standard & Poor's Corporation ("Standard & Poor's") or Aa by
Moody's Investors Service ("Moody's"). Reference is made to "Investment
Objective and Policies" in the Prospectus for a discussion of the investment
objective and policies of the Fund.
The Fund may invest up to 35% of its total assets in other types of mortgage
and asset related securities, and derivative securities relating thereto,
including fixed rate mortgage and asset related securities and stripped
securities. The Fund also may invest in fixed rate securities issued by the
Federal National Mortgage Association. The above securities must be issued or
guaranteed by agencies or instrumentalities of the United States or be rated
"investment grade" by Standard & Poor's or by Moody's. Securities rated
investment grade are obligations rated at the time of purchase within the four
highest quality ratings as determined by either Standard & Poor's (currently
AAA, AA, A and BBB) or Moody's (currently Aaa, Aa, A and Baa). No more than 10%
of the Fund's total assets will be invested in securities rated in the lowest
category of investment grade. The Fund also may invest up to 35% of its total
assets in money market securities rated in the highest rating category by
Standard & Poor's or Moody's and, for temporary or defensive purposes, may
invest up to 100% of its assets in such securities.
The collateral backing mortgage-backed securities ("MBSs") and asset-backed
securities ("ABSs") is usually held by an independent bailee, custodian or
trustee on behalf of the holders of the related MBSs or ABSs. In such
instances, the holder of the related MBSs or ABSs (i.e., the Fund) will have
either an ownership interest or security interest in the underlying collateral
and can exercise its rights thereto through such bailee, custodian or trustee.
The Fund's investments in MBSs, ABSs and other securities are described in
detail in the Prospectus. Included below is certain additional information
related to such investments.
PRIVATELY ISSUED MORTGAGE-BACKED AND ASSET-BACKED SECURITIES--CREDIT
ENHANCEMENTS
As discussed more fully in the Prospectus, the Fund will, with respect to at
least that portion of its total assets (at least 65%) invested primarily in
Adjustable Rate Securities, limit its investments in privately issued MBSs and
ABSs to those MBSs and ABSs rated at least AA by Standard & Poor's or Aa by
Moody's or, if unrated, which are of comparable quality as determined by
Merrill Lynch Asset Management, L.P. (the "Manager"). As further indicated in
the Prospectus, such a rating may be based, in part, on certain credit
enhancements. These credit enhancements may offer two types of protection: (i)
liquidity protection, and (ii) protection against losses resulting from
ultimate default by an obligor and the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that the receipt of payments on the underlying pool
occurs in a timely fashion. Protection against losses resulting from ultimate
default ensures ultimate payment of the obligations on at least a portion of
the assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through
a combination of such approaches. The Fund will not pay any additional fees for
such credit support, although the existence of credit support may increase the
price of a security.
2
<PAGE>
Credit enhancements can come from external providers such as banks or
financial insurance companies. Alternatively, they may come from the structure
of a transaction itself. Examples of credit support arising out of the
structure of the transaction include "senior-subordinated securities" (multiple
class securities with one or more classes subordinate to other classes as to
the payment of principal thereof and interest thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class), creation of "reserve funds" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and "overcollateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets
exceeds that required to make payment of the securities and pay any servicing
or other fees). The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquencies or losses in excess of
those anticipated could adversely affect the return on an investment in such
issue. In addition, the Fund may purchase subordinated securities which, as
noted above, may serve as a form of credit support for senior securities
purchased by other investors.
UNITED STATES GOVERNMENT AGENCIES OR INSTRUMENTALITIES
As indicated in the Prospectus, at the present time, the majority of MBSs in
which the Fund may invest are either guaranteed by the Government National
Mortgage Association ("GNMA"), or issued by the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC").
In addition, the Fund may invest in ABSs guaranteed by the U.S. Small Business
Administration. See "Investment Objective and Policies" in the Prospectus. Set
forth below is a more detailed description of those agencies and
instrumentalities, together with a description of the types of assets typically
comprising the pools underlying the securities of those entities.
Governmental National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes GNMA to guarantee the timely payment of the principal of and
interest on securities that are based on and backed by a pool of specified
mortgage loans. To qualify such securities for a GNMA guarantee, the underlying
mortgages must be insured by the Federal Housing Administration under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or be
guaranteed by the Veterans' Administration under the Servicemen's Readjustment
Act of 1944, as amended ("VA Loans"), or be pools of other eligible mortgage
loans. The Housing Act provides that the full faith and credit of the United
States Government is pledged to the payment of all amounts that may be required
to be paid under any guarantee. In order to meet its obligations under such
guarantee, GNMA is authorized to borrow from the United States Treasury with no
limitations as to amount.
GNMA pass-through MBSs may represent a pro rata interest in one or more pools
of the following types of mortgage loans: (i) fixed rate level payment mortgage
loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed rate
growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used
to reduce the borrower's monthly payments during the early years of the
mortgage loans ("buydown" mortgage loans); (viii) mortgage loans that provide
for adjustments in payments based on periodic changes in interest rates or in
other payment terms of the mortgage loans; and (ix) mortgage-backed serial
notes.
Federal National Mortgage Association. FNMA is a federally chartered and
privately owned corporation established under the Federal National Mortgage
Association Charter Act. FNMA was originally organized in 1938 as a United
States Government agency to add greater liquidity to the mortgage market. FNMA
was transformed into a private sector corporation by legislation enacted in
1968. FNMA
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provides funds to the mortgage market primarily by purchasing home mortgage
loans from local lenders, thereby providing them with funds for additional
lending. FNMA acquires funds to purchase such loans from investors that may not
ordinarily invest in mortgage loans directly, thereby expanding the total
amount of funds available for housing.
Each FNMA pass-through MBS represents a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency). The loans
contained in those pools consist of: (i) fixed rate level payment mortgage
loans; (ii) fixed rate growing equity mortgage loans; (iii) fixed rate
graduated payment mortgage loans; (iv) variable rate mortgage loans; (v) other
adjustable rate mortgage loans; and (vi) fixed rate mortgage loans secured by
multifamily projects.
Federal Home Loan Mortgage Corporation. FHLMC is a corporate instrumentality
of the United States established by the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). FHLMC was organized primarily for the purpose of
increasing the availability of mortgage credit to finance needed housing. The
operations of FHLMC currently consist primarily of the purchase of first lien,
conventional, residential mortgage loans and participation interests in such
mortgage loans and the resale of the mortgage loans so purchased in the form of
mortgage-backed securities.
The mortgage loans underlying the FHLMC MBSs typically consist of fixed rate
or adjustable rate mortgage loans with original terms to maturity of between
ten and thirty years, substantially all of which are secured by first liens on
one- to four-family residential properties or multifamily projects. Each
mortgage loan must meet the applicable standards set forth in the FHLMC Act.
Mortgage loans underlying FHLMC MBSs may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations in another FHLMC MBS.
U.S. Small Business Administration. The U.S. Small Business Administration
(the "SBA") is an independent agency of the United States established by the
Small Business Act of 1953. The SBA was organized primarily to assist
independently owned and operated businesses that are not dominant in their
respective markets. The SBA provides financial assistance, management
counseling and training for small businesses, as well as acting generally as an
advocate of small businesses.
The SBA guarantees the payment of principal and interest on portions of loans
made by private lenders to certain small businesses. The loans are generally
commercial loans such as working capital loans and equipment loans. The SBA is
authorized to issue from time to time, through its fiscal and transfer agent,
SBA-guaranteed participation certificates evidencing fractional undivided
interests in pools of these SBA-guaranteed portions of loans made by private
lenders. The SBA's guarantee of such certificates, and its guarantee of a
portion of the underlying loan, are backed by the full faith and credit of the
United States.
ADJUSTABLE RATE SECURITIES--INDEXES
As indicated above and described more fully in the Prospectus, at least 65%
of the Fund's total assets will be comprised of its investments in Adjustable
Rate Securities. The key determinant of the interest rates paid on such
securities is the interest rate index chosen (and the spread relating to such
securities). Certain of such indexes are tied to interest rates paid on
specified securities, such as one, three or five year U.S. Treasury securities,
while other indexes are more general. A prominent example of the latter type of
index is the cost of funds for member institutions (i.e., savings and loan
associations and savings banks) for the Federal Home Loan Bank (the "FHLB") of
San Francisco (the "COFI"). There are a number of factors that may affect the
COFI and cause it to behave differently from indexes tied to specific types of
securities. The COFI is
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dependent upon, among other things, the origination dates and maturities of the
member institution liabilities. Consequently, the COFI may not reflect the
average prevailing market interest rates on new liabilities of similar
maturities. There can be no assurance that the COFI will necessarily move in
the same direction as prevailing interest rates since as longer term deposits
or borrowings mature and are renewed at market interest rates the COFI will
rise or fall depending upon the differential between the prior and the new
rates on such deposits and borrowings. In addition, associations in the thrift
industry in recent years have caused and may continue to cause the cost of
funds of thrift institutions to change for reasons unrelated to changes in
general interest rate levels. Furthermore, any movement in the COFI as compared
to other indexes based upon specific interest rates may be affected by changes
instituted by the FHLB of San Francisco in the method used to calculate the
COFI. To the extent that COFI may reflect interest changes on a more delayed
basis than other indexes, in a period of rising interest rates any increase may
produce a higher yield to holder later than would be produced by such other
indices and in a period of declining interest rates the COFI may remain higher
than other market interest rates which may result in a higher level of
principal prepayments on mortgage loans which adjust in accordance with COFI
than mortgage or other loans which adjust in accordance with other indices. In
addition, to the extent that COFI may lag behind other indexes in a period of
rising interest rates securities based on COFI may have a lower market value
than would result from use of such other indexes, and in a period of declining
interest rates securities based on COFI may reflect a higher market value than
would securities based on other indexes.
ADDITIONAL COLLATERALIZED MORTGAGE OBLIGATION STRUCTURES
The Fund may invest to a significant extent in collateralized mortgage
obligations ("CMOs"). There are many types of CMO structures. Two such
structures are parallel pay CMOs and Planned Amortization Class CMOs ("PAC
Bonds"). Parallel pay CMOs are structured to provide payments of principal on
each payment date to more than one class. These simultaneous payments are taken
into account in calculating the stated maturity date or final distribution date
of each class, which, as with other CMO structures, must be retired by its
stated maturity date or final distribution date but may be retired earlier. PAC
Bonds generally require payments of a specified amount of principal on each
payment date so long as payments on the underlying pool of mortgage loans
remain within a certain range. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
PORTFOLIO STRATEGIES INVOLVING INTEREST RATE TRANSACTIONS, OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment Objective
and Policies--Portfolio Strategies Involving Interest Rate Transactions,
Options and Futures" in the Prospectus for information with respect to various
portfolio strategies involving such portfolio strategies. The Fund may seek to
increase its return through the use of covered options on portfolio securities
and to hedge its portfolio against movements in the interest rates by means of
other portfolio strategies. The Fund has authority to write (i.e., sell)
covered call and put options on its portfolio securities, purchase and sell
call and put options on securities and engage in transactions in interest rate
swaps, caps and floors, financial futures contracts, and related options on
such futures. Each of such portfolio strategies is described in the Prospectus.
Although certain risks are involved in such transactions (as discussed in the
Prospectus and below), the Manager believes that, because the Fund will (i)
write only covered options and (ii) engage in other transactions only for
hedging purposes, the portfolio strategies of the Fund will not subject the
Fund to the risks frequently associated with the speculative use of such
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of Fund shares, the Fund's net asset
value will fluctuate. There can be no assurance that the Fund's hedging
transactions will be effective. The following is further information relating
to certain portfolio strategies the Fund may utilize.
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Interest Rate Hedging Transactions and Risk Factors in Such Transactions. The
Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates by entering into interest rate transactions. The
Fund bears the risk of an imperfect correlation between the index used in the
hedging transaction and that pertaining to the securities which are the subject
of the hedging transaction.
The Fund expects to enter into interest rate transactions primarily to hedge
its portfolio of Adjustable Rate Securities against fluctuations in interest
rates. Typically, the parties with which the Fund will enter into interest rate
transactions will be broker-dealers and other financial institutions. Certain
Federal income tax requirements may, however, limit the Fund's ability to
engage in certain interest rate transactions. Gains from transactions in
interest rate swaps distributed to shareholders will be taxable as ordinary
income or, in certain circumstances, as long-term capital gains to
shareholders. See "Dividends, Distributions and Taxes."
The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined rate to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate cap therefore hedges against an
increase in interest rates above the cap on an Adjustable Rate Security held by
the Fund. Thus, for example, in the case of such a security indexed to COFI, if
COFI increases above the rate paid on the security, the counter-party will pay
the differential to the Fund. The opposite is true in the case of an interest
rate floor; it hedges against a decrease in the index rate below any floor on
the Adjustable Rate Security.
Interest rate swap transactions involve the exchange by the Fund with another
party of their respective commitments to pay or receive interest, such as an
exchange of fixed rate payments for floating rate payments. For example, if the
Fund holds an MBS with an interest rate that is reset only once each year, it
may swap the right to receive interest at this fixed rate for the right to
receive interest at a rate that is reset every week. This would enable the Fund
to offset a decline in the value of the MBS due to rising interest rates, but
would also limit its ability to benefit from falling interest rates.
Conversely, if the Fund holds an MBS with an interest rate that is reset every
week and it would like to lock in what it believes to be a high interest rate
for one year, it may swap the right to receive interest at this variable weekly
rate for the right to receive interest at a rate that is fixed for one year.
Such a swap would protect the Fund from a reduction in yield due to falling
interest rates, but would preclude it from taking full advantage of rising
interest rates.
The Fund usually will enter into interest rate swap transactions on a net
basis, i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. Inasmuch
as these transactions are entered into for good faith hedging purposes, the
Manager believes that such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to its borrowing
restrictions. The net amount of the excess, if any, of the Fund's obligations
over its entitlements with respect to each interest rate swap will be accrued
on a daily basis, and an amount of cash or high grade liquid debt securities
having an aggregate net asset value at least equal to the accrued excess will
be maintained in a segregated account by the Fund's custodian. If the interest
rate swap transaction is entered into on other than a net basis, the full
amount of the Fund's obligations will be accrued on a daily basis, and the full
amount of the Fund's obligations will be maintained in a segregated account by
the Fund's custodian. The Fund will not enter into any interest rate swap
transaction unless the credit quality of the unsecured senior debt or the
claims-paying ability of the other party thereto is rated in one of the highest
two rating categories by at least one nationally recognized statistical rating
organization or is believed by the Manager to be equivalent to such rating. If
there is a default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting
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both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with other
similar instruments traded in the interbank market.
The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Manager is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of the Fund would diminish compared with what it would
have been if these investment techniques were not used.
Interest rate swap transactions do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest
payments that the Fund is contractually obligated to make. If the MBS or other
security underlying an interest rate swap is prepaid and the Fund continues to
be obligated to make payments to the other party to the swap, the Fund would
have to make such payments from another source. If the other party to an
interest rate swap defaults, the Fund's risk of loss consists of the net amount
of interest payments that the Fund contractually is entitled to receive. Since
interest rate transactions are individually negotiated, the Manager expects to
achieve an acceptable degree of correlation between the Fund's rights to
receive interest on MBSs and its rights and obligations to receive and pay
interest pursuant to interest rate swaps.
Writing Covered Options. The Fund is authorized to write, i.e., sell, covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised,
the writer realizes a gain or loss from the sale of the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt with the Fund's custodian
with a value equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise for as long as the option is outstanding. The
Fund may engage in closing transactions in order to terminate put options that
it has written.
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Options referred to herein and in the Fund's Prospectus may be options issued
by The Options Clearing Corporation (the "Clearing Corporation") which are
currently traded on the Chicago Board Options Exchange, American Stock
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange, New York Stock
Exchange or Midwest Stock Exchange. An option position may be closed out only
on an exchange which provides a secondary market for an option of the same
series. If a secondary market does not exist, it might not be possible to
effect closing transactions in particular options, with the result, in the case
of a covered call option, that the Fund will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or the Clearing Corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by the Clearing Corporation as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms.
The Fund may also enter into over-the-counter option transactions ("OTC
options"), which are two-party contracts with price and terms negotiated
between the buyer and seller. The staff of the Securities and Exchange
Commission has taken the position that OTC options and the assets used as cover
for written OTC options are illiquid securities. However, if the OTC option is
sold by the Fund to a primary U.S. Government securities dealer recognized by
the Federal Reserve Bank of New York and the Fund has the unconditional
contractual right to repurchase such OTC option from the dealer at a
predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the
underlying security minus the option's strike price). The repurchase price with
the primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money". This policy 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 positions.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus
limiting the Fund's risk of loss through a decline in the market value of the
security until the put option expires. The amount of any appreciation in the
value of the underlying security will be offset partially by the amount of the
premium paid for the put option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale transaction and profit
or loss from the sale will depend on whether the amount received is more or
less than the premium paid for the put option plus the related transaction
cost. A closing sale transaction cancels out the Funds' position as the
purchaser of an option by means of an offsetting sale of an identical option
prior to the expiration of the option it has purchased. In certain
circumstances, the Fund may purchase call options on securities held in its
portfolio on which it has written call options or which it intends to purchase.
The Fund may purchase either options traded on an exchange or OTC options.
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Futures and Financial Futures. As described in the Prospectus, the Fund is
authorized to engage in transactions in financial futures, and related options
on such futures. Set forth below is further information concerning futures
transactions.
A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction. Futures contracts have been
designed by boards of trade which have been designated "contracts markets" by
the Commodity Futures Trading Commission ("CFTC").
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin", are required to be made on a daily
basis as the price of the futures contracts fluctuates making the long and
short positions in the futures contracts more or less valuable, a process known
as "mark to market." At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
The Fund has received an order from the Securities and Exchange Commission
exempting it from the provisions of Section 17(f) and Section 18(f) of the
Investment Company Act of 1940 (the "1940 Act") in connection with its strategy
of investing in futures contracts. Section 17(f) relates to the custody of
securities and other assets of an investment company and may be deemed to
prohibit certain arrangements between the Fund and commodities brokers with
respect to initial and variation margin. Section 18(f) of the 1940 Act
prohibits an open-end investment company such as the Fund from issuing a
"senior security" other than a borrowing from a bank. The staff of the
Securities and Exchange Commission has in the past indicated that a futures
contract may be a "senior security" under the 1940 Act.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the prices of options and futures contracts and
movements in the prices of the securities which are the subject of the hedge.
If the price of the options and futures contract moves more or less than the
price of the securities, the Fund will experience a gain or loss which will not
be completely offset by movements in the price of the securities which are the
subject of the hedge. The successful use of options and futures also depends on
the Investment Adviser's ability to predict correctly price movements in the
market involved in a particular options or futures transaction.
Prior to exercise or expiration, an exchange-traded option position can only
be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund will enter into an option or futures transaction on an
exchange only if there appears to be a liquid secondary market for such options
or futures. However, there can be no assurance that a liquid secondary market
will exist for any particular call or put option or futures contract at any
specific time. Thus, it may not be possible to close an option or futures
position. In the case of a futures position or an option on a futures position
written by the Fund, in the event of adverse price movements, the Fund would
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continue to be required to make daily cash payments of variation margin. In
such situations, if the Fund has insufficient cash, it may have to sell
portfolio securities to meet daily variation margin requirements at a time when
it may be disadvantageous to do so. In addition, the Fund may be required to
take or make delivery of the currency underlying futures contracts it holds.
The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to hedge effectively its portfolio. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option. The risk of loss from investing in futures transactions is
theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying currency (whether or not covered) which may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). "Trading limits" are imposed on the maximum number of contracts which
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Manager does not believe that these
trading and position limits will have any adverse impact on the portfolio
strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements and purchase and sale contracts.
Repurchase agreements and purchase and sale contracts may be entered into only
with a member bank of the Federal Reserve System or primary dealer in U.S.
Government securities or an affiliate thereof. Under such agreements, the bank
or primary dealer or affiliate 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 results in a fixed
rate of return insulated from market fluctuations during such period. In the
case of repurchase agreements, the prices at which the trades are conducted do
not reflect accrued interest on the underlying obligations; whereas, in the
case of purchase and sale contracts, the prices take into account accrued
interest. Such agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, the Fund will require the seller to
provide additional collateral if the market value of the securities falls below
the repurchase price at any time during the term of the repurchase agreement;
the Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or purchase and sale contract, instead of the contractual
fixed rate of return, the rate of return to the Fund shall be dependent upon
intervening fluctuations of the market value of such 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.
Lending of Portfolio Securities. Subject to investment restriction (8) below,
the Fund may lend securities from its portfolio to approved borrowers and
receive collateral in cash or securities issued or
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guaranteed by the United States Government which are maintained at all times in
an amount equal to at least 100% of the current market value of the loaned
securities. The purpose of such loans is to permit the borrower to use such
securities for delivery to purchasers when such borrower has sold short. If
cash collateral is received by the Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are delivered
to the Fund as collateral, the Fund and the borrower negotiate a rate for the
loaned premium to be received by the Fund for lending its portfolio securities.
In either event, the total yield on the Fund's portfolio is increased by loans
of its portfolio securities. The Fund will have the right to regain record
ownership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans.
CURRENT INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the 1940
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) With respect to at least 75% of its total assets, invest in the
securities of any one issuer if, immediately after and as a result of such
investment, the value of the holdings of the Fund in the securities of such
issuer exceeds 5% of the Fund's total assets, taken at market value, except
that such restriction shall not apply to securities issued or guaranteed by
the United States Government or any of its agencies or instrumentalities.
(2) Make investments for the purpose of exercising control or management.
(3) Purchase the securities of other investment companies except in
connection with a merger, consolidation, acquisition or reorganization, and
provided further that the Fund may purchase, to the extent permitted by the
1940 Act, the securities of another investment company having substantially
the same investment objective and policies as the Fund.
(4) Purchase or sell real estate (including interests in real estate
limited partnerships); provided that the Fund may invest in mortgage-backed
securities as described in the Prospectus and Statement of Additional
Information, and including any securities secured by real estate or
interests therein.
(5) Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities. (The deposit or payment by the Fund of
initial or variation margin in connection with options, futures or related
options transactions, if applicable, is not considered the purchase of a
security on margin.)
(6) Make short sales of securities or maintain a short position in
securities.
(7) Make loans to other persons (except as provided in (8) below);
provided that for purposes of this restriction the acquisition of mortgage-
backed and asset-backed securities, FNMA debentures, money market
securities, purchase and sale contracts and repurchase agreements shall not
be deemed to be the making of a loan.
(8) Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value; provided that such loans shall be made in
accordance with the guidelines set forth in the Prospectus and Statement of
Additional Information.
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(9) Issue senior securities, borrow money or pledge its assets in excess
of 33 1/3% of its total assets taken at value (including the amount
borrowed) and then only from banks as a temporary measure for the purpose
of meeting redemption requests, distribution requirements under the
Internal Revenue Code of 1986, as amended, or settlement of investment
transactions, or for extraordinary or emergency purposes; provided,
however, that for purposes of this restriction, transactions involving
"cover" or for which segregated accounts have been established as described
in the Prospectus and herein under "Investment Objective and Policies--
Portfolio Strategies Involving Interest Rate Transactions, Options and
Futures" and "Investment Objective and Policies--Other Investment Policies
and Practices" shall not be considered a borrowing. Usually only
"leveraged" investment companies may borrow in excess of 5% of their
assets; however, the Fund will not borrow to increase income but intends
only to borrow to meet redemption requests, to meet such distribution
requirements, to settle investment transactions which may otherwise require
untimely dispositions of Fund securities or for extraordinary or emergency
purposes. Interest paid on such borrowings will reduce net income. (See
restriction (10) below regarding the exclusion from this restriction of
arrangements with respect to interest rate transactions, options, futures
contracts and options on futures contracts.)
(10) Mortgage, pledge, hypothecate or in any manner transfer as security
for indebtedness any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in (9) above, and then
such mortgaging, pledging or hypothecating may not exceed 10% of its total
assets, taken at market value. (For the purpose of this restriction and
restriction (9) above, collateral arrangements with respect to interest
rate transactions or the writing of options, futures contracts, options on
futures contracts, and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge of assets, and neither such
arrangements nor the entering into of interest rate transactions nor the
purchase and sale of options, futures or related options are deemed to be
the issuance of a senior security.)
(11) Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are not otherwise readily marketable,
including repurchase agreements maturing in more than seven days, if,
regarding all such securities, more than 10% of its net assets, taken at
market value, would be invested in such securities. While the Fund will not
purchase illiquid securities in an amount exceeding 10% of its net assets,
the Fund may purchase, without regard to that limitation, securities that
are not registered under the Securities Act of 1933 (the "Securities Act"),
but that can be offered and sold to "qualified institutional buyers" under
Rule 144A under the Securities Act, provided that the Fund's Board of
Directors continuously determines, based on the trading markets for the
specific Rule 144A security, that it is liquid.
(12) Act as an underwriter of securities, except to the extent that the
Fund may technically be deemed an underwriter in selling portfolio
securities described in (11) above.
(13) Purchase or sell interests in oil, gas or other mineral exploration
or development programs.
(14) Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any particular
industry (provided that for these purposes, the Fund's investments in
mortgage-backed and asset-backed securities shall not be considered
investments in the securities of issuers in a particular industry).
Additional investment restrictions adopted by the Fund, which may be changed
by the Directors, provide that the Fund may not:
(i) Invest in securities or companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of its total assets would be invested in such securities
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<PAGE>
(except that the Fund will not be subject to this restriction with respect
to investments in mortgage-backed or asset-backed securities).
(ii) Write, purchase or sell puts or calls or combinations thereof,
except to the extent described in the Fund's Prospectus and in this
Statement of Additional Information, as amended from time to time.
(iii) Purchase or retain the securities of any issuer, if those
individual Directors, officers and directors of the Fund, the Manager or
any subsidiary thereof each owning beneficially more than 1/2 of 1% of the
securities of such issuer own in the aggregate more than 5% of the
securities of such issuer.
(iv) Purchase or sell OTC options and securities underlying such options
if, as a result of such a transaction, such options, to the extent the
Commission staff views such options as illiquid, together with all other
illiquid securities or securities which are not readily marketable, exceed
10% of the net assets of the Fund, taken at market value.
(v) Invest in residual interests in collateralized mortgage obligation
structures or residual interests in real estate mortgage investment
conduits.
The Fund will not change or modify the policy described in clause (iv) above
prior to the change or modification by the Commission staff of its position
regarding OTC options.
Portfolio securities of the Fund generally may not be purchased from, sold or
loaned to the Manager or its affiliates or any of their directors, officers or
employees, acting as principal.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm, or its affiliates except
for brokerage transactions permitted under the 1940 Act involving only usual
and customary commissions or transactions pursuant to an exemptive order under
the 1940 Act. See "Portfolio Transactions and Brokerage." Without such an
exemptive order, the Fund is prohibited from engaging in portfolio transactions
with Merrill Lynch or its affiliates acting as principal and from purchasing
securities in public offerings which are not registered under the Securities
Act or are not municipal securities as defined in the Securities Exchange Act
of 1934, in which such firms or any of its affiliates participate as an
underwriter or dealer.
Proposed Uniform Investment Restrictions. As discussed in the Prospectus
under "Investment Objective and Policies--Investment Restrictions", the Board
of Directors of the Fund has approved the replacement of the Fund's existing
investment restrictions with the fundamental and non-fundamental investment
restrictions set forth below. These uniform investment restrictions have been
proposed for adoption by all of the non-money market mutual funds advised by
Merrill Lynch Asset Management, L.P. (the "Investment Adviser") or its
affiliate, Fund Asset Management, L.P. ("FAM"). The investment objective and
policies of the Fund will be unaffected by the adoption of the proposed
investment restrictions.
Shareholders of the Fund are currently considering whether to approve the
proposed revised investment restrictions. If such shareholder approval is
obtained, the Fund's current investment restrictions will be replaced by the
proposed restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, the Fund may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
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<PAGE>
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the proposed non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors of the Fund has otherwise
determined to be liquid pursuant to applicable law. Notwithstanding the 15%
limitation herein, to the extent the laws of any state in which the Fund's
shares are registered or qualified
14
<PAGE>
for sale require a lower limitation, the Fund will observe such limitation.
As of the date hereof, therefore, the Fund will not invest more than 10% of
its total assets in securities which are subject to this investment
restriction (c). Securities purchased in accordance with Rule 144A under
the Securities Act (a "Rule 144A security") and determined to be liquid by
the Fund's Board of Directors are not subject to the limitations set forth
in this investment restriction (c). Notwithstanding the fact that the Board
may determine that a Rule 144A security is liquid and not subject to
limitations set forth in this investment restriction (c), the State of Ohio
does not recognize Rule 144A securities as securities that are free of
restrictions as to resale. To the extent required by Ohio law, the Fund
will not invest more than 5% of its total assets in securities of issuers
that are restricted as to disposition, including Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities, asset-
backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of the
Investment Adviser, the directors of such general partner or the officers
and directors of any subsidiary thereof each owning beneficially more than
one-half of one percent of the securities of such issuer own in the
aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (7) above, borrow
money or pledge its assets in excess of 33 1/3% of its total assets taken
at value (including the amount borrowed) and then only from banks as a
temporary measure for the purpose of meeting redemption requests,
distribution requirements under the Internal Revenue Code of 1986, as
amended, or settlement of investment transactions, or for extraordinary or
emergency purposes; provided, however, that for purposes of this
restriction, transactions involving "cover" or for which segregated
accounts have been established as described in the Prospectus and herein
under "Investment Objective and Policies--Portfolio Strategies Involving
Interest Rate Transactions, Options and Futures" and "Investment Objective
and Policies--Other Investment Policies and Practices" shall not be
considered a borrowing. Usually only "leveraged" investment companies may
borrow in excess of 5% of their assets; however, the Fund will not borrow
to increase income but intends only to borrow to meet redemption requests,
to meet such distribution requirements, to settle investment transactions
which may otherwise require untimely dispositions of Fund securities or for
extraordinary or emergency purposes. Interest paid on such borrowings will
reduce net income.
15
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is P.O. Box
9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel--President (1)(2)--President of Merrill Lynch Asset Management,
L.P. ("MLAM" or the "Manager") or its predecessors since 1977 and Chief
Investment Officer since 1976; President and Chief Investment Officer of Fund
Asset Management, L.P. ("FAM") or its predecessors since 1977; President and
Director of Princeton Services, Inc. ("Princeton Services") since 1993;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") since 1990;
Executive Vice President of Merrill Lynch since 1990 and Senior Vice President
thereof from 1985 to 1990; and Director of Merrill Lynch Funds Distributor,
Inc. (the "Distributor").
Joe Grills--Director (2)--183 Soundview Lane, New Canaan, Connecticut 06840.
Member of the Committee of Investment of Employee Benefit Assets of the
Financial Executives Institute ("CIEBA") since 1986; member of CIEBA's
Executive Committee since 1988 and its Chairman from 1991 to 1992; Assistant
Treasurer of International Business Machines Incorporated ("IBM") and Chief
Investment Officer of IBM Retirement Funds from 1986 until 1993; Member of the
Investment Advisory Committee of the State of New York Common Retirement Fund;
Director, Duke Management Company and Winthrop Financial Associates (real
estate management).
Walter Mintz--Director (2)--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Associates (investment
partnership) since 1982.
Melvin R. Seiden--Director (2)--780 Third Avenue, Suite 2502, New York, New
York 10017. President of Silbanc Properties, Ltd. (real estate, investment and
consulting) since 1987; Chairman and President of Seiden & de Cuevas, Inc.
(private investment firm) from 1964 to 1987.
Stephen B. Swensrud--Director (2)--24 Federal Street, Boston, Massachusetts
02110. Principal of Fernwood Associates (financial consultants); Director,
Hitchiner Manufacturing Company.
Harry Woolf--Director (2)--The Institute for Advanced Study, Olden Lane,
Princeton, New Jersey 08540. Member of the editorial board of Interdisciplinary
Science Reviews; Director, Alex. Brown Mutual Funds, Advanced Technology
Laboratories, Family Health International and SpaceLabs Medical (medical
equipment manufacturing and marketing).
Terry K. Glenn--Executive Vice President (1)(2)--Executive Vice President of
the Manager and FAM or their predecessors since 1983; Executive Vice President
and Director of Princeton Services since 1993; President of the Distributor
since 1986 and Director since 1991; President of Princeton Administrators, L.P.
since 1988.
Gerald M. Richard--Treasurer (1)(2)--Senior Vice President and Treasurer of
the Manager and FAM or their predecessors since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of the Distributor since
1984 and Vice President since 1981.
Jeffrey B. Hewson--Vice President (1)(2)--Vice President of the Manager or
its predecessors since 1989 and Portfolio Manager of the Manager or its
predecessors since 1985; Senior Consultant, Price Waterhouse 1981 to 1985.
Gregory Mark Maunz--Vice President (1)(2)--Vice President of the Manager or
its predecessors since 1985 and Portfolio Manager of the Manager or its
predecessors since 1984.
Theodore J. Magnani--Vice President (1)--Vice President of the Manager or its
predecessors since 1992.
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<PAGE>
Donald C. Burke--Vice President (1)(2)--Vice President and Director of
Taxation of the Manager or its predecessors since 1990; employee of Deloitte &
Touche LLP from 1982 to 1990.
Michael J. Hennewinkel--Secretary (1)(2)--Vice President of the Manager or
its predecessors since 1985 and attorney associated with the Manager and FAM
or their predecessors since 1982.
- --------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of certain
other investment companies for which the Manager or an affiliate, FAM,
acts as investment adviser or manager.
At September 30, 1994, the officers and Directors of the Fund as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of
common stock of Merrill Lynch & Co., Inc.
Until calendar year 1994, the Fund paid each Director not affiliated with
the Manager (each a "non-affiliated Director") a fee of $5,000 per year plus
$500 per meeting attended, together with such Director's actual out-of-pocket
expenses relating to attendance at meetings. The Fund also compensated members
of its Audit Committee, which consists of all of the nonaffiliated Directors.
As of calendar year 1994, the Fund has paid each nonaffiliated Director a fee
of $5,000 per year plus $250 for each board meeting attended and each Audit
and Nominating Committee member an additional $1,000 per year plus $500 for
each Committee meeting attended. For the fiscal year ended May 31, 1994, fees
and expenses paid to nonaffiliated Directors aggregated $40,587.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, other funds or
investment advisory clients for which the Manager or its affiliates act as an
adviser. Because of different objectives or other factors, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. If purchases or sales of securities by the Manager
for the Fund or other funds for which it acts as investment adviser or for its
advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the Manager or
its affiliates during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an
adverse effect on price.
The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). The Manager receives for its services to the Fund
monthly compensation at the annual rate of 0.50% of the average daily net
assets of the Fund. For the fiscal year ended May 31, 1994, the total
management fees paid to the Manager aggregated $2,710,336. For the fiscal year
ended May 31, 1993, the total management fees paid to the Manager aggregated
$4,759,742. For the period August 2, 1991 (commencement of operations) to May
31, 1992, the total management fees payable to the Manager aggregated
$3,052,541. During such period, the Manager elected to waive a portion of its
fee in the amount of $680,946.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Manager reimburse the Fund in any amount
necessary to prevent the aggregate ordinary operating expenses (excluding
taxes, brokerage fees and commissions, distribution fees and extraordinary
charges such as litigation costs) from exceeding in any fiscal year 2.5% of
the Fund's first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of the remaining average daily
net assets. Such reimbursement, if any, will be subtracted from the monthly
advisory fee. No fee payment will be
17
<PAGE>
made to the Manager during any fiscal year which will cause such expenses to
exceed the most restrictive expense limitation at the time of such payment. For
the fiscal years ended May 31, 1994 and 1993 and the period August 2, 1991
(commencement of operations) to May 31, 1992, no reimbursement was required
pursuant to such expense limitations.
The Management Agreement obligates the Manager to provide investment advisory
services and to pay all compensation of and furnish office space for officers
and employees of the Fund connected with investment and economic research,
trading and investment management of the Fund, as well as the fees of all
Directors of the Fund who are affiliated persons of the Manager or any of its
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 subcustodian and
transfer agent, expenses of redemption of shares, Securities and Exchange
Commission fees, expenses of registering the shares under Federal, state or
foreign laws, fees and expenses of nonaffiliated 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). The Distributor
will pay the promotional expenses of the Fund in connection with the offering
of shares of the Fund. Certain expenses will be financed by the Fund pursuant
to a distribution plan in compliance with Rule 12b-1 under the 1940 Act. See
"Purchase of Shares--Distribution Plans."
Merrill Lynch & Co., Inc., Merrill Lynch Investment Management, Inc. and
Princeton Services, Inc. are "controlling persons" of the Manager as defined
under the Investment Company Act because of their ownership of its voting
securities or their power to exercise a controlling influence over its
management or policies.
Duration and Termination. Unless earlier terminated as described herein, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the 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 1940 Act) of any such party.
Such contracts are not assignable and may be terminated without penalty on 60
days' written notice at the option of either party thereto or by the vote of
the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select Pricing
System: shares of Class A and Class D are sold to investors choosing the
initial sales charge alternatives, and shares of Class B and Class C are sold
to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents identical interests
in the investment portfolio of the Fund and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred sales
charge arrangements. Class B, Class C and Class D shares each have exclusive
voting rights with respect to the Rule 12b-1 distribution plan adopted with
respect to such class pursuant to which account maintenance and/or distribution
fees are paid. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege".
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<PAGE>
The Merrill Lynch Select PricingSM System is used by more than 50 mutual
funds advised by the Manager or its affiliate, FAM. Funds advised by the
Manager or FAM are referred to herein as "MLAM-advised mutual funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Management
Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
As a result of the implementation of the Merrill Lynch Select Pricing System,
Class A shares of the Fund outstanding prior to October 21, 1994, have been
redesignated Class D shares. The Class A shares currently being offered differ
from the Class A shares offered prior to October 21, 1994 in many respects,
including sales charges, exchange privilege and the classes of persons to whom
such shares are offered. For the period August 2, 1991 (commencement of
operations) to May 31, 1992, the Fund sold 9,932,771 of its former Class A
shares (now redesignated Class D Shares), for aggregate net proceeds to the
Fund of $99,100,022. The gross sales charges for the sale of its former Class A
shares of the Fund were $1,381,880, of which $80,666 and $1,301,214 were
received by the Distributor and Merrill Lynch, respectively. During the fiscal
year ended May 31, 1993, the Fund sold 5,909,926 of its former Class A shares
for aggregate net proceeds to the Fund of $58,465,229. The gross sales charge
for the sale of its former Class A shares for that period was $153,817, of
which $133,086 was received by Merrill Lynch and $20,731 was received by the
Distributor. During the fiscal year ended May 31, 1994, the Fund sold 1,365,792
of its former Class A shares for aggregate net proceeds to the Fund of
$13,269,165. The gross sales charge for the sale of its former Class A shares
for that period was $61,480, of which $49,708 was received by Merrill Lynch and
$11,772 was received by the Distributor.
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 (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under Section
401 of the Internal Revenue Code of 1986, as amended (the "Code")) although
more than one beneficiary is involved. The term "purchase" also includes
purchases by any "company," as that term is defined in the 1940 Act, but does
not include purchases by any such company which has not been in existence for
at least six months or which has no purpose other than the purchase of shares
of the Fund or shares of other registered investment companies at a discount;
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.
Closed-End Fund Investment Option. Class A shares of the Fund and other MLAM-
advised mutual funds ("Eligible Class A Shares") are offered at net asset value
to shareholders of certain closed-end funds
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<PAGE>
advised by MLAM or the Investment Adviser who purchased such closed-end fund
shares prior to October 21, 1994 and wish to reinvest the net proceeds from a
sale of their closed-end fund shares of common stock in Eligible Class A
Shares, if the conditions set forth below are satisfied. Alternatively, closed-
end fund shareholders who purchased such shares on or after October 21, 1994
and wish to reinvest the net proceeds from a sale of their closed-end fund
shares are offered Class A shares (if eligible to buy Class A shares) or Class
D shares of the Fund and other MLAM-advised mutual funds ("Eligible Class D
Shares"), if the following conditions are met. First, the sale of the closed-
end fund shares must be made through Merrill Lynch, and the net proceeds
therefrom must be immediately reinvested in Eligible Class A or Class D Shares.
Second, the closed-end fund shares must either have been acquired in the
initial public offering or be shares representing dividends from shares of
common stock acquired in such offering. Third, the closed-end fund shares must
have been continuously maintained in a Merrill Lynch securities account.
Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option. Class A shares of the Fund are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior Floating
Rate Fund") who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock of Senior Floating Rate Fund in shares of the
Fund. In order to exercise this investment option, Senior Floating Rate Fund
shareholders must sell their Senior Floating Rate Fund shares to the Senior
Floating Rate Fund in connection with a tender offer conducted by the Senior
Floating Rate Fund and reinvest the proceeds immediately in the Fund. This
investment option is available only with respect to the proceeds of Senior
Floating Rate Fund shares as to which no Early Withdrawal Charge (as defined in
the Senior Floating Rate Fund prospectus) is applicable. Purchase orders from
Senior Floating Rate Fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related Senior Floating Rate
Fund tender offer terminates and will be effected at the net asset value of the
Fund at such day.
REDUCED INITIAL SALES CHARGE
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 any other MLAM-advised mutual funds. For any such
right of accumulation to be made available the Distributor must be provided at
the time of purchase, by the purchaser or the purchaser's securities dealer,
with sufficient information to permit confirmation of qualification. Acceptance
of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares held in the name
of a nominee or custodian under pension, profit-sharing, or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds, made within a thirteen-month period starting
with the first purchase pursuant to the Letter of Intention in the form
provided in the Prospectus. The Letter of Intention is available only to
investors whose accounts are maintained at the Fund's Transfer Agent. The
Letter of Intention is not available to employee benefit plans for which
Merrill Lynch provides plan participant record-keeping services. The Letter of
Intention is not a binding obligation to purchase any amount of Class A or
Class D shares, however, its execution will result in the purchaser paying a
lower sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intention may be included under a
subsequent Letter of Intention executed within 90 days of such
20
<PAGE>
purchase if the Distributor is informed in writing of this intent within such
90-day period. The value of Class A shares of the Fund and of other MLAM-
advised mutual funds, presently held at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intention, may be included as a credit toward the completion of such Letter,
but the reduced sales charge applicable to the amount covered by such Letter
will be applied only to new purchases. If the total amount of shares does not
equal the amount stated in the Letter of Intention (minimum of $25,000), the
investor will be notified and must pay, within 20 days of the expiration of
such Letter, the difference between the sales charge on the Class A or Class D
shares purchased at the reduced rate and the sales charge applicable to the
shares actually purchased through the Letter. Class A or Class D shares equal
to five percent of the intended amount will be held in escrow during the
thirteen-month period (while remaining registered in the name of the purchaser)
for this purpose. The first purchase under the Letter of Intention must be at
least five percent of the dollar amount of such Letter. If a purchase during
the term of such Letter would otherwise be subject to a further reduced sales
charge based on the right of accumulation, the purchaser will be entitled on
that purchase and subsequent purchases to that further reduced percentage sales
charge but there will be no retroactive reduction of the sales charges on any
previous purchase. The value of any shares redeemed or otherwise disposed of by
the purchaser prior to termination or completion of the Letter of Intention
will be deducted from the total purchases made under such Letter. An exchange
from a MLAM-advised money market fund into the Fund that creates a sales charge
will count toward completing a new or existing Letter of Intention from the
Fund.
Employer Sponsored Retirement and Savings Plans. Class A and Class D shares
are offered at net asset value to employer sponsored retirement or savings
plans, such as tax qualified retirement plans within the meaning of Section
401(a) of the Code, deferred compensation plans within the meaning of Section
403(b) and 457 of the Code, other deferred compensation arrangements, Voluntary
Employee Benefits Association ("VEBA") plans, and non-qualified After Tax
Savings and Investment programs, maintained on the Merrill Lynch Group Employee
Services system, herein referred to as "Employer Sponsored Retirement or
Savings Plans", provided the plan has accumulated $20 million or more in MLAM-
advised mutual funds (in the case of Class A shares) or $5 million or more in
MLAM-advised mutual funds (in the case of Class D shares). Class D shares may
be offered at net asset value to new Employer Sponsored Retirement or Savings
Plans, provided the plan has $3 million or more initially invested in MLAM-
advised mutual funds. Assets of Employer Sponsored Retirement or Savings Plans
sponsored by the same sponsor or an affiliated sponsor may be aggregated. Class
A shares and Class D shares also are offered at net asset value to Employer
Sponsored Retirement or Savings Plans that have at least 1,000 employees
eligible to participate in the plan (in the case of Class A shares) or between
500 and 999 employees eligible to participate in the plan (in the case of Class
D shares). Employees eligible to participate in Employer Sponsored Retirement
or Savings Plans of the same sponsoring employer or its affiliates may be
aggregated. Tax qualified retirement plans within the meaning of Section 401(a)
of the Code meeting any of the foregoing requirements and which are provided
specialized services (e.g., plans whose participants may direct on a daily
basis their plan allocations among a wide range of investments including
individual corporate equities and other securities in addition to mutual fund
shares) by Blueprint, are offered Class A shares at a price equal to net asset
value per share plus a reduced sales charge of 0.50%. Any Employer Sponsored
Retirement or Savings Plan which does not meet the above described
qualifications to purchase Class A shares at net asset value has the option of
(i) purchasing Class A shares at the initial sales charge schedule and possible
CDSC schedule disclosed in the Prospectus if it is otherwise eligible to
purchase Class A shares, (ii) purchasing Class D shares at the initial sales
charge and possible CDSC schedule disclosed in the Prospectus, (iii) if the
Employer Sponsored Retirement or Savings Plan meets the specified requirements,
purchasing Class B shares with a waiver of the
21
<PAGE>
CDSC upon redemption, or if the Employer Sponsored Retirement or Savings Plan
does not qualify to purchase Class B shares with a waiver of the CDSC upon
redemption, purchasing Class C shares at the CDSC schedule disclosed in the
Prospectus. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Employer Sponsored
Retirement or Savings Plans.
Purchase Privileges of Certain Persons. Directors of the Fund, members of
the Board of other MLAM-advised investment companies, directors and employees
of Merrill Lynch & Co., Inc. and its subsidiaries (the term "subsidiaries",
when used herein with respect to Merrill Lynch & Co., Inc., includes MLAM, FAM
and certain other entities directly or indirectly wholly-owned and controlled
by Merrill Lynch & Co., Inc.), and any trust, pension, profit-sharing or other
benefit plan for such persons, may purchase Class A shares of the Fund at net
asset value.
Class D shares of the Fund will be 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. Second, the investor also must establish that such redemption
had been made within 60 days prior to the investment in the Fund, and the
proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
Class D shares of the Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than six months. 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.
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, if the following conditions are satisfied:
First, the investor must purchase Class D shares of the Fund with proceeds
from a redemption of shares of such other mutual fund and such fund was
subject to a sales charge either at the time of purchase or on a deferred
basis; second, such purchase of Class D shares must be made within 90 days
after such notice of termination.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund which might result from an acquisition of assets having net
22
<PAGE>
unrealized appreciation which is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund. The
issuance of Class D shares for consideration other than cash is limited to
bona fide reorganizations, statutory mergers or other acquisitions of
portfolio securities which (i) meet the investment objectives and policies of
the Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, which are not restricted as to
transfer either by law or liquidity of market (except that the Fund may
acquire through such transactions restricted or illiquid securities to the
extent the Fund does not exceed the applicable limits on acquisition of such
securities set forth under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Fund to the
Distributor with respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act.
Among other things, each Distribution Plan provides that the Distributor shall
provide and the Directors shall review quarterly reports of the disbursement
of the account maintenance fees and/or distribution fees paid to the
Distributor. In their consideration of each Distribution Plan, the Directors
must consider all factors they deem relevant, including information as to the
benefits of the Distribution Plan to the Fund and its related class of
shareholder. Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of Directors
who are not "interested persons" of the Fund, as defined in the Investment
Company Act (the "Independent Directors"), shall be committed to the
discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is a reasonable likelihood that such Distribution Plan
will benefit the Fund and its related class of shareholders. Each Distribution
Plan can be terminated at any time, without penalty, by the vote of a majority
of the Independent Directors or by the vote of the holders of a majority of
the outstanding related class of voting securities of the Fund. A Distribution
Plan cannot be amended to increase materially the amount to be spent by the
Fund without the approval of the related class of shareholder, and all
material amendments are required to be approved by the vote of the Directors,
including a majority of the Independent Directors who have no direct or
indirect financial interest in such Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such
Distribution Plan or such report, the first two years in an easily accessible
place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge
23
<PAGE>
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 May 31, 1994,
with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and the Distributor's voluntary maximum for the period August 2, 1991
(commencement of the public offering of Class B shares) to May 31, 1994. Since
Class C shares of the Fund had not been publicly issued prior to the date of
this Statement of Additional Information, information concerning Class C
shares is not yet provided below.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF MAY 31, 1994
------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ----------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule As
Adopted................ $983,259 $61,454 $10,646 $72,100 $16,640 $55,460 $1,872
Under Distributor's
Voluntary Waiver....... $983,259 $61,454 $ 4,916 $66,370 $16,640 $49,730 $1,872
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since August 2, 1991
(commencement of the public offering of Class B shares) other than shares
acquired through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 7, 1993, under a prior plan
at the 0.75% rate, 0.50% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule. See "Purchase of Shares--Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any contingent deferred sales
charge payments) is amortizing the unpaid balance. No assurance can be
given that payments of the distribution fee will reach either the
voluntary maximum or the NASD maximum.
24
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and purchase of Fund shares.
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 New York Stock Exchange is restricted as determined by
the Commission or such Exchange is closed (other than customary weekend and
holiday closings), for any period during which an emergency exists, as defined
by the Securities and Exchange Commission, as a result of which disposal of
portfolio securities or determination of the net asset value of the Fund is
not reasonably practicable, and for such other periods as the Securities and
Exchange Commission may by order permit for the protection of shareholders of
the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by
the Fund at such time.
DEFERRED SALES CHARGES--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Alternative Sale
Arrangements--Deferred Sales Charge Alternatives--Class B and Class C Shares",
while Class B shares redeemed within four years of purchase are subject to a
CDSC under most circumstances, the charge is waived (i) on redemptions of
Class B shares in connection with certain post-retirement withdrawals from an
Individual Retirement Account ("IRA") or other retirement plan or (ii) on
redemptions of Class B following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies are (a) any partial or
complete redemption in connection with a tax-free distribution following
retirement under a tax-deferred retirement plan or attaining age 59 1/2 in the
case of an IRA or other retirement plan, or part of a series of equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) or any redemption resulting from the tax-free return of an excess
contribution to an IRA; or (b) any partial or complete redemption following
the death or disability (as defined in the Code) of a Class B shareholder
(including one who owns the Class B shares as joint tenant with his or her
spouse), provided the redemption is requested within one year of the death or
initial determination of disability. For the period August 2, 1991
(commencement of operations) to May 31, 1992 and the fiscal years ended May
31, 1993 and May 31, 1994, the Distributor received contingent deferred sales
charges of $911,653, $3,964,093 and $2,010,325, respectively, all of which was
paid to Merrill Lynch.
Retirement Plans. Any Retirement Plan which does not meet the qualifications
to purchase Class A shares at net asset value has the option of purchasing
Class A or Class D shares at the sales charge schedule disclosed in the
Prospectus, or if the Retirement Plan meets the following requirements, then
it may purchase Class B or Class C shares with a waiver of the CDSC upon
redemption. The CDSC is waived for any Eligible 401(k) Plan redeeming Class B
or Class C shares. "Eligible 401(k) Plan" is defined as a retirement plan
qualified under Section 401(k) of the Code with a salary reduction feature
offering a menu of investments to plan participants. The CDSC is also waived
for redemptions from 401(a) plans qualified under the Code, provided, however,
each plan has the same or an affiliated sponsoring employer as an Eligible
401(k) Plan purchasing Class B shares of MLAM-advised mutual funds ("Eligible
401(a) Plan"). Other tax qualified retirement plans within the meaning of
Sections 401(a) and 403(b) of the Code which are provided specialized services
(e.g., plans whose participants may direct on a daily basis their plan
allocations among a menu of investments) by independent administration firms
contracted through Merrill Lynch also may purchase Class B shares with a
waiver of the CDSC. The CDSC is waived for any Class B shares which are
purchased by an
25
<PAGE>
Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied Individual Retirement Account
and held in such account at the time of redemption. The Class B CDSC is also
waived for any Class B shares which are purchased by a Merrill Lynch rollover
IRA that was funded by a rollover from a terminated 401(k) plan managed by the
MLAM Private Portfolio Group and held in such account at the time of
redemption. The minimum initial and subsequent purchase requirements are waived
in connection with all the above referenced Retirement Plans. "Eligible 401(k)
Plan" is defined as a retirement plan qualified under Section 401(k) of the
Code with a salary reduction feature offering a menu of investments to plan
participants.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Directors, the Manager is responsible
for the execution of the Fund's portfolio transactions. The Fund has no
obligation to deal with any dealer or broker or group of brokers in the
execution of transactions in portfolio securities. Orders for transactions in
portfolio securities are placed for the Fund with a number of brokers and
dealers, including Merrill Lynch. In placing orders, it is the policy of the
Fund to obtain the most favorable net results, taking into account various
factors, including price (including applicable dealer spread or brokerage
commissions), size of the transaction and difficulty of execution. Where
practicable, the Manager surveys a number of brokers and dealers in connection
with proposed portfolio transactions and selects the broker or dealer which
offers the Fund best price and execution or other services which are of benefit
to the Fund. Securities firms also may receive brokerage commissions on
transactions including covered call options written by the Fund and the sale of
underlying securities upon the exercise of such options. In addition,
consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and policies established by the Fund's Directors, the
Manager may consider sales of shares of the Fund as a factor in the selection
of brokers or dealers to execute portfolio transactions for the Fund.
The Fund does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Manager may receive orders for
transactions by the Fund. Such supplemental research services ordinarily
consist of assessments and analyses of the business or prospects of a company,
industry or economic sector. Information so received will be in addition to and
not in lieu of the services required to be performed by the Manager under the
Management Agreement. The expenses of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information, and the
Manager may use such information in servicing its other accounts.
The Fund invests in securities traded primarily in the over-the-counter
market. Transactions in the over-the-counter market are generally principal
transactions with dealers and the costs of such transactions involve dealer
spreads rather than brokerage commissions. With respect to over-the-counter
transactions, where possible, the Fund deals directly with the dealers who make
a market in the securities involved, except in those circumstances in which
better prices and execution are available elsewhere. Under the 1940 Act,
persons affiliated with the Fund are prohibited from dealing with the Fund as
principal in purchase and sale of securities. Since transactions in the over-
the-counter market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the Fund, including
Merrill Lynch, will not serve as the Fund's dealer in such transactions.
However, affiliated persons of the Fund may serve as its broker in over-the-
counter transactions conducted on an agency basis. The Fund may not purchase
securities from any underwriting syndicate of which Merrill Lynch is a member,
except pursuant to procedures adopted by the Directors of the Fund which comply
with rules adopted by the Securities and Exchange Commission.
26
<PAGE>
For the fiscal years ended May 31, 1992, 1993 and 1994, the Fund paid no
brokerage commissions.
The Directors of the Fund have considered the possibility of recapturing for
the benefit of the Fund brokerage commissions, dealer spreads and other
expenses of possible portfolio transactions, such as underwriting commissions,
by conducting such portfolio transactions through affiliated entities,
including Merrill Lynch. For example, brokerage commissions received by Merrill
Lynch could be offset against the management fee paid by the Fund to the
Manager. After considering all factors deemed relevant, the Directors made a
determination not to seek such recapture. The Directors will reconsider this
matter from time to time.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which
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 disclosing 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.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such actions, for defensive or other reasons, appear
advisable to the Investment Adviser. While it is not possible to predict
turnover rates with any certainty, at present it is anticipated that the Fund's
annual portfolio turnover rate, under normal circumstances, will be less than
200%. (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by
the monthly average of the value of the portfolio securities owned by the Fund
during the particular fiscal 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.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value.
The net asset value of the shares of the Fund is determined by the Manager
once daily, Monday through Friday, at 4:15 P.M. New York time, on each day
during which the New York Stock Exchange is open for trading. The New York
Stock Exchange is not open on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net asset value per share is computed by dividing the sum of the value of the
securities held by the Fund plus any cash or other assets minus all liabilities
by the total number of shares outstanding at such time, rounded to the nearest
cent. Expenses, including the management fees and any account maintenance
and/or distribution fees, are accrued daily. The per share net asset value of
the Class B, Class C and Class D
27
<PAGE>
shares generally will be lower than the per share net asset value of the Class
A shares reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares and the daily expense accruals of the account
maintenance fees applicable with respect to the Class D shares; moreover the
per share net asset value of the Class B and Class C shares generally will be
lower than the per share net asset value of its Class D shares reflecting the
daily expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to the Class B and Class C shares of the Fund. It is
expected, however, that the per share net asset value of the four class will
tend to converge immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differential between the classes.
The Board of Directors will take steps to ensure that such value reflects the
fair value of those securities and the Board will continuously monitor the
accuracy of such pricing information. Portfolio securities of the Fund which
are traded in the market are valued at the last available bid price in the
market or on the basis of yield equivalents as obtained from one or more
dealers that make markets in such securities. Options on mortgage-backed
securities and other securities of the Fund which are traded on exchanges, are
valued at their last bid price in the case of options purchased by the Fund and
their last asked price in the case of options written by the Fund. An option
traded on the market is valued at its last bid price or asked price as obtained
from at least two independent entities (one of which is not a party to the
option). Interest rate futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges.
Where there is no market quotation on securities or options, fair market
value will be determined in good faith by or under the direction of the Fund's
Directors. Such valuations and procedures will be reviewed periodically by the
Directors.
Generally, trading in mortgage-backed or other securities issued or
guaranteed by United States Government agencies or instrumentalities is
substantially completed each day at various times prior to 4:15 P.M., New York
time. The values of such securities used in computing the net asset value of
the Fund's shares are determined as of such times. Occasionally, events
affecting the values of such securities may occur between the times at which
they are determined and the time the Fund determines its net asset value which
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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Certain of such services are
not available to investors who place orders for the Fund shares through
Blueprint. Full details as to each such service and copies of the various plans
described below can be obtained from the Fund, the Distributor or Merrill
Lynch.
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
28
<PAGE>
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for
each purchase or sale transaction other than automatic investment purchases and
the reinvestment of ordinary income dividends and long-term capital gain
distributions.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent. Shareholders considering
transferring their Class A shares from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the Class A
or Class D shares are to be transferred will not take delivery of shares of the
Fund, a shareholder either must redeem the Class A or Class D shares (paying
any applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder at the Transfer Agent. Shareholders
considering transferring a tax-deferred retirement account such as an
individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A (if the shareholder is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer, or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation can also be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder.
Investors whose shares of the Fund are held within a CMA account may arrange to
have periodic investments made in the Fund, in their CMA accounts or in certain
related accounts in the amount of $100 or more ($1 for retirement accounts)
through the CMA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund, without sales charge, as
of the close of business on the payable date of the dividend or distribution.
Shareholders may elect in writing to receive either their dividends or capital
gains distributions, or both, in cash, in which event payment will be mailed or
direct deposited on or about the payment date.
29
<PAGE>
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividend
and/or capital gains distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after the receipt by the Transfer Agent of such
notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more, and monthly withdrawals for
shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A or Class D
shares. Redemptions will be made at net asset value as determined at the close
of business on the New York Stock Exchange on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
Exchange is not open for business on such date, the Class A or Class D shares
will be redeemed at the close of business on the following business day. The
check for the withdrawal payment will be mailed, or the direct deposit for the
withdrawal payment will be made, on the next business day following redemption.
When a shareholder is making systematic withdrawals, dividends and
distributions on all Class A or Class D shares in the Investment Account are
reinvested automatically in Fund Class A or Class D shares, respectively. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
charge or penalty, by the shareholder, the Fund, the Transfer Agent or the
Distributor. Withdrawal payments should not be considered as dividends, yield
or income. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original investment
may be reduced correspondingly. Purchases of additional Class A or Class D
shares concurrent with withdrawals are ordinarily disadvantageous to the
shareholder because of sales charges and tax liabilities. The Fund will not
knowingly accept purchase orders for Class A or Class D shares of the Fund from
investors who maintain a systematic withdrawal plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Periodic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA (R),
CBA (R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
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<PAGE>
RETIREMENT PLANS
Any Retirement Plan which does not meet the qualifications to purchase Class
A or Class D shares at net asset value has the option of purchasing Class A or
Class D shares at the sales charge schedule disclosed in the Prospectus, or if
the Retirement Plan meets the following requirements, then it may purchase
Class B shares with a waiver of the CDSC upon redemption. The CDSC is waived
for any Eligible 401(k) Plan redeeming Class B shares. "Eligible 401(k) Plan"
is defined as a retirement plan qualified under Section 401(k) of the Code with
a salary reduction feature offering a menu of investments to plan participants.
The CDSC is also waived for redemptions from a 401(a) plan qualified under the
Code, provided, however, that each such plan has the same or an affiliated
sponsoring employer as an Eligible 401(k) Plan purchasing Class B shares of
MLAM-advised mutual funds ("Eligible 401(a) Plan"). Other tax qualified
retirement plans within the meaning of Section 401(a) of the Code which are
provided specialized services (e.g., plans whose participants may direct on a
daily basis their plan allocations among a menu of investments) by independent
administration firms contracted through Merrill Lynch also may purchase Class B
shares with a waiver of the CDSC. The CDSC also is waived for any Class B or
Class C shares which are purchased by an Eligible 401(k) Plan or Eligible
401(a) Plan and are rolled over into a Merrill Lynch or Merrill Lynch Trust
Company custodied IRA and held in such account at the time of redemption. The
Class B CDSC also is waived for any Class B shares which are purchased by a
Merrill Lynch rollover IRA that was funded by a rollover from a terminated
401(k) plan managed by the MLAM Private Portfolio Group and held in such
account at the time of redemption. The minimum initial and subsequent purchase
requirements are waived in connection with all the above-referenced Retirement
Plans.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing System, Class A shareholders may exchange Class A shares
of the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his account in which
the exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second MLAM-advised mutual fund but
does not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund as
a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund. Class B, Class C and Class D shares will be
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of
the shares acquired in the exchange, the holding period for the previously
owned shares of the Fund is "tacked" to the holding period of the newly
acquired shares of the other Fund as more fully described below. Class A, Class
B, Class C and Class D shares also will be exchangeable for shares of certain
MLAM-advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C or Class D shares. Shares with
a net asset value of at least $100 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have been held by the
shareholder for 15 days. It is contemplated that the exchange privilege may be
applicable to other new mutual funds whose shares may be distributed by the
Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are
31
<PAGE>
transacted on the basis of relative net asset value per Class A or Class D
share, respectively, plus an amount equal to the difference, if any, between
the sales charge previously paid on the outstanding Class A or Class D shares
and the sales charge payable at the time of the exchange on the new Class A or
Class D shares. With respect to outstanding Class A or Class D shares as to
which previous exchanges have taken place, the "sales charge previously paid"
shall include the aggregate of the sales charge paid with respect to such Class
A or Class D shares in the initial purchase and any subsequent exchange. Class
A or Class D shares issued pursuant to dividend reinvestment are sold on a no-
load basis in each of the funds offering Class A or Class D shares. For
purposes of the exchange privilege, Class A and Class D shares acquired through
dividend reinvestment shall be deemed to have been sold with a sales charge
equal to the sales charge previously paid on the Class A or Class D shares on
which the dividend was paid. Based on this formula, Class A and Class D shares
of the Fund generally may be exchanged into the Class A or Class D shares of
the other funds or into shares of the Class A and Class D money market funds
with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another MLAM-
advised mutual fund ("new Class B or Class C shares") on the basis of relative
net asset value per Class B or Class C 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 then the CDSC
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through
use of the exchange privilege will be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of computing
the sales charge that may be payable on a disposition of the new Class B or
Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund Class B shares for two and a half years. The 2% sales charge that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Special
Value Fund and receive cash. There will be no CDSC due on this redemption,
since by "tacking" the two and a half year holding period of Fund Class B
shares to the three year holding period for the Special Value Fund Class B
shares, the investor will be deemed to have held the new Class B shares for
more than five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
towards satisfaction of the holding period requirement for purposes of reducing
the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund which were acquired
as a result of an exchange for Class B or Class C shares of the Fund, may, in
turn, be exchanged back into Class B shares of any fund offering such shares,
in which event the holding period for Class B or Class C shares of the Fund
will be aggregated with previous holding periods for purposes of reducing the
contingent deferred sales charge. Thus, for example, an investor may exchange
Class B or Class C shares of the Fund for shares of Merrill Lynch Institutional
Fund after having held the Class B or Class C shares for two and a half years
and three years later decide to redeem the shares of Merrill Lynch
Institutional Fund for cash. At the time of this redemption, the 2% contingent
deferred sales charge that would have been due had the Class B or Class C
shares of the Fund been redeemed for cash rather than exchanged for shares of
Merrill Lynch Institutional Fund will be payable. If, instead of such
redemption the
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<PAGE>
shareholder exchanged such shares for Class B or Class C shares of a fund which
the shareholder continues to hold for an additional two and a half years, any
subsequent redemption will not incur a contingent deferred sales charge.
Merrill Lynch Mutual Fund Adviser Program. Class A shareholders of the Fund
that participate in the Merrill Lynch Mutual Fund Adviser Program may exchange
Class A shares of the Fund for Class A shares of the funds listed below at net
asset value. Once the initial allocation of assets is made under the program,
any subsequent exchange under the program of Class A shares of a fund for Class
A shares of the Fund will be made on the basis of the relative net asset values
of the shares being exchanged with no additional charges for any difference
between the sales charge previously paid on Fund shares exchanged and the sales
charge payable on Fund shares acquired in the exchange.
The investment objectives of the other funds into which exchanges can be made
are as follows:
Funds issuing Class A, Class B, Class C and Class D Shares:
Merrill Lynch Americas Income Fund,
Inc. ...............................
A high level of current income,
consistent with prudent investment
risk, by investing primarily in debt
securities denominated in a currency
of a country located in the Western
Hemisphere (i.e., North and South
America and the surrounding waters).
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal Se-
ries Trust, a series fund, whose ob-
jective is to provide as high a level
of income exempt from Federal and Ari-
zona income taxes as is consistent
with prudent investment management
through investment in a portfolio pri-
marily of intermediate-term investment
grade Arizona Municipal Bonds.
Merrill Lynch ArizonaMunicipal Bond
Fund................................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Arizona income taxes as is
consistent with prudent investment
management.
Merrill Lynch ArkansasMunicipal Bond
Fund................................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Arkansas income taxes as
is consistent with prudent investment
management.
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<PAGE>
Merrill Lynch Asset Growth Fund, High total investment return, consis-
Inc. ............................... tent with prudent risk, from invest-
ment in United States and foreign eq-
uity, debt and money market securities
the combination of which will be var-
ied both with respect to types of se-
curities and markets in response to
changing market and economic trends.
Merrill Lynch Asset Income Fund, A high level of current income through
Inc. ............................... investment primarily in United States
fixed income securities.
Merrill Lynch Balanced Fund for
Investment and Retirement...........
As high a level of total investment re-
turn as is consistent with reasonable
risk by investing in common stock and
other types of securities, including
fixed income securities and convert-
ible securities.
Merrill Lynch Basic Value Fund, Capital appreciation and, secondarily,
Inc. ............................... income through investment in securi-
ties, primarily equities, that are un-
dervalued and therefore represent ba-
sic investment value.
Merrill Lynch California Insured
Municipal Bond Fund.................
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and California income taxes as is con-
sistent with prudent investment man-
agement through investment in a port-
folio primarily of insured California
Municipal Bonds.
Merrill Lynch California Limited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal Se-
ries Trust, a series fund, whose ob-
jective is to provide as high a level
of income exempt from Federal and Cal-
ifornia income taxes as is consistent
with prudent investment management
through investment in a portfolio pri-
marily of intermediate-term investment
grade California Municipal Bonds.
Merrill Lynch CaliforniaMunicipal
Bond Fund...........................
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and California income taxes as is con-
sistent with prudent investment man-
agement.
Merrill Lynch Capital Fund, Inc. ....
The highest total investment return
consistent with prudent risk through a
fully managed investment policy util-
izing equity, debt and convertible
securities.
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<PAGE>
Merrill Lynch ColoradoMunicipal Bond
Fund................................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Colorado income taxes as
is consistent with prudent investment
management.
Merrill Lynch ConnecticutMunicipal
Bond Fund...........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Connecticut income taxes
as is consistent with prudent invest-
ment management.
Merrill Lynch CorporateBond Fund,
Inc. ...............................
Current income from three separate di-
versified portfolios of fixed income
securities.
Merrill Lynch Developing Capital
Markets Fund, Inc. .................
Long-term appreciation through invest-
ment in securities, principally equi-
ties, of issuers in countries having
smaller capital markets.
Merrill Lynch Dragon Fund, Inc. ..... Capital appreciation primarily through
investment primarily in equity and
debt securities of issuers domiciled
in developing countries located in
Asia and the Pacific Basin, other than
Japan, Australia and New Zealand.
Merrill Lynch EuroFund .............. Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
Merrill Lynch Federal Securities High current return through investments
Trust .............................. in U.S. Government and Government
agency securities, including GNMA
mortgage-backed certificates and other
mortgage-backed Government securities.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal Se-
ries Trust, a series fund, whose ob-
jective is to provide as high a level
of income exempt from Federal income
taxes as is consistent with prudent
investment management while serving to
offer shareholders the opportunity to
own securities exempt from Florida in-
tangible personal property taxes
through investment in a portfolio pri-
marily of intermediate-term investment
grade Florida Municipal Bonds.
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<PAGE>
Merrill Lynch FloridaMunicipal Bond
Fund................................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal income taxes as is consistent
with prudent investment management
while seeking to offer shareholders
the opportunity to own securities ex-
empt from Florida intangible personal
property taxes.
Merrill Lynch Fund for Tomorrow, Long-term growth through investment in
Inc. ............................... a portfolio of good quality securi-
ties, primarily common stock, poten-
tially positioned to benefit from de-
mographic and cultural changes as they
affect consumer markets.
Merrill Lynch Fundamental Growth
Fund, Inc. .........................
Long-term growth of capital through in-
vestment in a diversified portfolio of
equity securities placing particular
emphasis on companies that have exhib-
ited an above-average growth rate in
earnings.
Merrill Lynch GlobalAllocation Fund,
Inc. ...............................
High total return, consistent with pru-
dent risk, through a fully managed in-
vestment policy utilizing United
States and foreign equity, debt and
money market securities, the combina-
tion of which will be varied from time
to time both with respect to the types
of securities and markets in response
to changing market and economic
trends.
Merrill Lynch Global Bond Fund for
Investment and Retirement ..........
High total investment return from in-
vestment in a global portfolio of debt
instruments denominated in various
currencies and multinational currency
units.
Merrill Lynch GlobalConvertible
Fund, Inc. .........................
High total return from investment pri-
marily in an internationally diversi-
fied portfolio of convertible debt se-
curities, convertible preferred stock
and "synthetic" convertible securities
consisting of a combination of debt
securities or preferred stock and war-
rants or options.
Merrill Lynch Global Holdings, Inc.
(residents of Arizona must meet
investor suitability standards).....
The highest total investment return
consistent with prudent risk through
worldwide investment in an interna-
tionally diversified portfolio of se-
curities.
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<PAGE>
Merrill Lynch Global Resources Long-term growth and protection of cap-
Trust .............................. ital from investment in securities of
domestic and foreign companies that
possess substantial natural resource
assets.
Merrill Lynch GlobalSmallCap Fund,
Inc.................................
Long-term growth of capital by invest-
ing primarily in equity securities of
companies with relatively small market
capitalizations located in various
foreign countries and in the United
States.
Merrill Lynch Global Utility Fund, Capital appreciation and current income
Inc. ............................... through investment of at least 65% of
its total assets in equity and debt
securities issued by domestic and for-
eign companies which are primarily en-
gaged in the ownership or operation of
facilities used to generate, transmit
or distribute electricity, telecommu-
nications, gas or water.
Merrill Lynch Growth Fund for
Investment and Retirement ..........
Growth of capital and, secondarily, in-
come from investment in a diversified
portfolio of equity securities placing
principal emphasis on those securities
which management of the fund believes
to be undervalued.
Merrill Lynch Healthcare Fund, Inc.
(residents of Wisconsin must meet
investor suitability standards) ....
Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and services
in healthcare.
Merrill Lynch International Equity
Fund ...............................
Capital appreciation and, secondarily,
income by investing in a diversified
portfolio of equity securities of is-
suers located in countries other than
the United States.
Merrill Lynch Latin America Fund, Capital appreciation by investing pri-
Inc. ............................... marily in Latin American equity and
debt securities.
Merrill Lynch MarylandMunicipal Bond
Fund................................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Maryland income taxes as
is consistent with prudent investment
management.
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<PAGE>
Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal Se-
ries Trust, a series fund, whose ob-
jective is to provide as high a level
of income exempt from Federal and Mas-
sachusetts income taxes as is consis-
tent with prudent investment manage-
ment through investment in a portfolio
primarily of intermediate-term invest-
ment grade Massachusetts Municipal
Bonds.
Merrill Lynch MassachusettsMunicipal
Bond Fund ..........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Massachusetts income taxes
as is consistent with prudent invest-
ment management.
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal Se-
ries Trust, a series fund, whose ob-
jective is to provide as high a level
of income exempt from Federal and
Michigan income taxes as is consistent
with prudent investment management
through investment in a portfolio pri-
marily of intermediate-term investment
grade Michigan Municipal Bonds.
Merrill Lynch MichiganMunicipal Bond
Fund ...............................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Michigan income taxes as
is consistent with prudent investment
management.
Merrill Lynch MinnesotaMunicipal
Bond Fund ..........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Minnesota personal income
taxes as is consistent with prudent
investment management.
Merrill Lynch MunicipalBond Fund,
Inc. ...............................
Tax-exempt income from three separate
diversified portfolios of municipal
bonds.
Merrill Lynch Municipal Intermediate
Term Fund ..........................
Currently the only portfolio of Merrill
Lynch Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal income taxes as possible by
investing in investment grade obliga-
tions with a dollar weighted average
maturity of five to twelve years.
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<PAGE>
Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal Se-
ries Trust, a series fund, whose ob-
jective is to provide as high a level
of income exempt from Federal and New
Jersey income taxes as is consistent
with prudent investment management
through a portfolio primarily of in-
termediate-term investment grade New
Jersey Municipal Bonds.
Merrill Lynch New JerseyMunicipal
Bond Fund ..........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and New Jersey income taxes as
is consistent with prudent investment
management.
Merrill Lynch New MexicoMunicipal
Bond Fund...........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and New Mexico income taxes as
is consistent with prudent investment
management.
Merrill Lynch New York Limited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal Se-
ries Trust, a series fund, whose ob-
jective is to provide as high a level
of income exempt from Federal, New
York State and New York City income
taxes as is consistent with prudent
investment management through invest-
ment in a portfolio primarily of in-
termediate-term investment grade New
York Municipal Bonds.
Merrill Lynch New YorkMunicipal Bond
Fund ...............................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal, New York State and New York
City income taxes as is consistent
with prudent investment management.
Merrill Lynch North
CarolinaMunicipal Bond Fund ........
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and North Carolina income
taxes as is consistent with prudent
investment management.
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<PAGE>
Merrill Lynch OhioMunicipal Bond
Fund ...............................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Ohio income taxes as is
consistent with prudent investment
management.
Merrill Lynch Oregon Municipal Bond
Fund ...............................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Oregon income taxes as is
consistent with prudent investment
management.
Merrill Lynch Pacific Fund, Inc. .... Capital appreciation primarily by in-
vesting in equity securities of corpo-
rations domiciled in Far Eastern and
Western Pacific countries, including
Japan, Australia, Hong Kong and Singa-
pore.
Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a
portfolio of intermediate-term
investment grade Pennsylvania
Municipal Bonds.
Merrill Lynch PennsylvaniaMunicipal
Bond Fund ..........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Pennsylvania income taxes
as is consistent with prudent invest-
ment management.
Merrill Lynch Phoenix Fund, Inc. .... Long-term growth of capital by invest-
ing in equity and fixed income securi-
ties, including tax-exempt securities,
of issuers in weak financial condition
or experiencing poor operating results
believed to be undervalued relative to
the current or prospective condition
of such issuer.
Merrill Lynch Short-Term Global
Income Fund, Inc. ..................
As high a level of current income as is
consistent with prudent investment
management from a global portfolio of
high quality debt securities denomi-
nated in various currencies and multi-
national currency units and having re-
maining maturities not exceeding three
years.
40
<PAGE>
Merrill Lynch Special Value Fund, Long-term growth of capital from in-
Inc. ............................... vestments in securities, primarily
common stock, of relatively small
companies believed to have special
investment value and emerging growth
companies regardless of size.
Merrill Lynch Strategic Dividend Long-term total return from investment
Fund ............................... in dividend paying common stocks
which yield more than Standard &
Poor's 500 Composite Stock Price In-
dex.
Merrill Lynch Technology Fund, Capital appreciation through worldwide
Inc. ............................... investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and serv-
ices in technology.
Merrill Lynch TexasMunicipal Bond
Fund................................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a se-
ries fund, whose objective is to pro-
vide investors with as high a level
of income exempt from Federal income
taxes as is consistent with prudent
investment management by investing
primarily in a portfolio of long-
term, investment grade obligations
issued by the State of Texas, its po-
litical subdivisions, agencies and
instrumentalities.
Merrill Lynch Utility Income Fund, High current income through investment
Inc. ............................... in equity and debt securities issued
by companies which are primarily en-
gaged in the ownership or operation
of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
Merrill Lynch World Income Fund, High current income by investing in a
Inc. ............................... global portfolio of fixed income se-
curities denominated in various cur-
rencies, including multinational cur-
rencies.
Class A Share Money Market Funds:
Merrill Lynch Ready Assets Trust .... Preservation of capital, liquidity and
the highest possible current income
consistent with the foregoing objec-
tives from the short-term money mar-
ket securities in which the Trust in-
vests.
Merrill Lynch Retirement Reserves
Money Fund (available only for
exchanges within certain retirement
plans) ........................
Currently the only portfolio of Mer-
rill Lynch Retirement Series Trust, a
series fund, whose objectives are
current income, preservation of capi-
tal and liquidity available from in-
vesting in a diversified portfolio of
short-term money market securities.
41
<PAGE>
Merrill Lynch U.S.A. Government
Reserves ......................
Preservation of capital, current income
and liquidity available from investing
in direct obligations of the U.S. Gov-
ernment and repurchase agreements re-
lating to such securities.
Merrill Lynch U.S. Treasury
Money Fund ....................
Preservation of capital, liquidity and
current income through investment ex-
clusively in a diversified portfolio
of short-term marketable securities
which are direct obligations of the
U.S. Treasury.
Class B, Class C and Class D Share
Money Market Funds:
Merrill Lynch Government Fund .. A Portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in securities issued or guaranteed by
the U.S. Government, its agencies and
instrumentalities and in repurchase
agreements secured by such obliga-
tions.
Merrill Lynch Institutional Fund .... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide maximum
current income consistent with liquid-
ity and the maintenance of a high
quality portfolio of money market se-
curities.
Merrill Lynch Institutional
Tax-Exempt Fund ...............
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income exempt from Federal income tax-
es, preservation of capital and li-
quidity available from investing in a
diversified portfolio of short-term,
high quality municipal bonds.
Merrill Lynch Treasury Fund .... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in direct obligations of the U.S.
Treasury and up to 10% of its total
assets in repurchase agreements se-
cured by such obligations.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds
42
<PAGE>
described above 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 Securities and Exchange Commission. The Fund reserves the right to
limit the number of times an investor may exercise the exchange privilege.
Certain funds may suspend the continuous offering of their shares at any time
and may thereafter resume such offering from time to time. The exchange
privilege is available only in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
All or a portion of the Fund's net investment income will be declared as
dividends daily prior to the determination of net asset value on that day and
paid monthly. 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 long-term and short-term capital
gains, if any, will be distributed to the Fund's shareholders at least
annually. See "Shareholder Services--Automatic Reinvestment of Dividends and
Capital Gains Distributions" for information concerning the manner in which
dividends and distributions may be automatically reinvested in shares of the
Fund. Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares of the
Fund or received in cash. The per share dividends and distributions on Class B
and Class C shares will be lower than the per share dividends and distributions
on Class A and Class D shares as a result of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares; similarly, the per share dividends and
distributions on Class D shares will be lower than the per share dividends and
distributions on Class A shares as a result of the account maintenance fees
applicable with respect to the Class D shares. See "Determination of Net Asset
Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C and Class D shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to a shareholder as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to a
43
<PAGE>
shareholder as long-term capital gains, regardless of the length of time the
shareholder has owned Fund shares. Any loss upon the sale or exchange of Fund
shares held for six months or less, however, will be treated as long-term
capital loss to the extent of any capital gain dividends received by the
shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, will not be eligible for the dividends-received deduction allowed to
corporations under the Code. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities 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. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that the investor is
not otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon the purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for the
new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
44
<PAGE>
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to avoid imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition
of the tax. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution requirements.
TAX TREATMENT OF INTEREST RATE TRANSACTIONS, OPTIONS AND FUTURES
The Fund may write (i.e., sell) covered call and covered put options on its
portfolio securities, purchase call and put options on securities, and engage
in transactions in financial futures and related options on such futures.
Options and futures contracts that are "Section 1256 contracts" will be "marked
to market" for Federal income tax purposes at the end of each taxable year,
i.e., each such option or futures contract will be treated as sold for its fair
market value on the last day of the taxable year. Any 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 or currency exchange 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
contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an option or futures contract.
The Fund may make investments that produce taxable income that is not matched
by a corresponding receipt of cash or an offsetting loss deduction. Such
investments would include dollar rolls and obligations that have original issue
discount (such as SMBSs), accrete discount or are subordinated in the mortgage-
backed securities structure. Such taxable income would be treated as income
earned by the Fund and would be subject to the distribution requirements of the
Code. Because such income may not be matched by a corresponding receipt of cash
by the Fund or an offsetting loss deduction, the Fund may be required to borrow
money or dispose of other securities to be able to make distributions to
shareholders. The Fund intends to make sufficient and timely distributions to
shareholders so as to qualify for RIC status at all times and to avoid
imposition of the excise tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
45
<PAGE>
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax. In general, state law does not consider income
derived from MBSs to be income attributable to U.S. Government obligations.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield, in advertisements or information
furnished to present or prospective shareholders. Total return is based on the
Fund's historical performance and is not intended to indicate future
performance. Average annual total return and yield are determined separately
for Class A, Class B, Class C and Class D shares in accordance with formulas
specified by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the contingent deferred sales charge that would
be applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B and Class C shares.
The Fund also may quote annual, average and annualized total return and
aggregate total return performance data, both as a percentage and as a dollar
amount based on a hypothetical $1,000 investment, for various periods other
than those noted below. Such data will be computed as described above, except
that (1) as required by the period 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. Actual annual or
annualized total return data generally will be lower than average annual total
return data since the average rates of return reflect compounding of return;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time.
Set forth below is total return information for the Class B and Class D
shares of the Fund for the periods indicated. As a result of the implementation
of the Select Pricing System, Class A shares of the Fund outstanding prior to
October 21, 1994, have been redesignated Class D shares, and historical
performance data pertaining to such shares is provided below under the caption
"Class D Shares". Since the new Class A and Class C shares have not been issued
prior to the date of this Statement of Additional Information, performance
information concerning the new Class A and Class C shares is not yet provided.
46
<PAGE>
<TABLE>
<CAPTION>
CLASS B SHARES CLASS D SHARES
----------------------------------- -----------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS A HYPOTHETICAL EXPRESSED AS A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF THE ON A HYPOTHETICAL AT THE END OF THE
$1,000 INVESTMENT PERIOD $1,000 INVESTMENT PERIOD
----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
PERIOD
- ------
One Year Ended May 31,
1994................... (3.14%) $ 968.60 (2.77%) $ 972.30
Inception (August 2,
1991) to May 31, 1994.. 2.02% $1,058.30 1.70% $1,048.90
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
YEAR ENDED MAY 31,
- ------------------
1994.................... 0.77% $1,007.70 1.28% $1,012.80
1993.................... 2.48% $1,024.80 2.99% $1,029.90
Inception (August 2,
1991) to May 31, 1992.. 4.33% $1,043.30 4.75% $1,047.50
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (August 2,
1991) to May 31, 1994.. 5.83% $1,058.30 4.89% $1,048.90
</TABLE>
In order to reflect the reduced sales charges in the case of Class A or Class
D shares, or the waiver of the contingent deferred sales charge in the case of
Class B or Class C shares applicable to certain investors, as described under
"Purchase of Shares" and "Redemption of Shares", respectively, the total return
data quoted by the Fund in advertisements directed to such investors may take
into account the reduced, and not the maximum, sales charge or may not take
into account the contingent deferred sales charge and therefore may reflect
greater total return since, due to the reduced sales charges or the waiver of
sales charges, a lower amount of expenses may be deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on April 19, 1991. It has an
authorized capital of 600,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D Common Stock. Class A and Class C each consist of 100,000,000 shares
while Class B and Class D each consist of 200,000,000 shares. Class A, Class B,
Class C and Class D Common Stock all represent an interest in the same assets
of the Fund and are identical in all respects except that the Class B, Class C
and Class D shares bear certain expenses related to the account maintenance
and/or distribution of such shares and have exclusive voting rights with
respect to matters relating to such account maintenance and/or distribution
expenditures. The Fund has received an order from the Securities and Exchange
Commission (the "Commission") permitting the issuance and sale of multiple
classes of Common Stock. The Board of Directors of the Fund may classify and
reclassify the shares of the Fund into additional classes of Common Stock at a
future date.
47
<PAGE>
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
of 1940 does not require shareholders to act upon any of the following matters:
(i) election of Directors; (ii) approval of an investment advisory agreement;
(iii) approval of a distribution agreement; and (iv) ratification of selection
of independent accountants. Generally, under Maryland law, a meeting of
shareholders may be called for any purpose on the written request of the
holders of at least 25% of the outstanding shares of the Fund. 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 of Common Stock 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, except that, as noted above, expenses
related to the account maintenance and/or distribution of the shares of a class
will be borne solely by such class. Stock certificates will be issued by the
Transfer Agent only on specific request. Certificates for fractional shares are
not issued in any case.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares for $100,000. Such shares will be acquired for investment and can only
be disposed by redemption. The organizational expenses of the Fund were paid by
the Fund and amortized over a period not exceeding five years. The proceeds
realized by the Manager (or any subsequent holder) upon redemption of any of
such shares will be reduced by the proportionate amount of the unamortized
organizational expenses which the number of shares redeemed bears to the number
of shares initially purchased.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class D shares
of the Fund based on the current offering period value of the Fund's net assets
and number of shares outstanding on May 31, 1994, and its shares outstanding on
that date is as set forth below. Information is not provided for new Class A
shares because no new Class A shares were publicly offered prior to the date of
this Statement of Additional Information. The offering price for Class B and
Class C shares of the Fund is the net asset value of Class B and Class C
shares, respectively.
<TABLE>
<CAPTION>
CLASS D
-----------
<S> <C>
Net Assets......................................................... $23,043,432
===========
Number of Shares Outstanding....................................... 2,418,159
===========
Net Asset Value Per Share (net assets divided by number of shares
outstanding) ..................................................... $ 9.53
Sales Charge (for Class D shares: 4.00% of offering price (4.17% of
amount invested))* ............................................... .40
-----------
Offering Price..................................................... $ 9.93
===========
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, have
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the
Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
48
<PAGE>
CUSTODIAN
The Bank of New York, 90 Washington Street, 12th Floor, New York, New York
10286, acts as the custodian of the Fund's assets. The Custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest and dividends on the
Fund's investment.
TRANSFER AGENT
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund's
transfer agent. The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. See "Management of the Fund--Transfer Agency Services" in
the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on May 31 of each year. The Fund sends to
its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements
audited by Independent Auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the 1940 Act, to
which reference is hereby made.
Under a separate agreement Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such
name to any other company, and the Fund has granted Merrill Lynch, under
certain conditions, the use of any other name it might assume in the future,
with respect to any corporation organized by Merrill Lynch.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's common stock on September 30, 1994.
49
<PAGE>
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER
AND CORPORATE BOND RATINGS
COMMERCIAL PAPER
Commercial paper with the greatest capacity for timely payment is rated A by
Standard & Poor's Corporation ("S&P"). Issues within this category are further
redefined with designations 1, 2 and 3 to indicate the relative degree of
safety; A-1, the highest of the three, indicates the degree of safety is very
strong.
Moody's Investors Service, Inc. ("Moody's") employs the designations of
Prime-1, Prime-2 and Prime-3 to indicate the relative repayment ability of
rated issuers. Prime-1 issues have a superior capacity for repayment.
CORPORATE BONDS
Bonds rated AAA have the highest rating assigned by S&P to a debt obligation.
Capacity to pay interest and repay principal is extremely strong. Bonds rated
AA have a very strong capacity to pay interest and repay principal and differ
from the highest rated issues only in small degree. 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. 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.
Bonds rated Aaa by Moody's 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. Bonds rated Aa are judged to
be of high quality by all standards. They are rated lower than the best bonds
because margins of protection may not be as large 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.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. Bonds
which are rated Baa are considered as medium grade obligations; i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well. Moody's applies numerical modifiers 1, 2
and 3 in each generic rating classification from Aa through B in its corporate
bond rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
50
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Adjustable Rate Securities Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Adjustable Rate Securities Fund,
Inc. as of May 31, 1994, the related statements of operations for the year then
ended, and changes in net assets for each of the years in the two-year period
then ended, and financial highlights for each of the years in the two-year
period then ended and the period August 2, 1991 (commencement of operations) to
May 31, 1992. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at May 31,
1994 by correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Adjustable Rate Securities Fund, Inc. as of May 31, 1994, the results of its
operations, the changes in its net assets and financial highlights for each of
the respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
June 30, 1994
51
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Value Percent of
Index Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable Constant Maturity $ 5,464,276 Bear Stearns Secured Investors, Inc. II,
Mortgage- Treasury Indexed Pass-Through 91-1-A, 7.90% due 11/25/2021 $ 5,567,262 $ 5,445,479 1.37%
Backed Obligations Federal Home Loan Mortgage Corporation:
Obliga- 12,235,245 5.537% due 8/01/2031 12,648,185 12,502,891 3.15
tions** 101,234 7.265% due 8/01/2020 103,575 100,474 0.03
3,207,604 7.732% due 5/01/2015 3,261,732 3,318,868 0.83
Federal National Mortgage Association:
2,505,006 5.31% due 11/01/2013 2,577,025 2,569,197 0.65
1,871,109 6.25% due 9/01/2015 1,924,903 1,907,946 0.48
703,611 6.628% due 10/01/2013 723,840 719,222 0.18
7,461,212 6.792% due 12/01/2021 7,615,099 7,619,763 1.92
26,351,591 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-35-A1, 5.947%
due 10/01/2022 27,010,381 26,475,127 6.66
Resolution Trust Corporation, REMIC (a):
10,000,000 92-4-B2, 5.729% due 7/25/2028 10,102,247 10,000,000 2.52
2,892,605 91-M7-A3, 6.365% due 1/25/2021 2,901,645 2,892,605 0.73
14,365,846 91-M6-A3, 6.385% due 6/25/2021 14,755,546 14,442,164 3.63
39,063,765 91-M2-A1, 6.76% due 9/25/2020 39,078,985 39,234,669 9.87
21,287,353 91-M2-A3, 6.828% due 9/25/2020 21,340,570 21,619,968 5.44
5,579,206 92-6-B4, 7.367% due 11/25/2025 5,716,682 5,561,743 1.40
14,125,630 Sears Mortgage Securities Corporation,
REMIC (a) 92-11-A1, 5.524% due
4/25/2022 14,267,924 14,010,859 3.53
Cost of Funds 10,162,396 DLJ Mortgage Acceptance Corp., REMIC (a)
Indexed 91-6-A1, 7.828% due 9/01/2021 10,397,401 10,241,789 2.58
Obligations Federal National Mortgage Association:
27,930,903 4.96% due 5/01/2018 28,694,603 27,599,224 6.94
1,411,511 5.625% due 7/01/2017 1,466,979 1,407,983 0.35
11,494,480 5.625% due 10/01/2028 11,946,177 11,458,560 2.88
11,184,110 5.625% due 2/01/2029 11,623,611 11,103,724 2.79
2,148,064 Kidder Peabody Acceptance Corporation I,
REMIC (a) 88-04-A, 6.669% due 1/01/2019 2,225,932 2,126,584 0.53
Resolution Trust Corporation, REMIC (a):
9,037,206 91-M6-A2, 5.487% due 6/25/2021 9,202,421 8,828,175 2.22
17,638,005 91-M2-A2, 7.552% due 9/25/2020 17,708,248 17,671,076 4.45
2,888,813 Ryland--First Nationwide Trust, REMIC (a)
88-1-A, 5.773% due 10/25/2018 2,982,699 2,863,536 0.72
London Interbank 13,402,100 Federal Home Loan Mortgage Corporation,
Offered Rate REMIC (a) 92-1363-C, 47.00% (c) due
Indexed Obligations 8/15/2022 (d) 1,596,897 958,250 0.24
5,913,846 Federal Home Loan Mortgage Corporation,
3.766% due 2/01/2024 6,067,450 5,751,216 1.45
5,400,244 Fund America Investors Corporation II,
Pass-Through (a) 93-K-F, 6.187%
due 1/25/2023 5,400,244 5,400,244 1.36
Resolution Trust Corporation, REMIC (a):
4,242,827 91-M4-B, 5.937% due 2/25/2020 4,240,175 4,221,613 1.06
6,509,430 91-M7-B, 5.937% due 1/25/2021 6,509,430 6,631,481 1.67
15,000,000 92-C1-B, 5.937% due 8/25/2023 14,446,875 15,225,000 3.83
</TABLE>
52
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
27,000,000 Saxon Mortgage Securities Corporation,
REMIC (a) 92-3-B, 5.551% due 10/01/2021 27,620,000 27,472,500 6.91
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 331,724,743 327,381,930 82.37
Fixed Rate 35,377,546 Capstead Mortgage Securities Corporation
Mortgage- II, REMIC (a) 93-I-A3, 12.01% (c) due
Backed 9/25/2023 (d) 505,632 420,108 0.11
Obligations** 1,003,045 Citicorp Mortgage Securities Inc., REMIC
(a) 92-12-A3, 8.00% due 3/25/2021 1,020,660 989,253 0.25
3,266,961 Collateralized Mortgage Securities Corp.,
REMIC (a) 90-5-L, 11.981% (b) due
9/20/2020 761,229 506,379 0.13
101,156,947 DLJ Mortgage Acceptance Corp., REMIC (a)
92-6-A1, 14.753% (c) due 7/25/2022 (d) 1,705,161 1,244,230 0.31
Federal National Mortgage Association,
REMIC (a):
4,496,068 91-G-46-K, 9.00% (b) due 12/25/2009 1,659,427 1,157,738 0.29
453,540 90-142-K, 10.99% (b) due 7/25/2014 140,966 19,956 0.00
4,105,287 Federal National Mortgage Association,
Trust 32-2, 8.46% (c) due 4/01/2018 (d) 3,457,655 1,275,205 0.32
8,513,834 Kidder Peabody Acceptance Corporation,
REMIC (a) 93-M1-A2, 7.15% due 4/25/2025 8,477,003 8,146,675 2.05
Prudential Home Mortgage Securities
Company, Inc., REMIC (a):
23,112,384 93-44-A2, 6.75% due 8/25/2023 23,542,600 23,061,826 5.80
42,338 92-1-A9, 13.00% (c) due 2/25/2022 80,259 24,556 0.01
29,947,399 Residential Funding Mortgage Securities I,
Inc., REMIC (a) 92-S3-A9, 14.00% (c)
due 1/01/2007 (d) 2,198,796 89,842 0.02
8,926,386 Resolution Trust Corporation, REMIC (a)
92-CHF-B, 7.15% due 12/25/2020 9,036,623 8,937,544 2.25
Sears Mortgage Securities Corp., REMIC
(a):
67,318,483 92-12-A3, 18.00% (c) due 7/25/2023 (d) 851,848 883,555 0.22
513,729 91-K-A4, 18.00% (b) due 9/25/2021 753,622 780,868 0.20
Total Investments in Fixed Rate
Mortgage-Backed Obligations 54,191,481 47,537,735 11.96
Total Investments in Mortgage-Backed
Obligations 385,916,224 374,919,665 94.33
</TABLE>
53
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Value Percent of
Index Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Short-Term Repurchase $ 15,800,000 Nikko Securities International, Inc.,
Securities Agreements*** purchased on 5/31/1994 to yield 4.30%
to 6/01/1994 $ 15,800,000 $ 15,800,000 3.98%
US Government 10,000,000 Federal Home Loan Mortgage Association,
& Agency 4.17% due 6/27/1994 9,969,883 9,969,883 2.51
Obligations****
Total Investments in Short-Term Securities 25,769,883 25,769,883 6.49
Total Investments $411,686,107 400,689,548 100.82
============
Liabilities in Excess of Other Assets (3,270,253) (0.82)
------------ -------
Net Assets $397,419,295 100.00%
============ =======
<FN>
*Adjustable Rate Obligations have coupon rates which reset
periodically.
**Mortgage-Backed Obligations are subject to principal paydowns as
a result of prepayments or refinancings of the underlying mortgage
instruments. As a result, the average life may be substantially less
than the original maturity.
***Repurchase Agreements are fully collateralized by US Government
& Agency Obligations.
****US Government & Agency Obligations are traded on a discount basis;
the interest rate shown is the discount rate paid at the time of purchase
by the Fund.
(a) Real Estate Mortgage Investment Conduits (REMIC).
(b) Represents the approximate yield to maturity. These securities have
a high coupon interest rate and were purchased at a substantial
premium to their original face amounts. Monthly premium amortization,
due to prepayments, reduces considerably the net interest income
earned on these securities.
(c) Represents the approximate yield to maturity.
(d) Represents the interest only portion of a mortgage-backed obligation.
See Notes to Financial Statements.
</TABLE>
54
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of May 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$411,686,107) (Notes 1a & 1b) $400,689,548
Cash 145,408
Receivables:
Interest $ 2,144,671
Principal paydowns 702,780
Capital shares sold 296,728 3,144,179
------------
Deferred organization expenses (Note 1g) 51,197
Prepaid registration fees and other assets (Note 1g) 74,675
------------
Total assets 404,105,007
------------
Liabilities: Payables:
Capital shares redeemed 5,508,500
Dividends to shareholders (Note 1h) 521,552
Distributor (Note 2) 243,640
Investment adviser (Note 2) 169,204 6,442,896
------------
Accrued expenses and other liabilities 242,816
------------
Total liabilities 6,685,712
------------
Net Assets: Net assets $397,419,295
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $241,816
Consist of: Class B Common Stock, $0.10 par value, 200,000,000 shares authorized 3,926,889
Paid-in capital in excess of par 427,747,212
Undistributed investment income--net 362,953
Accumulated realized capital losses--net (Note 5) (23,863,016)
Unrealized depreciation on investments--net (10,996,559)
------------
Net assets $397,419,295
============
Net Asset Class A--Based on net assets of $23,043,432 and 2,418,159 shares outstanding $ 9.53
Value: ============
Class B--Based on net assets of $374,375,863 and 39,268,886 shares outstanding $ 9.53
============
See Notes to Financial Statements.
</TABLE>
55
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended May 31, 1994
<S> <S> <C>
Investment Interest and discount earned, net of premium amortization $ 25,076,112
Income Other 217,119
(Note 1f): ------------
Total income 25,293,231
------------
Expenses: Distribution fees--Class B (Note 2) 3,808,315
Investment advisory fees (Note 2) 2,710,336
Transfer agent fees--Class B (Note 2) 451,897
Accounting services (Note 2) 226,047
Printing and shareholder reports 145,025
Professional fees 87,612
Maintenance fees--Class A (Note 2) 85,730
Custodian fees 64,345
Registration fees (Note 1g) 51,643
Directors' fees and expenses 40,587
Transfer agent fees--Class A (Note 2) 28,456
Amortization of organization expenses (Note 1g) 23,565
Other 41,965
------------
Total expenses 7,765,523
------------
Investment income--net 17,527,708
------------
Realized & Realized loss on investments--net (19,663,874)
Unrealized Change in unrealized depreciation on investments--net 8,608,834
Gain (Loss) ------------
on Invest- Net Increase in Net Assets Resulting from Operations $ 6,472,668
ments--Net ============
(Notes 1f & 3):
See Notes to Financial Statements.
</TABLE>
56
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended May 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 17,527,708 $ 39,959,417
Realized loss on investments--net (19,663,874) (3,230,836)
Change in unrealized depreciation on investments--net 8,608,834 (13,586,313)
------------ ------------
Net increase in net assets resulting from operations 6,472,668 23,142,268
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (1,245,307) (3,578,083)
(Note 1h): Class B (15,919,448) (36,381,334)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (17,164,755) (39,959,417)
------------ ------------
Capital Net decrease in net assets derived from capital share transactions (332,880,261) (209,712,303)
Share ------------ ------------
Transactions
(Note 4):
Net Assets: Total decrease in net assets (343,572,348) (226,529,452)
Beginning of year 740,991,643 967,521,095
------------ ------------
End of year* $397,419,295 $740,991,643
============ ============
*Undistributed investment income--net $ 362,953 $ --
============ ============
See Notes to Financial Statements.
</TABLE>
57
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and Class A Class B
ratios have been derived from For the For the
information provided in the finan- Period Period
cial statements. August 2, August 2,
1991++ to 1991++ to
Increase (Decrease) in For the Year Ended May 31, May 31, For the Year Ended May 31, May 31,
Net Asset Value: 1994 1993 1992 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of
Operating period $ 9.76 $ 9.92 $ 10.00 $ 9.76 $ 9.92 $ 10.00
Performance: --------- --------- -------- -------- -------- ---------
Investment income--net .37 .45 .56 .32 .40 .52
Realized and unrealized loss on
investments--net (.24) (.16) (.08) (.24) (.16) (.08)
--------- --------- -------- -------- -------- ---------
Total from investment
operations .13 .29 .48 .08 .24 .44
--------- --------- -------- -------- -------- ---------
Less dividends:
Investment income--net (.36) (.45) (.56) (.31) (.40) (.52)
--------- --------- -------- -------- -------- ---------
Net asset value, end of
period $ 9.53 $ 9.76 $ 9.92 $ 9.53 $ 9.76 $ 9.92
========= ========= ======== ======== ======== =========
Total Based on net asset value
Investment per share 1.28% 2.99% 4.75%++++ 0.77% 2.48% 4.33%++++
Return:** ========= ========= ======== ======== ======== =========
Ratios to Expenses, net of reimbursement
Average Net and excluding maintenance and
Assets: distribution fees .71% .66% .62%* .71% .65% .61%*
========= ========= ======== ======== ======== =========
Expenses, net of reimbursement .96% .91% .87%* 1.46% 1.40% 1.36%*
========= ========= ======== ======== ======== =========
Expenses .96% .91% .96%* 1.46% 1.40% 1.47%*
========= ========= ======== ======== ======== =========
Investment income--net 3.69% 4.79% 6.54%* 3.20% 4.15% 6.07%*
========= ========= ======== ======== ======== =========
Supplemental Net assets, end of period
Data: (in thousands) $ 23,043 $ 51,398 $ 80,411 $374,376 $689,593 $ 887,110
========= ========= ======== ======== ======== =========
Portfolio turnover 60.38% 104.71% 94.72% 60.38% 104.71% 94.72%
========= ========= ======== ======== ======== =========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
58
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Adjustable Rate Securities Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a diversi-
fied, open-end management investment company. The Fund offers both
Class A and Class B Shares. Class A Shares are sold with a front-
end sales charge. Class B Shares may be subject to a contingent
deferred sales charge. Both classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and con-
ditions, except that Class A Shares bear the expenses of the on-
going account maintenance fee and have exclusive voting rights with
respect to such maintenance fee expenditures and Class B Shares bear
certain expenses related to the distribution of such shares and have
exclusive voting rights with respect to matters relating to such
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
in the market are valued at the last available bid price in the market
or on the basis of yield equivalents as obtained from one or more deal-
ers that make markets in such securities. Options on mortgage-backed
securities and other securities of the Fund which are traded on
exchanges are valued at their last bid price in the case of options
purchased by the Fund and their last asked price in the case of
options written by the Fund. Options traded on the market are valued
at their last bid price or asked price as obtained from at least
two independent entities (one of which is not a party to the option).
Interest rate futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of
such exchanges. Securities for which market quotations are not readily
available are valued at their fair value as determined in good faith
by or under the direction of the Board of Directors of the Fund.
(b) Repurchase agreements--The Fund invests in US Government secur-
ities pursuant to repurchase agreements with a member bank of the Fed-
eral Reserve System or a primary dealer in US Government securities.
Under such agreements, the bank or primary dealer agrees to repurchase
the security at a mutually agreed upon time and price. The Fund takes
possession of the underlying securities, marks to market such secur-
ities and, if necessary, receives additions to such securities daily
to ensure that the contract is fully collateralized.
(c) Options--When the Fund sells an option, an amount equal to the
premium received by the Fund is reflected as an asset and an equiva-
lent liability. The amount of the liability is subsequently marked to
market to reflect the current market value of the option written.
When a security is purchased or sold through an exercise of an option,
the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added
to) the proceeds of the security sold. When an option expires (or the
Fund enters into a closing transaction), the Fund realizes a gain or
loss on the option to the extent of the premiums received or paid
(or gain or loss to the extent that the cost of the closing trans-
action is less than or greater than the premiums paid or received).
Written and purchased options are non-income producing
investments.
(d) Futures contracts--The Fund may purchase or sell interest rate
futures contracts and related options on such futures contracts. Upon
entering into a contract, the Fund deposits and maintains as col-
lateral such initial margin as required by the exchange on which the
transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margins and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a real-
ized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed.
(e) Income taxes--It is the Fund's policy to comply with the require-
ments of the Internal Revenue Code applicable to regulated invest-
ment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax pro-
vision is required.
(f) Security transactions and investment income--Security trans-
actions are recorded on the dates the transactions are entered into
(the trade dates). Interest income (including amortization of dis-
count and premiums) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(g) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(h) Dividends and distributions--All or a portion of the Fund's net
investment income is declared daily and paid monthly. Distributions
paid by the Fund are recorded on the ex-dividend dates.
(i) Dollar rolls--The Fund sells mortgage-backed securities for
delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity)
securities on a specific future date.
59
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). Effective January 1,
1994, the investment advisory business of MLAM was reorganized
from a corporation to a limited partnership. Both prior to and after
the reorganization, ultimate control of MLAM was vested with
Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of
MLAM is Princeton Services, Inc., an indirect wholly-owned
subsidiary of ML & Co. The limited partners are ML & Co. and
Merrill Lynch Investment Management, Inc. ("MLIM"), which is also
an indirect wholly-owned subsidiary of ML & Co. The Fund has
entered into a Distribution Agreement and a Distribution Plan with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"),
a wholly-owned subsidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund. For
such services, the Fund pays a monthly fee of 0.50%, on an annual
basis, of the average daily value of the Fund's net assets. For the
year ended May 31, 1994, MLAM earned fees of $2,710,336. The Invest-
ment Advisory Agreement obligates MLAM to reimburse the Fund to the
extent the Fund's expenses (excluding interest, taxes, distribution
fees, brokerage fees and commissions, and extraordinary items)
exceed 2.5% of the Fund's first $30 million of average daily net
assets, 2.0% of the Fund's next $70 million of average daily net
assets, and 1.5% of the average daily net assets in excess thereof.
No fee payment will be made to MLAM during any fiscal year which
will cause such expenses to exceed the most restrictive expense
limitation at the time of such payment.
The Fund has adopted separate Plans of Distribution (the "Distri-
bution Plans") for Class A and Class B Shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, pursuant to
which MLFD receives from the Fund at the end of each month (a)
an account maintenance fee, at an annual rate of 0.25% of the
average daily net assets of the Fund's Class A Shares, in order to
compensate the Distributor in connection with account mainte-
nance activities, and (b) an account maintenance fee and a distribu-
tion fee relating to Class B Shares, accrued daily and paid monthly,
at the annual rate of 0.25% and 0.50%, respectively, of the average
daily net assets of the Fund attributable to Class B Shares. In order
to compensate the Distributor for the services it provides and the
expenses borne by the Distributor under the Distribution Agree-
ment. As authorized by the Distribution Plans, the Distributor has
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended May 31, 1994 were $328,517,202 and $715,564,238,
respectively.
Net realized and unrealized losses as of May 31, 1994 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $(19,663,837) $(10,996,559)
Short-term investments (37) --
------------ ------------
Total $(19,663,874) $(10,996,559)
============ ============
As of May 31, 1994, net unrealized depreciation for Federal income
tax purposes aggregated $12,835,753, of which $1,456,009 related
to appreciated securities and $14,291,762 related to depreciated
securities. The aggregate cost of investments at May 31, 1994 for
Federal income tax purposes was $413,525,301.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $332,880,261 and $209,712,303 for the years ended May 31, 1994
and May 31, 1993, respectively.
Transactions in capital shares for Class A and Class B Shares were
as follows:
Class A Shares for the Year Dollar
Ended May 31, 1994 Shares Amount
Shares sold 1,365,792 $ 13,269,165
Shares issued to shareholders
in reinvestment of dividends
to shareholders 75,693 735,836
------------ -------------
Total issued 1,441,485 14,005,001
Shares redeemed (4,289,994) (41,714,877)
------------ -------------
Net decrease (2,848,509) $ (27,709,876)
============ =============
Class A Shares for the Year Dollar
Ended May 31, 1993 Shares Amount
Shares sold 5,909,926 $ 58,465,229
Shares issued to shareholders
in reinvestment of dividends
to shareholders 210,719 2,068,479
------------ -------------
Total issued 6,120,645 60,533,708
Shares redeemed (8,960,468) (87,979,025)
------------ -------------
Net decrease (2,839,823) $ (27,445,317)
============ =============
Class B Shares for the Year Dollar
Ended May 31, 1994 Shares Amount
Shares sold 4,768,628 $ 46,269,096
60
<PAGE>
entered into an agreement with Merrill Lynch, Pierce, Fenner &
Smith Inc. ("MLPF&S"), which provides for the compensation of
MLPF&S in connection with account maintenance activities for
Class A Shares and for providing distribution-related services to the
Fund for Class B Shares. For the year ended May 31, 1994, MLFD
earned $85,730 and $3,808,315 for Class A and Class B Shares,
respectively, under the Distribution Plans, all of which was paid to
MLPF&S pursuant to the agreement. For the year ended May 31,
1994, MLFD earned underwriting discounts of $11,772, and MLPF&S
earned dealer concessions of $49,708 on the sale of the Fund's
Class A Shares. MLPF&S also received contingent deferred sales
charges of $2,010,325 relating to Class B Share transactions during
the year.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, MLPF&S, FDS, MLFD, and/or ML & Co.
Shares issued to shareholders
in reinvestment of dividends
to shareholders 966,330 9,395,018
------------ -------------
Total issued 5,734,958 55,664,114
Shares redeemed (37,100,715) (360,834,499)
------------ -------------
Net decrease (31,365,757) $(305,170,385)
============ =============
Class B Shares for the Year Dollar
Ended May 31, 1993 Shares Amount
Shares sold 28,963,546 $ 285,135,805
Shares issued to shareholders
in reinvestment of dividends
to shareholders 2,110,164 20,705,785
------------ -------------
Total issued 31,073,710 305,841,590
Shares redeemed (49,873,230) (488,108,576)
------------ -------------
Net decrease (18,799,520) $(182,266,986)
============ =============
5. Capital Loss Carryforward:
At May 31, 1994, the Fund had a net capital loss carryforward of
approximately $21,580,000, all of which expires in 2002. This amount
will be available to offset like amounts of any future taxable gains.
61
<PAGE>
[THIS PAGE IS INTENTIONALLY LEFT BLANK.]
62
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Privately Issued Mortgage-Backed and Asset-Backed Securities--Credit En-
hancements.............................................................. 2
United States Government Agencies or
Instrumentalities....................................................... 3
Adjustable Rate Securities--Indexes...................................... 4
Additional Collateralized Mortgage Obligation
Structures.............................................................. 5
Portfolio Strategies Involving Interest Rate
Transactions, Options and Futures....................................... 5
Other Investment Policies and Practices.................................. 10
Current Investment Restrictions.......................................... 11
Management of the Fund.................................................... 15
Directors and Officers................................................... 15
Management and Advisory Arrangements..................................... 17
Purchase of Shares........................................................ 18
Initial Sales Charge Alternatives--Class A and Class D Shares............ 19
Reduced Initial Sales Charge............................................. 20
Distribution Plans....................................................... 23
Limitations on the Payment of Deferred Sales Charges..................... 23
Redemption of Shares...................................................... 25
Deferred Sales Charge--Class B Shares.................................... 25
Portfolio Transactions.................................................... 26
Portfolio Turnover....................................................... 27
Determination of Net Asset Value.......................................... 27
Shareholder Services...................................................... 28
Investment Account....................................................... 28
Automatic Investment Plan................................................ 29
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 29
Systematic Withdrawal Plans--Class A and Class D Shares.................. 30
Retirement Plans......................................................... 31
Exchange Privilege....................................................... 31
Dividends, Distributions and Taxes........................................ 43
Dividends and Distributions.............................................. 43
Taxes.................................................................... 43
Tax Treatment of Interest Rate Transactions, Options and Futures......... 45
Performance Data.......................................................... 46
General Information....................................................... 47
Description of Shares.................................................... 47
Computation of Offering Price Per Share.................................. 48
Independent Auditors..................................................... 48
Custodian................................................................ 49
Transfer Agent........................................................... 49
Legal Counsel............................................................ 49
Reports to Shareholders.................................................. 49
Additional Information................................................... 49
Security Ownership of Certain Beneficial Owners.......................... 49
Appendix--Description of Commercial Paper and
Corporate Bond Ratings................................................... 50
Commercial Paper......................................................... 50
Corporate Bonds.......................................................... 50
Independent Auditors' Report.............................................. 51
Schedule of Investments................................................... 52
Statement of Assets and Liabilities....................................... 55
Statement of Operations................................................... 56
Statements of Changes in Net Assets....................................... 57
Financial Highlights...................................................... 58
Notes to Financial Statements............................................. 59
</TABLE>
Code #13938-1094
Statement of
Additional Information
[ART TO COME]
- ----------------------------------
MERRILL LYNCH
ADJUSTABLE RATE
SECURITIES FUND, INC.
October 21, 1994
Distributor:
Merrill Lynch Funds
Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for the years ended May 31, 1993 and 1994 and for
the period August 2, 1991 (commencement of operations) through May 31, 1992
Contained in Part B:
Schedule of Investments as of May 31, 1994
Statement of Assets and Liabilities as of May 31, 1994
Statement of Operations for the year ended May 31, 1994
Statements of Changes in Net Assets for the years ended May 31, 1994
and 1993.
Financial Highlights for the years ended May 31, 1993 and 1994 and for
the period August 2, 1991 (commencement of operations) to May 31,
1992
(C) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) --Articles of Incorporation of Registrant.(a)
(b) --Articles of Amendment of Registrant.(b)
(c) --Articles Supplementary of Registrant.(c)
2 --By-Laws of Registrant.(d)
3 --None.
4(a) --Specimen certificate for Class A shares of common stock of
Registrant.(b)
(b) --Specimen certificate for Class B shares of common stock of
Registrant.(b)
(c) --Portions of the Articles of Incorporation and the By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant.(f)
5(a) --Form of proposed Management Agreement between Registrant and Merrill
Lynch Asset Management, Inc.(b)
(b) --Supplement to Management Agreement between Registrant and Merrill
Lynch Asset Management, L.P.
6(a) --Form of Class A Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.
(b) --Class B Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.(b)
(c) --Form of Class C Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).
(d) --Form of Class D Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).
7 --None.
8 --Custody Agreement between Registrant and The Bank of New York.(b)
9 --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc.(b)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
11 --Consent of Deloitte & Touche LLP, independent auditors for
Registrant.
12 --None.
13 --Form of certificate of Merrill Lynch Asset Management, Inc.(d)
14 --None.
15(a) --Class A Shares Distribution Plan of Registrant.(b)
(b) --Amended and Restated Class B Shares Distribution Plan of
Registrant.(g)
(c) --Form of Class C Distribution Plan Sub-Agreement of Registrant.
(d) --Form of Class D Distribution Plan Sub-Agreement of Registrant.
16(a) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to item 22 relating to Class A
shares.(e)
(b) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to item 22 relating to Class B
shares.(e)
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
</TABLE>
- --------
(a) Filed on May 2, 1991 in connection with the Registrant's Registration
Statement on Form N-1A under the Securities Act of 1933.
(b) Filed on June 7, 1991 in connection with Pre-Effective Amendment No. 1 to
the Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933.
(c) Filed on September 28, 1992 in connection with Post-Effective Amendment No.
2 to the Registrant's Registration Statement on Form N-1A under the
Securities Act of 1933.
(d) Filed on June 14, 1991 in connection with Pre-Effective Amendment No. 2 to
the Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933.
(e) Filed on March 5, 1992 in connection with Post-Effective Amendment No. 1 to
the Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933.
(f) Reference is made to Article V, Article VI (Section 3), Article VII,
Article VIII and Article X of the Registrant's Articles of Incorporation,
previously filed as Exhibit (1), to the Registration Statement; and to
Article II, Article III (sections 1, 3, 5, 6, and 17), Article VI, Article
VII, Article XIII and Article XIV of the Registrant's By-Laws previously
filed as Exhibit (2) to the Registration Statement.
(g) Filed as an exhibit to Post-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-1A filed September 27, 1994.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1994
-------------- ------------------
<S> <C>
Class A shares of Common Stock, par value $0.10 per
share.................................................. 17
Class B shares of Common Stock, par value $0.10 per
share.................................................. 613
Class C shares of Common Stock, par value $0.10 per
share.................................................. 0
Class D shares of Common Stock, par value $0.10 per
share.................................................. 0
</TABLE>
C-2
<PAGE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A and Class B Distribution
Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940 may be concerned, such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only on receipt of a written promise by,
or on behalf of, the recipient to repay that amount of the advance which
exceeds the amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification; and (iii)(a) such
promise must be secured by a surety bond, other suitable insurance or an
equivalent form of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient or the advance ultimately
will be found entitled to indemnification.
In Section 9 of the Class A and Class B Distribution Agreements relating to
the securities being offered hereby, the Registrant agrees to indemnify the
Distributor and each person, if any, who controls the Distributor within the
meaning of the Securities Act of 1933, as amended (the "Act"), against certain
types of civil liabilities arising in connection with the Registration
Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager") acts as
investment adviser for the following investment companies: Convertible
Holdings, Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Growth Fund, Inc.,
Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Balanced Fund for
Investment and Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
for Tomorrow, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch
Global Resources Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global
C-3
<PAGE>
SmallCap Fund, Inc., Merrill Lynch Growth Fund for Investment and Retirement,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch High Income Municipal Bond
Fund, Inc., Merrill Lynch Institutional Intermediate Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Senior
Floating Rate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch Short-
Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill
Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc. and
Merrill Lynch Variable Series Funds, Inc. Fund Asset Management, L.P. ("FAM"),
an affiliate of the Manager, acts as the investment adviser for the following
registered investment companies: Apex Municipal Fund, Inc., 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., Corporate High Yield Fund, Inc., Corporate High Yield Fund II,
Inc., Emerging Tigers Fund, Inc., Financial Institutions Series Trust, Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Multi-State Limited Maturity 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., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal
Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund,
Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured
Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund
II, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund,
Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, Inc., MuniYield Fund, Inc., MuniYield Insured
Fund, Inc., MuniYield Insured Fund II, 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 New York Insured Fund III,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income
Portfolio II, Inc., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia
Holdings, Inc., Taurus MuniNew York Holdings, Inc., and Worldwide DollarVest
Fund, Inc. The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Institutional Intermediate Fund
is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The
address of the Manager and FAM is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial
Center, North Tower, 250 Vesey Street, New York, New York 10281. The address of
Financial Data Services is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
November 1, 1992 for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President and Mr.
Richard is Treasurer of all or substantially all of the investment companies
described in the preceding paragraph and Messrs. Durnin, Glenn, Giordano,
Harvey, Kirstein, Monagle and Ms. Griffin are directors or officers of one or
more of such companies.
C-4
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION WITH MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- --------------------- ----------------------------------
<S> <C> <C>
ML&Co. Limited Partner Financial Services Holding Company
Merrill Lynch
Investment
Management Inc. ....... Limited Partner Investment Advisory Services
Princeton Services, Inc.
("Princeton Services"). General Partner General Partner of FAM
Arthur Zeikel........... President and Chief President and Chief Investment Officer of
Investment Officer FAM; President and Director of Princeton
Services; Director of Merrill Lynch Funds
Distributor, Inc. ("MLFD"), Executive Vice
President of ML & Co., Inc. and Executive
Vice President of Merrill Lynch
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM; Executive
President Vice President and Director of Princeton
Services; President and Director of MLFD;
Director of Financial Data Services, Inc.
("FDS"); President of Princeton
Administrators
Bernard J. Durnin....... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Vincent R. Giordano..... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Elizabeth Griffin....... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Norman R. Harvey........ Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
N. John Hewitt.......... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President, General Counsel and
President, General Secretary of FAM; Senior Vice President,
Counsel and Director and Secretary of Princeton
Secretary Services; Director of MLFD
Ronald M. Kloss......... Senior Vice Senior Vice President and Controller of FAM;
President and Senior Vice President and Controller of
Controller Princeton Services
Stephen M.M. Miller..... Senior Vice Executive Vice President of Princeton
President Administrators; Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr. . Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Gerald M. Richard....... Senior Vice Senior Vice President and Treasurer of FAM;
President and Senior Vice President and Treasurer of
Treasurer Princeton Services; Vice President and
Treasurer of MLFD
Richard L. Rufener...... Senior Vice Senior Vice President of FAM; Vice President
President of MLFD; Senior Vice President of Princeton
Services
Ronald L. Welburn....... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Anthony Wiseman......... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
</TABLE>
C-5
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end investment companies referred to in the first paragraph of Item 28
except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund,
Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc.,
MuniVest Pennsylvania Fund, MuniYield Arizona Fund, MuniYield Arizona Fund II,
Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Insured Fund II, 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 New
York Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc., Senior High Income Portfolio II, Inc., Taurus MuniCalifornia Holdings,
Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Breen, Graczyk, Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Arthur Zeikel........... Director President and Director
Philip L. Kirstein...... Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Kevin P. Boman.......... Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Sharon Creveling........ Vice President and Assistant Treasurer None
Mark A. DeSario......... Vice President None
James T. Fatseas........ Vice President None
Stanley Graczyk......... Vice President None
Michelle T. Lau......... Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Richard L. Rufener...... Vice President None
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary None
</TABLE>
C-6
<PAGE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules thereunder will be
maintained at the offices of the Registrant and Financial Data Services, Inc.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Trust--
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-7
<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 POST-EFFECTIVE AMENDMENT TO ITS
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933
AND HAS DULY CAUSED THIS 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 12TH DAY OF OCTOBER, 1994.
Merrill Lynch Adjustable Rate Securities
Fund, Inc.
(Registrant)
/s/ Arthur Zeikel
By__________________________________
(ARTHUR ZEIKEL, PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Arthur Zeikel President and
- ------------------------------------- Director (Principal October 12,
(ARTHUR ZEIKEL) Executive Officer) 1994
/s/ Gerald M. Richard Treasurer (Principal
- ------------------------------------- Financial and October 12,
(GERALD M. RICHARD) Accounting Officer) 1994
Director
- -------------------------------------
(JOE GRILLS)
Walter Mintz* Director
- -------------------------------------
(WALTER MINTZ)
Melvin R. Seiden* Director
- -------------------------------------
(MELVIN R. SEIDEN)
Stephen B. Swensrud* Director
- -------------------------------------
(STEPHEN B. SWENSRUD)
Harry Woolf* Director
- -------------------------------------
(HARRY WOOLF)
/s/ Arthur Zeikel
*By _________________________________ October 12,
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT) 1994
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT NUMBER DESCRIPTION NUMBER
-------------- ----------- ------
<C> <S> <C>
5(b) --Supplement to Agreement between Registrant and
Merrill Lynch Asset Management, L.P.
6(a) --Form of Class A Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.
(including Form of Selected Dealers Agreement)
6(c) --Form of Class C Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.
(including Form of Selected Dealers Agreement)
6(d) --Form of Class D Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.
(including Form of Selected Dealers Agreement)
11 --Consent of Deloitte & Touche LLP, independent
auditors for Registrant
15(c) --Form of Class C Distribution Plan and Class C
Distribution Plan Sub-Agreement
15(d) --Form of Class D Distribution Plan and Class D
Distribution Plan Sub-Agreement
17(a) --Financial Data Schedule for Class A Shares
17(b) --Financial Data Schedule for Class B Shares
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR Submission file due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1994
<PERIOD-START> JUN-01-1993
<PERIOD-END> MAY-31-1994
<INVESTMENTS-AT-COST> 411686107
<INVESTMENTS-AT-VALUE> 400689548
<RECEIVABLES> 3144179
<ASSETS-OTHER> 271280
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 404105007
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6685712
<TOTAL-LIABILITIES> 6685712
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 431915917
<SHARES-COMMON-STOCK> 2418159
<SHARES-COMMON-PRIOR> 5266667
<ACCUMULATED-NII-CURRENT> 362953
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (23863016)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (10996559)
<NET-ASSETS> 23043432
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 25076112
<OTHER-INCOME> 217119
<EXPENSES-NET> 7765523
<NET-INVESTMENT-INCOME> 17527708
<REALIZED-GAINS-CURRENT> (19663874)
<APPREC-INCREASE-CURRENT> 8608834
<NET-CHANGE-FROM-OPS> 6472668
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1245307
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1365792
<NUMBER-OF-SHARES-REDEEMED> 4289994
<SHARES-REINVESTED> 75693
<NET-CHANGE-IN-ASSETS> (343572348)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4192679)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2710336
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7765523
<AVERAGE-NET-ASSETS> 34291858
<PER-SHARE-NAV-BEGIN> 9.76
<PER-SHARE-NII> .37
<PER-SHARE-GAIN-APPREC> (.24)
<PER-SHARE-DIVIDEND> .36
<PER-SHARE-DISTRIBUTIONS> .0
<RETURNS-OF-CAPITAL> .0
<PER-SHARE-NAV-END> 9.53
<EXPENSE-RATIO> .96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1994
<PERIOD-START> JUN-01-1993
<PERIOD-END> MAY-31-1994
<INVESTMENTS-AT-COST> 411686107
<INVESTMENTS-AT-VALUE> 400689548
<RECEIVABLES> 3144179
<ASSETS-OTHER> 271280
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 404105007
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6685712
<TOTAL-LIABILITIES> 6685712
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 431915917
<SHARES-COMMON-STOCK> 39268886
<SHARES-COMMON-PRIOR> 70634642
<ACCUMULATED-NII-CURRENT> 362953
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (23863016)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (10996559)
<NET-ASSETS> 374375863
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 25076112
<OTHER-INCOME> 217119
<EXPENSES-NET> 7765523
<NET-INVESTMENT-INCOME> 17527708
<REALIZED-GAINS-CURRENT> (19663874)
<APPREC-INCREASE-CURRENT> 8608834
<NET-CHANGE-FROM-OPS> 6472668
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 15919448
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4768628
<NUMBER-OF-SHARES-REDEEMED> 37100715
<SHARES-REINVESTED> 966330
<NET-CHANGE-IN-ASSETS> (343572348)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4192679)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2710336
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7765523
<AVERAGE-NET-ASSETS> 507775371
<PER-SHARE-NAV-BEGIN> 9.76
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> (.24)
<PER-SHARE-DIVIDEND> .31
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.53
<EXPENSE-RATIO> 1.46
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.5(B)
SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT
WITH
MERRILL LYNCH ASSET MANAGEMENT
As of January 1, 1994 Merrill Lynch Investment Management, Inc. d/b/a Merrill
Lynch Asset Management was reorganized as a limited partnership, formally known
as Merrill Lynch Asset Management, L.P. and continuing to do business under the
name Merrill Lynch Asset Management ("MLAM"). The general partner of MLAM is
Princeton Services, Inc. and the limited partners are Merrill Lynch Investment
Management, Inc. and Merrill Lynch & Co., Inc. Pursuant to Rule 202(a)(1)-1
under the Investment Advisers Act of 1940 and Rule 2a-6 under the Investment
Company Act of 1940 such reorganization did not constitute an assignment of this
investment advisory agreement since it did not involve a change of control or
management of the investment adviser. Pursuant to the requirements of Section
205 of the Investment Advisers Act of 1940, however, Merrill Lynch Asset
Management hereby supplements this investment advisory agreement by undertaking
to advise you of any change in the membership of the partnership within a
reasonable time after any such change occurs.
By /s/ Arthur Zeikel
---------------------------
Dated: January 3, 1994
<PAGE>
EXHIBIT 99.6(A)
[DRAFT: 8.26.94]
CLASS A SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 21st day of October 1994 between Merrill Lynch
Adjustable Rate Securities Fund, Inc., a Maryland corporation (the "Fund"), and
MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), as an open-end investment company,
and it is affirmatively in the interest of the Fund to offer its shares for sale
continuously; and
WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement with
each other with respect to the continuous offering of the Class A shares of
common stock in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints the
------------------------------
Distributor as the principal underwriter and distributor of the Fund to sell
Class A shares of common stock in the
<PAGE>
Fund (sometimes herein referred to as "Class A shares") to eligible investors
(as defined below) and hereby agrees during the term of this Agreement to sell
Class A shares of the Fund to the Distributor upon the terms and conditions
herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
--------------------------
exclusive representative of the Fund to act as principal underwriter and
distributor, except that:
(a) The Fund may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class A shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class A shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class A
shares from the Fund shall not apply to Class A shares issued in connection with
the merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding Class A shares of any such
company by the Fund.
2
<PAGE>
(c) Such exclusive right also shall not apply to Class A shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
(d) Such exclusive right also shall not apply to Class A shares issued by
the Fund pursuant to any conversion, exchange or reinstatement privilege
afforded redeeming shareholders or to any other Class A shares as shall be
agreed between the Fund and the Distributor from time to time.
Section 3. Purchase of Class A shares from the Fund.
----------------------------------------
(a) The Distributor shall have the right to buy from the Fund the Class A
shares needed, but not more than the Class A shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class A shares of the
Fund placed with the Distributor by eligible investors or securities dealers.
Investors eligible to purchase Class A shares shall be those persons so
identified in the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of additional
information", respectively) under the Securities Act of 1933, as amended (the
"Securities Act"), relating to such Class A shares ("eligible investors"). The
price which the Distributor shall pay for the Class A shares so purchased from
the Fund shall be the net asset value, determined as set forth in Section 3(d)
hereof, used in determining the public offering price on which such orders were
based.
(b) The Class A shares are to be resold by the Distributor to eligible
investors at the public offering price, as set forth
3
<PAGE>
in Section 3(c) hereof, or to securities dealers having agreements with the
Distributor upon the terms and conditions set forth in Section 7 hereof.
(c) The public offering price(s) of the Class A shares, i.e., the price
- -
per share at which the Distributor or selected dealers may sell Class A shares
to eligible investors, shall be the public offering price as set forth in the
prospectus and statement of additional information relating to such Class A
shares, but not to exceed the net asset value at which the Distributor is to
purchase the Class A shares, plus a sales charge not to exceed 4% of the public
offering price (4.17% of the net amount invested), subject to reductions for
volume purchases. Class A shares may be sold to certain Directors, officers and
employees of the Fund, directors and employees of Merrill Lynch & Co., Inc. and
its subsidiaries, and to certain other persons described in the prospectus and
statement of additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the prospectus and
statement of additional information. If the public offering price does not
equal an even cent, the public offering price may be adjusted to the nearest
cent. All payments to the Fund hereunder shall be made in the manner set forth
in Section 3(f).
(d) The net asset value of Class A shares shall be determined by the Fund
or any agent of the Fund in accordance with the method set forth in the
prospectus and statement of additional
4
<PAGE>
information of the Fund and guidelines established by the Directors.
(e) The Fund shall have the right to suspend the sale of its Class A
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend the
sale of its Class A shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by Federal or
New York authorities, or if there shall have been some other event, which, in
the judgment of the Fund, makes it impracticable or inadvisable to sell the
Class A shares.
(f) The Fund, or any agent of the Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Class A shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Class A shares from eligible investors. The
Fund (or its agent) will confirm orders upon their receipt, will make
appropriate book entries and, upon receipt by the Fund (or its agent) of payment
therefor, will deliver deposit receipts or certificates for such Class A shares
pursuant to the instructions of the Distributor. Payment shall be made to the
Fund in New York Clearing House funds. The Distributor agrees to cause such
payment and such instructions to be delivered promptly to the Fund (or its
agent).
5
<PAGE>
Section 4. Repurchase or Redemption of Class A shares by the Fund.
------------------------------------------------------
(a) Any of the outstanding Class A shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Class A shares so
tendered in accordance with its obligations as set forth in Article VII of its
Articles of Incorporation, as amended from time to time, and in accordance with
the applicable provisions set forth in the prospectus and statement of
additional information. The price to be paid to redeem or repurchase the Class
A shares shall be equal to the net asset value calculated in accordance with the
provisions of Section 3(d) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in the prospectus
and statement of additional information of the Fund. All payments by the Fund
hereunder shall be made in the manner set forth below. The redemption or
repurchase by the Fund of any of the Class A shares purchased by or through the
Distributor will not affect the sales charge secured by the Distributor or any
selected dealer in the course of the original sale, except that if any Class A
shares are tendered for redemption or repurchase within seven business days
after the date of the confirmation of the original purchase, the right to the
sales charge shall be forfeited by the Distributor and the selected dealer which
sold such Class A shares.
The Fund shall pay the total amount of the redemption price as defined in
the above paragraph pursuant to the instructions of
6
<PAGE>
the Distributor in New York Clearing House funds on or before the seventh
business day subsequent to its having received the notice of redemption in
proper form. The proceeds of any redemption of shares shall be paid by the Fund
as follows: (i) any applicable CDSC shall be paid to the Distributor, and (ii)
the balance shall be paid to or for the account of the shareholder, in each case
in accordance with the applicable provisions of the prospectus and statement of
additional information.
(b) Redemption of Class A shares or payment may be suspended at times when
the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund.
------------------
(a) The Fund shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class A shares of the
Fund, and this shall include, upon request by the Distributor, one certified
copy of all financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor
7
<PAGE>
such number of copies of the prospectus and statement of additional information
as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to any necessary
approval of the Class A shareholders, all necessary action to fix the number of
authorized Class A shares and such steps as may be necessary to register the
same under the Securities Act, to the end that there will be available for sale
such number of Class A shares as the Distributor may reasonably be expected to
sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class A shares for sale under the
securities laws of such states as the Distributor and the Fund may approve. Any
such qualification may be withheld, terminated or withdrawn by the Fund at any
time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualification.
(d) The Fund will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.
8
<PAGE>
Section 6. Duties of the Distributor.
-------------------------
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class A shares of the Fund but shall not be obligated to sell any
specific number of Class A shares. The services of the Distributor to the Fund
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class A shares of the Fund, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Fund to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Fund, for the confirmation of sales to eligible investors and
selected dealers, the collection of amounts payable by eligible investors and
selected dealers on such sales, and the cancellation of unsettled transactions,
as may be necessary to comply with the requirements of the National
9
<PAGE>
Association of Securities Dealers, Inc. (the "NASD"), as such requirements may
from time to time exist.
Section 7. Selected Dealers Agreements.
---------------------------
(a) The Distributor shall have the right to enter into selected dealers
agreements with securities dealers of its choice ("selected dealers") for the
sale of Class A shares and fix therein the portion of the sales charge which may
be allocated to the selected dealers; provided that the Fund shall approve the
forms of agreements with dealers and the dealer compensation set forth therein.
Class A shares sold to selected dealers shall be for resale by such dealers only
at the public offering price(s) set forth in the prospectus and statement of
additional information. The form of agreement with selected dealers to be used
during the continuous offering of the Class A shares is attached hereto as
Exhibit A.
(b) Within the United States, the Distributor shall offer and sell Class A
shares only to such selected dealers as are members in good standing of the
NASD.
Section 8. Payment of Expenses.
-------------------
(a) The Fund shall bear all costs and expenses of the Fund, including fees
and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
10
<PAGE>
materials to Class A shareholders (including but not limited to the expense of
setting in type any such registration statements, prospectuses, statements of
additional information, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments made to selected
dealers as reimbursement for their expenses associated with payments of sales
commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof which are to be used in connection
with the offering of Class A shares to selected dealers or eligible investors
pursuant to this Agreement. The Distributor shall bear the costs and expenses
of preparing, printing and distributing any other literature used by the
Distributor or furnished by it for use by selected dealers in connection with
the offering of the Class A shares for sale to eligible investors and any
expenses of advertising incurred by the Distributor in connection with such
offering.
(c) The Fund shall bear the cost and expenses of qualification of the
Class A shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5(c) hereof and the cost and
expenses payable to each such state for continuing
11
<PAGE>
qualification therein until the Fund decides to discontinue such qualification
pursuant to Section 5(c) hereof.
Section 9. Indemnification.
---------------
(a) The Fund shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor against any loss, liability, claim,
damage or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by reason of any
person acquiring any Class A shares, which may be based upon the Securities Act,
or on any other statute or at common law, on the ground that the registration
statement or related prospectus and statement of additional information, as from
time to time amended and supplemented, or an annual or interim report to
shareholders of the Fund, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with, information
furnished to the Fund in connection therewith by or on behalf of the
Distributor; provided, however, that in no case (i) is the indemnity of the Fund
in favor of the Distributor and any such controlling persons to be deemed to
protect such Distributor or any such controlling persons thereof against any
liability to the Fund or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of
12
<PAGE>
willful misfeasance, bad faith or gross negligence in the performance of their
duties or by reason of the reckless disregard of their obligations and duties
under this Agreement; or (ii) is the Fund to be liable under its indemnity
agreement contained in this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the Distributor or such
controlling persons, as the case may be, shall have notified the Fund in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor or such
controlling persons shall have received notice of such service on any designated
agent), but failure to notify the Fund of any such claim shall not relieve it
from any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. The Fund will be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Fund elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or defendants in
the suit. In the event the Fund elects to assume the defense of any such suit
and retain such counsel, the Distributor or such controlling person or persons,
defendant or defendants in the suit shall bear the fees and expenses of any
13
<PAGE>
additional counsel retained by them, but in case the Fund does not elect to
assume the defense of any such suit, it will reimburse the Distributor or such
controlling person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses of any counsel retained by them. The Fund shall
promptly notify the Distributor of the commencement of any litigation or
proceedings against it or any of its officers or Directors in connection with
the issuance or sale of any of the Class A shares.
(b) The Distributor shall indemnify and hold harmless the Fund and each of
its Directors and officers and each person, if any, who controls the Fund
against any loss, liability, claim, damage or expense described in the foregoing
indemnity contained in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity with,
information furnished to the Fund in writing by or on behalf of the Distributor
for use in connection with the registration statement or related prospectus and
statement of additional information, as from time to time amended, or the annual
or interim reports to Class A shareholders. In case any action shall be brought
against the Fund or any person so indemnified, in respect of which indemnity may
be sought against the Distributor, the Distributor shall have the rights and
duties given to the Fund, and the Fund and each person so indemnified shall have
the rights and duties given to the Distributor by the provisions of subsection
(a) of this Section 9.
14
<PAGE>
Section 10. Merrill Lynch Mutual Fund Adviser Program.
-----------------------------------------
In connection with the Merrill Lynch Mutual Fund Adviser Program, the
Distributor and its affiliate, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, are authorized to offer and sell shares to the Fund, as agent for
the Fund, to participants in such program. The terms of this Agreement shall
apply to such sales, including terms as to the offering price of shares, the
proceeds to be paid to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the Distributor.
Section 11. Duration and Termination of this Agreement. This Agreement
------------------------------------------
shall become effective as of the date first above written and shall remain in
force until October 21, 1995 and thereafter, but only for so long as such
continuance is specifically approved at least annually by (i) the Directors or
by the vote of a majority of the outstanding voting securities of the Fund and
(ii) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Directors or by vote of a majority of the outstanding voting
securities of the Fund, or by the Distributor, on sixty days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
15
<PAGE>
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. Amendments of this Agreement. This Agreement may be amended
----------------------------
by the parties only if such amendment is specifically approved by (i) the
Directors or by the vote of a majority of outstanding voting securities of the
Fund and (ii) by the vote of a majority of those Directors of the Fund who are
not parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval.
Section 13. Governing Law. The provisions of this Agreement shall be
-------------
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
Section 14. This Agreement supersedes the prior Distribution Agreement
entered into by the parties hereto with respect to the Class A shares of the
Fund.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC.
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
CLASS A SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
--------------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with Merrill Lynch Adjustable Rate Securities Fund, Inc. a Maryland corporation
(the "Fund"), pursuant to which it acts as the distributor for the sale of Class
A shares of common stock, par value $0.10 per share (herein referred to as
"Class A shares"), of the Fund and as such has the right to distribute Class A
shares of the Fund for resale. The Fund is an open-end investment company
registered under the Investment Company Act of 1940, as amended, and its Class A
shares are registered under the Securities Act of 1933, as amended. You have
received a copy of the Class A shares Distribution Agreement (the "Distribution
Agreement") between ourself and the Fund and reference is made herein to certain
provisions of such Distribution Agreement. The terms "Prospectus" and
"Statement of Additional Information" used herein refer to the prospectus and
statement of additional information, respectively, on file with the Securities
and Exchange Commission which is part of the most recent effective registration
statement pursuant to the Securities Act of 1933, as amended. We offer to sell
to you, as a member of the Selected Dealers Group, Class A shares of the Fund
for resale to investors identified in the Prospectus and Statement of Additional
Information as eligible to purchase Class A shares ("eligible investors") upon
the following terms and conditions:
1. In all sales of these Class A shares to eligible investors, you shall
act as dealer for your own account and in no transaction shall you have any
authority to act as agent for the Fund, for us or for any other member of the
Selected Dealers Group, except in connection with the Merrill Lynch Mutual Fund
Adviser program and such other special programs as we from time to time agree,
in which case you shall have authority to offer and sell shares, as agent for
the Fund, to participants in such program.
2. Orders received from you will be accepted through us only at the public
offering price applicable to each order, as set forth in the current Prospectus
and Statement of Additional
1
<PAGE>
Information of the Fund. The procedure relating to the handling of orders shall
be subject to Section 5 hereof and instructions which we or the Fund shall
forward from time to time to you. All orders are subject to acceptance or
rejection by the Distributor or the Fund in the sole discretion of either. The
minimum initial and subsequent purchase requirements are as set forth in the
current Prospectus and Statement of Additional Information of the Fund.
3. The sales charges for sales to eligible investors, computed as
percentages of the public offering price and the amount invested, and the
related discount to Selected Dealers are as follows:
<TABLE>
<CAPTION>
Discount to
Selected
Sales Charge Dealers as
Sales Charge as Percentage* Percentage
as Percentage of the Net of the
of the Amount Offering
Amount of Purchase Offering Price Invested Price
- ----------------------- -------------- -------------- -----------
<S> <C> <C> <C>
Less than $25,000...... 4.00% 4.17% 3.75%
$25,000 but less
than $50,000.......... 3.75% 3.40% 3.50%
$50,000 but less
than $100,000......... 3.25% 3.36% 3.00%
$100,000 but less
than $250,000......... 2.50% 2.56% 2.25%
$250,000 but less
than $1,000,000....... 1.50% 1.52% 1.25%
$1,000,000 and over**.. 0.00% 0.00% 0.00%
</TABLE>
___________________
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchases may be subject to a contingent deferred sales charge as
set forth in the current Prospectus and Statement of Additional Information.
2
<PAGE>
The term "purchase" 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 Class A shares for his or their own account and to
single purchases by a trustee or other fiduciary purchasing Class A 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, as
amended, but does not include purchases by any such company which has not been
in existence for at least six months or which has no purpose other than the
purchase of Class A shares of the Fund or Class A 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.
The reduced sales charges are applicable through a right of accumulation under
which certain eligible investors are permitted to purchase Class A shares of the
Fund 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 Class A, Class B, Class C and Class D shares of the Fund
and of any other investment company with an initial sales charge for which the
Distributor acts as the distributor. For any such right of accumulation to be
made available, the Distributor must be provided at the time of purchase, by the
purchaser or you, with sufficient information to permit confirmation of
qualification, and acceptance of the purchase order is subject to such
confirmation.
The reduced sales charges are applicable to purchases aggregating $10,000 or
more of Class A shares or of Class D shares of any other investment company with
an initial sales charge for which the Distributor acts as the distributor made
through you within a thirteen-month period starting with the first purchase
pursuant to a Letter of Intention in the form provided in the Prospectus. A
purchase not originally made pursuant to a Letter of Intention may be included
under a subsequent letter executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. If
the intended amount of shares is not purchased within the thirteen-month period,
an appropriate price adjustment will be made pursuant to the terms of the Letter
of Intention.
You agree to advise us promptly at our request as to amounts of any sales made
by you to eligible investors qualifying for reduced sales charges. Further
information as to the reduced sales charges pursuant to the right of
accumulation or a Letter of Intention is set forth in the Prospectus and
Statement of Additional Information.
3
<PAGE>
4. You shall not place orders for any of the Class A shares unless you have
already received purchase orders for such Class A shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class A shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class A shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class A shares of the Fund which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for Class A shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and subject to the
compensation provisions of Section 3 hereof and (ii) to tender Class A shares
directly to the Fund or its agent for redemption subject to the applicable terms
and conditions set forth in Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from your customers so as
to profit yourself as a result of such withholding: e.g., by a change in the
- -
"net asset value" from that used in determining the offering price to your
customers.
7. If any Class A shares sold to you under the terms of this Agreement are
repurchased by the Fund or by us for the account of the Fund or are tendered for
redemption within seven business days after the date of the confirmation of the
original purchase by you, it is agreed that you shall forfeit your right to, and
refund to us, any discount received by you on such Class A shares.
8. No person is authorized to make any representations concerning Class A
shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class A
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no liability
or
4
<PAGE>
responsibility to you in these respects unless expressly assumed in connection
therewith.
9. You agree to deliver to each of the purchasers making purchases from you
a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you agree
thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to suspend sales
or withdraw the offering of Class A shares entirely or to certain persons or
entities in a class or classes specified by us. Each party hereto has the right
to cancel this agreement upon notice to the other party.
11. We shall have full authority to take such action as we may deem advisable
in respect of all matters pertaining to the continuous offering. We shall be
under no liability to you except for lack of good faith and for obligations
expressly assumed by us herein. Nothing contained in this paragraph is intended
to operate as, and the provisions of this paragraph shall not in any way
whatsoever constitute, a waiver by you of compliance with any provision of the
Securities Act of 1933, as amended, or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.
12. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.
13. Upon application to us, we will inform you as to the states in which we
believe the Class A shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell Class A shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class A shares, if necessary.
14. All communications to us should be sent to the address below. Any notice
to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
15. Your first order placed pursuant to this Agreement for the purchase of
Class A shares of the Fund will represent your acceptance of this Agreement.
5
<PAGE>
16. This Agreement supersedes any prior Selected Dealers Agreement entered
into by the parties hereto with respect to the Class A shares of the Fund.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By __________________________________
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:__________________________________________
By:_________________________________________________
Address:____________________________________________
____________________________________________________
Date:_______________________________________________
6
<PAGE>
EXHIBIT 99.6(C)
[DRAFT: 8.26.94]
[TO BE EXECUTED BY ALL FUNDS]
CLASS C SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 21st day of October 1994, between
Merrill Lynch Adjustable Rate Securities Fund, Inc., a Maryland
corporation (the "Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR,
INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
-------------------
WHEREAS, the Fund is registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), as an
open-end investment company, and it is affirmatively in the in-
terest of the Fund to offer its shares for sale continuously; and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either direct-
ly to purchasers or through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Fund's Class C shares in order to promote the growth of
the Fund and facilitate the distribution of its Class C shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby
------------------------------
appoints the Distributor as the principal underwriter and
distributor of the Fund to sell Class C shares of common stock in
<PAGE>
the Fund (sometimes herein referred to as "Class C shares") to
the public and hereby agrees during the term of this Agreement to
sell shares of the Fund to the Distributor upon the terms and
conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
--------------------------
shall be the exclusive representative of the Fund to act as prin-
cipal underwriter and distributor of the Class C shares, except
that:
(a) The Fund may, upon written notice to the Distributor,
from time to time designate other principal underwriters and
distributors of Class C shares with respect to areas other than
the United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
Agreement to sell Class C shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
(b) The exclusive right granted to the Distributor to
purchase Class C shares from the Fund shall not apply to Class C
shares of the Fund issued in connection with the merger or conso-
lidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise
of all (or substantially all) the assets or the outstanding Class
C shares of any such company by the Fund.
2
<PAGE>
(c) Such exclusive right also shall not apply to Class C
shares issued by the Fund pursuant to reinvestment of dividends
or capital gains distributions.
(d) Such exclusive right also shall not apply to Class C
shares issued by the Fund pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class C shares as shall be agreed between the Fund and the
Distributor from time to time.
Section 3. Purchase of Class C Shares from the Fund.
----------------------------------------
(a) It is contemplated that the Fund will commence an
offering of its Class C shares, and thereafter the Distributor
shall have the right to buy from the Fund the Class C shares
needed, but not more than the Class C shares needed (except for
clerical errors in transmission) to fill unconditional orders for
Class C shares of the Fund placed with the Distributor by
eligible investors or securities dealers. Investors eligible to
purchase Class C shares shall be those persons so identified in
the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act
of 1933, as amended (the "Securities Act"), relating to such
Class C shares. The price which the Distributor shall pay for the
Class C shares so purchased from the Fund shall be the net asset
value, determined as set forth in Section 3(c) hereof.
3
<PAGE>
(b) The Class C shares are to be resold by the Distributor
to investors at net asset value, as set forth in Section 3(c)
hereof, or to securities dealers having agreements with the Dis-
tributor upon the terms and conditions set forth in Section 7
hereof.
(c) The net asset value of Class C shares of the Fund shall
be determined by the Fund or any agent of the Fund in accordance
with the method set forth in the prospectus and statement of
additional information and guidelines established by the Board of
Directors.
(d) The Fund shall have the right to suspend the sale of
its Class C shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Fund
shall also have the right to suspend the sale of its Class C
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Fund, makes it imprac-
ticable or inadvisable to sell the Class C shares.
(e) The Fund, or any agent of the Fund designated in
writing by the Fund, shall be promptly advised of all purchase
orders for Class C shares received by the Distributor. Any order
may be rejected by the Fund; provided, however, that the Fund
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class C shares. The Fund
4
<PAGE>
(or its agent) will confirm orders upon their receipt, will make
appropriate book entries and, upon receipt by the Fund (or its
agent) of payment therefor, will deliver deposit receipts or
certificates for such Class C shares pursuant to the instructions
of the Distributor. Payment shall be made to the Fund in New
York Clearing House funds. The Distributor agrees to cause such
payment and such instructions to be delivered promptly to the
Fund (or its agent).
Section 4. Repurchase or Redemption of Class C Shares by
---------------------------------------------
the Fund.
- --------
(a) Any of the outstanding Class C shares may be tendered
for redemption at any time, and the Fund agrees to repurchase or
redeem the Class C shares so tendered in accordance with its
obligations as set forth in Article VI of its Articles of
Incorporation, as amended from time to time, and in accordance
with the applicable provisions set forth in the prospectus and
statement of additional information of the Fund. The price to be
paid to redeem or repurchase the Class C shares shall be equal to
the net asset value calculated in accordance with the provisions
of Section 3(c) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in
the prospectus and statement of additional information of the
Fund. All payments by the Fund hereunder shall be made in the
manner set forth below.
5
<PAGE>
The Fund shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
the Distributor on or before the seventh business day subsequent
to its having received the notice of redemption in proper form.
The proceeds of any redemption of shares shall be paid by the
Fund as follows: (i) any applicable CDSC shall be paid to the
Distributor, and (ii) the balance shall be paid to or for the
account of the shareholder, in each case in accordance with the
applicable provisions of the prospectus and statement of
additional information.
(b) Redemption of Class C shares or payment may be sus-
pended at times when the New York Stock Exchange is closed, when
trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Fund.
------------------
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the
Distributor may reasonably request for use in connection with the
distribution of Class C shares of the Fund, and this shall in-
clude, upon request by the Distributor, one certified copy of all
6
<PAGE>
financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor
such number of copies of its prospectus and statement of addi-
tional information as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to
any necessary approval of the shareholders, all necessary action
to fix the number of authorized shares and such steps as may be
necessary to register the same under the Securities Act to the
end that there will be available for sale such number of Class C
shares as the Distributor reasonably may be expected to sell.
(c) The Fund shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
C shares for sale under the securities laws of such states as the
Distributor and the Fund may approve. Any such qualification may
be withheld, terminated or withdrawn by the Fund at any time in
its discretion. As provided in Section 8(c) hereof, the expense
of qualification and maintenance of qualification shall be borne
by the Fund. The Distributor shall furnish such information and
other material relating to its affairs and activities as may be
required by the Fund in connection with such qualification.
(d) The Fund will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
7
<PAGE>
Section 6. Duties of the Distributor.
-------------------------
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class C shares of the Fund but shall not be
obligated to sell any specific number of shares. The services of
the Distributor to the Fund hereunder are not to be deemed exclu-
sive and nothing herein contained shall prevent the Distributor
from entering into like arrangements with other investment com-
panies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class C shares of the Fund, the Distri-
butor shall use its best efforts in all respects duly to conform
with the requirements of all Federal and state laws relating to |
the sale of such securities. Neither the Distributor nor any
selected dealer, as defined in Section 7 hereof, nor any other
person is authorized by the Fund to give any information or to
make any representations, other than those contained in the
registration statement or related prospectus and statement of
additional information and any sales literature specifically
approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Fund, for the confirmation of
sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales,
and the cancellation of unsettled transactions, as may be neces-
sary to comply with the requirements of the National Association
8
<PAGE>
of Securities Dealers, Inc. (the "NASD"), as such requirements
may from time to time exist.
Section 7. Selected Dealer Agreements.
--------------------------
(a) The Distributor shall have the right to enter into
selected dealer agreements with securities dealers of its choice
("selected dealers") for the sale of Class C shares; provided,
that the Fund shall approve the forms of agreements with dealers.
Class C shares sold to selected dealers shall be for resale by
such dealers only at net asset value determined as set forth in
Section 3(c) hereof. The form of agreement with selected dealers
to be used during the continuous offering of the shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class C shares only to such selected dealers that are
members in good standing of the NASD.
Section 8. Payment of Expenses.
-------------------
(a) The Fund shall bear all costs and expenses of the Fund,
including fees and disbursements of its counsel and auditors, in
connection with the preparation and filing of any required
registration statements and/or prospectuses and statements of
additional information under the Investment Company Act, the
Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
materials to Class C shareholders (including but not limited to
the expense of setting in type any such registration statements,
9
<PAGE>
prospectuses, statements of additional information, annual or
interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class C
shares to selected dealers or investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class C shares for sale to
the public and any expenses of advertising incurred by the Dis-
tributor in connection with such offering. It is understood and
agreed that so long as the Fund's Class C Shares Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act
remains in effect, any expenses incurred by the Distributor here-
under may be paid from amounts recovered by it from the Fund
under such Plan.
(c) The Fund shall bear the cost and expenses of qualifi-
cation of the Class C shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
10
<PAGE>
fying the Fund as a broker or dealer in such states of the United
States or other jurisdictions as shall be selected by the Fund
and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing
qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
---------------
(a) The Fund shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class C shares, which may be
based upon the Securities Act, or on any other statute or at
common law, on the ground that the registration statement or
related prospectus and statement of additional information, as
from time to time amended and supplemented, or an annual or
interim report to Class C shareholders of the Fund, includes an
untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make
the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with, in-
formation furnished to the Fund in connection therewith by or on
behalf of the Distributor; provided, however, that in no case (i)
11
<PAGE>
is the indemnity of the Fund in favor of the Distributor and any
such controlling persons to be deemed to protect such Distributor
or any such controlling persons thereof against any liability to
the Fund or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the
performance of their duties or by reason of the reckless
disregard of their obligations and duties under this Agreement;
or (ii) is the Fund to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made
against the Distributor or any such controlling persons, unless
the Distributor or such controlling persons, as the case may be,
shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information
of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor
or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund
of any such claim shall not relieve it from any liability which
it may have to the person against whom such action is brought
otherwise than on account of its indemnity agreement contained in
this paragraph. The Fund will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but if
the Fund elects to assume the defense, such defense shall be
12
<PAGE>
conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or
defendants in the suit. In the event the Fund elects to assume
the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or
defendants in the suit shall bear the fees and expenses, as
incurred, of any additional counsel retained by them, but in case
the Fund does not elect to assume the defense of any such suit,
it will reimburse the Distributor or such controlling person or
persons, defendant or defendants in the suit, for the reasonable
fees and expenses, as incurred, of any counsel retained by them.
The Fund shall promptly notify the Distributor of the commence-
ment of any litigation or proceedings against it or any of its
officers or Directors in connection with the issuance or sale of
any of the Class C shares.
(b) The Distributor shall indemnify and hold harmless the
Fund and each of its Directors and officers and each person, if
any, who controls the Fund against any loss, liability, claim,
damage or expense, as incurred, described in the foregoing indem-
nity contained in subsection (a) of this Section, but only with
respect to statements or omissions made in reliance upon, and in
conformity with, information furnished to the Fund in writing by
or on behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of
additional information as from time to time amended, or the
13
<PAGE>
annual or interim reports to shareholders. In case any action
shall be brought against the Fund or any person so indemnified,
in respect of which indemnity may be sought against the Distri-
butor, the Distributor shall have the rights and duties given to
the Fund, and the Fund and each person so indemnified shall have
the rights and duties given to the Distributor by the provisions
of subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Proqram.
-----------------------------------------
In connection with the Merrill Lynch Mutual Fund Adviser Program,
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
------------------------------------------
This Agreement shall become effective as of the date first above
written and shall remain in force until October 21, 1995 and
thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Directors or
by the vote of a majority of the outstanding voting securities of
the Fund and (ii) by the vote of a majority of those Directors
who are not parties to this Agreement or interested persons of
14
<PAGE>
any such party cast in person at a meeting called for the purpose
of voting on such approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Directors or by vote of a majority
of the outstanding voting securities of the Fund, or by the
Distributor, on sixty days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
assignment.
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 12. Amendments of this Agreement. This Agreement
----------------------------
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Directors or by the vote of a majority
of outstanding voting securities of the Fund and (ii) by the vote
of a majority of those Directors of the Fund who are not parties
to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such
approval.
Section 13. Governing Law. The provisions of this Agree-
-------------
ment shall be construed and interpreted in accordance with the
laws of the State of New York as at the time in effect and the
applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
15
<PAGE>
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC.
By___________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By___________________________________
Title:
16
<PAGE>
EXHIBIT A
MERRILL LYNCH ADJUSTABLE
RATE SECURITIES FUND, INC.
CLASS C SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
-------------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch Adjustable Rate Securities
Fund, Inc., a Maryland corporation (the "Fund"), pursuant to
which it acts as the distributor for the sale of Class C shares
of common stock, par value $0.10 per share (herein referred to as
the "Class C shares"), of the Fund and as such has the right to
distribute Class C shares of the Fund for resale. The Fund is an
open-end investment company registered under the Investment
Company Act of 1940, as amended, and its Class C shares being
offered to the public are registered under the Securities Act of
1933, as amended. You have received a copy of the Class C Shares
Distribution Agreement (the "Distribution Agreement") between
ourself and the Fund and reference is made herein to certain
provisions of such Distribution Agreement. The terms "Prospec-
tus" and "Statement of Additional Information" as used herein
refer to the prospectus and statement of additional information,
respectively, on file with the Securities and Exchange Commission
which is part of the most recent effective registration statement
pursuant to the Securities Act of 1933, as amended. We offer to
sell to you, as a member of the Selected Dealers Group, Class C
shares of the Fund upon the following terms and conditions:
1. In all sales of these Class C shares to the public, you
shall act as dealer for your own account and in no transaction
shall you have any authority to act as agent for the Fund, for us
or for any other member of the Selected Dealers Group, except in
connection with the Merrill Lynch Mutual Fund Adviser program and
such other special programs as we from time to time agree, in
which case you shall have authority to offer and sell shares, as
agent for the Fund, to participants in such program.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
of orders shall be subject to Section 4 hereof and instructions
which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor
1
<PAGE>
or the Fund in the sole discretion of either. The minimum ini-
tial and subsequent purchase requirements are as set forth in the
current Prospectus and Statement of Additional Information of the
Fund.
3. You shall not place orders for any of the Class C shares
unless you have already received purchase orders for such Class C
shares at the applicable public offering prices and subject to
the terms hereof and of the Distribution Agreement. You agree
that you will not offer or sell any of the Class C shares except
under circumstances that will result in compliance with the
applicable Federal and state securities laws and that in
connection with sales and offers to sell Class C shares you will
furnish to each person to whom any such sale or offer is made a
copy of the Prospectus and, if requested, the Statement of Addi-
tional Information (as then amended or supplemented) and will not
furnish to any person any information relating to the Class C
shares of the Fund which is inconsistent in any respect with the
information contained in the Prospectus and Statement of Addi-
tional Information (as then amended or supplemented) or cause any
advertisement to be published in any newspaper or posted in any
public place without our consent and the consent of the Fund.
4. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Fund for Class C shares of the
Fund to be resold by us to you subject to the applicable terms
and conditions governing the placement of orders by us set forth
in Section 3 of the Distribution Agreement and (ii) to tender
Class C shares directly to the Fund or its agent for redemption
subject to the applicable terms and conditions set forth in Sec-
tion 4 of the Distribution Agreement.
5. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such with-
holding: e.g., by a change in the "net asset value" from that
- -
used in determining the offering price to your customers.
6. No person is authorized to make any representations
concerning Class C shares of the Fund except those contained in
the current Prospectus and Statement of Additional Information of
the Fund and in such printed information subsequently issued by
us or the Fund as information supplemental to such Prospectus and
Statement of Additional Information. In purchasing Class C
shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional Informa-
tion and supplemental information above mentioned. Any printed
information which we furnish you other than the Fund's Prospec-
tus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not
the responsibility of the Fund, and you agree that the Fund shall
2
<PAGE>
have no liability or responsibility to you in these respects
unless expressly assumed in connection therewith.
7. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to
the time of offering or sale and you agree thereafter to deliver
to such purchasers copies of the annual and interim reports and
proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional
copies of the Prospectus and Statement of Additional Information,
annual or interim reports and proxy solicitation materials of the
Fund will be supplied to you in reasonable quantities upon re-
quest.
8. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of Class C shares
entirely or to certain persons or entities in a class or classes
specified by us. Each party hereto has the right to cancel this
Agreement upon notice to the other party.
9. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
10. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association.
11. Upon application to us, we will inform you as to the
states in which we believe the Class C shares have been qualified
for sale under, or are exempt from the requirements of, the
respective securities laws of such states, but we assume no
responsibility or obligation as to your right to sell Class C
shares in any jurisdiction. We will file with the Department of
State in New York a Further State Notice with respect to the
Class C shares, if necessary.
12. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or tele-
graphed to you at the address specified by you below.
3
<PAGE>
13. Your first order placed pursuant to this Agreement for
the purchase of Class C shares of the Fund will represent your
acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:____________________________________
By:___________________________________________
Address:______________________________________
______________________________________________
Date:_________________________________________
4
<PAGE>
EXHIBIT 99.6(D)
[DRAFT: 8.26.94]
[TO BE EXECUTED BY ALL FUNDS]
CLASS D SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 21st day of October 1994 between Merrill Lynch
Adjustable Rate Securities Fund, Inc., a Maryland corporation (the "Fund"), and
MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), as an open-end investment company,
and it is affirmatively in the interest of the Fund to offer its shares for sale
continuously;
and
WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement with
each other with respect to the continuous offering of the Class D shares of
common stock in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints the
------------------------------
Distributor as the principal underwriter and distributor of the Fund to sell
Class D shares of common stock in the Fund (sometimes herein referred to as
"Class D shares") to the
<PAGE>
public and hereby agrees during the term of this Agreement to sell Class D
shares of the Fund to the Distributor upon the terms and conditions herein set
forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
--------------------------
exclusive representative of the Fund to act as principal underwriter and
distributor, except that:
(a) The Fund may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class D shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class D shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class D
shares from the Fund shall not apply to Class D shares issued in connection with
the merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding Class D shares of any such
company by the Fund.
(c) Such exclusive right also shall not apply to Class D shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2
<PAGE>
(d) Such exclusive right also shall not apply to Class D shares issued by
the Fund pursuant to any conversion, exchange or reinstatement privilege
afforded redeeming shareholders or to any other Class D shares as shall be
agreed between the Fund and the Distributor from time to time.
Section 3. Purchase of Class D Shares from the Fund.
----------------------------------------
(a) It is contemplated that the Fund will commence an offering of its
Class D shares, and thereafter the Distributor shall have the right to buy from
the Fund the Class D shares needed, but not more than the Class D shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Class D shares of the Fund placed with the Distributor by eligible investors or
securities dealers. Investors eligible to purchase Class D shares shall be
those persons so identified in the currently effective prospectus and statement
of additional information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act of 1933, as
amended (the "Securities Act"), relating to such Class D shares. The price which
the Distributor shall pay for the Class D shares so purchased from the Fund
shall be the net asset value, determined as set forth in Section 3(d) hereof,
used in determining the public offering price on which such orders were based.
(b) The Class D shares are to be resold by the Distributor to investors at
the public offering price, as set forth in Section 3(c) hereof, or to securities
dealers having agreements
3
<PAGE>
with the Distributor upon the terms and conditions set forth in Section 7
hereof.
(c) The public offering price(s) of the Class D shares, i.e., the price
- -
per share at which the Distributor or selected dealers may sell Class D shares
to the public, shall be the public offering price as set forth in the prospectus
and statement of additional information relating to such Class D shares, but not
to exceed the net asset value at which the Distributor is to purchase the Class
D shares, plus a sales charge not to exceed 4.0% of the public offering price
(4.17% of the net amount invested), subject to reductions for volume purchases.
Class D shares may be sold to certain Directors, officers and employees of the
Fund, directors and employees of Merrill Lynch & Co., Inc. and its subsidiaries,
and to certain other persons described in the prospectus and statement of
additional information, without a sales charge or at a reduced sales charge,
upon terms and conditions set forth in the prospectus and statement of
additional information. If the public offering price does not equal an even
cent, the public offering price may be adjusted to the nearest cent. All
payments to the Fund hereunder shall be made in the manner set forth in Section
3(f).
(d) The net asset value of Class D shares shall be determined by the Fund
or any agent of the Fund in accordance with the method set forth in the
prospectus and statement of additional
4
<PAGE>
information of the Fund and guidelines established by the Directors.
(e) The Fund shall have the right to suspend the sale of its Class D
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend the
sale of its Class D shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by Federal or
New York authorities, or if there shall have been some other event, which, in
the judgment of the Fund, makes it impracticable or inadvisable to sell the
Class D shares.
(f) The Fund, or any agent of the Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Class D shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Class D shares. The Fund (or its agent) will
confirm orders upon their receipt, will make appropriate book entries and, upon
receipt by the Fund (or its agent) of payment therefor, will deliver deposit
receipts or certificates for such Class D shares pursuant to the instructions of
the Distributor. Payment shall be made to the Fund in New York Clearing House
funds. The Distributor agrees to cause such payment and such instructions to be
delivered promptly to the Fund (or its agent).
5
<PAGE>
Section 4. Repurchase or Redemption of Class D Shares by the Fund.
------------------------------------------------------
(a) Any of the outstanding Class D shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Class D shares so
tendered in accordance with its obligations as set forth in Article VII of its
Articles of Incorporation, as amended from time to time, and in accordance with
the applicable provisions set forth in the prospectus and statement of
additional information. The price to be paid to redeem or repurchase the Class
D shares shall be equal to the net asset value calculated in accordance with the
provisions of Section 3(d) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in the prospectus
and statement of additional information of the Fund. All payments by the Fund
hereunder shall be made in the manner set forth below. The redemption or
repurchase by the Fund of any of the Class D shares purchased by or through the
Distributor will not affect the sales charge secured by the Distributor or any
selected dealer in the course of the original sale, except that if any Class D
shares are tendered for redemption or repurchase within seven business days
after the date of the confirmation of the original purchase, the right to the
sales charge shall be forfeited by the Distributor and the selected dealer which
sold such Class D shares.
The Fund shall pay the total amount of the redemption price as defined in
the above paragraph pursuant to the instructions of
6
<PAGE>
the Distributor in New York Clearing House funds on or before the seventh
business day subsequent to its having received the notice of redemption in
proper form. The proceeds of any redemption of shares shall be paid by the Fund
as follows: (i) any applicable CDSC shall be paid to the Distributor, and (ii)
the balance shall be paid to or for the account of the shareholder, in each case
in accordance with the applicable provisions of the prospectus and statement of
additional information.
(b) Redemption of Class D shares or payment may be suspended at times when
the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund.
------------------
(a) The Fund shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class D shares of the
Fund, and this shall include, upon request by the Distributor, one certified
copy of all financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor
7
<PAGE>
such number of copies of the prospectus and statement of additional information
as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to any necessary
approval of the Class D shareholders, all necessary action to fix the number of
authorized Class D shares and such steps as may be necessary to register the
same under the Securities Act, to the end that there will be available for sale
such number of Class D shares as the Distributor may reasonably be expected to
sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class D shares for sale under the
securities laws of such states as the Distributor and the Fund may approve. Any
such qualification may be withheld, terminated or withdrawn by the Fund at any
time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualification.
(d) The Fund will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.
Section 6. Duties of the Distributor.
-------------------------
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class D shares of the Fund but shall not be obligated to sell any
specific number of Class D shares. The
8
<PAGE>
services of the Distributor to the Fund hereunder are not to be deemed exclusive
and nothing herein contained shall prevent the Distributor from entering into
like arrangements with other investment companies so long as the performance of
its obligations hereunder is not impaired thereby.
(b) In selling the Class D shares of the Fund, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Fund to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Fund, for the confirmation of sales to investors and selected
dealers, the collection of amounts payable by investors and selected dealers on
such sales, and the cancellation of unsettled transactions, as may be necessary
to comply with the requirements of the National Association of Securities
Dealers, Inc. (the "NASD"), as such requirements may from time to time exist.
Section 7. Selected Dealers Agreements.
---------------------------
(a) The Distributor shall have the right to enter into selected dealers
agreements with securities dealers of its choice
9
<PAGE>
("selected dealers") for the sale of Class D shares and fix therein the portion
of the sales charge which may be allocated to the selected dealers; provided
that the Fund shall approve the forms of agreements with dealers and the dealer
compensation set forth therein. Class D shares sold to selected dealers shall
be for resale by such dealers only at the public offering price(s) set forth in
the prospectus and statement of additional information. The form of agreement
with selected dealers to be used during the continuous offering of the Class D
shares is attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer and sell Class D
shares only to such selected dealers as are members in good standing of the
NASD.
Section 8. Payment of Expenses.
-------------------
(a) The Fund shall bear all costs and expenses of the Fund, including fees
and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class D
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).
10
<PAGE>
(b) The Distributor shall be responsible for any payments made to selected
dealers as reimbursement for their expenses associated with payments of sales
commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof which are to be used in connection
with the offering of Class D shares to selected dealers or investors pursuant to
this Agreement. The Distributor shall bear the costs and expenses of preparing,
printing and distributing any other literature used by the Distributor or
furnished by it for use by selected dealers in connection with the offering of
the Class D shares for sale to the public and any expenses of advertising
incurred by the Distributor in connection with such offering. It is understood
and agreed that so long as the Fund's Class D Shares Distribution Plan pursuant
to Rule 12b-1 under the Investment Company Act remains in effect, any expenses
incurred by the Distributor hereunder in connection with account maintenance
activities may be paid from amounts recovered by it from the Fund under such
plan.
(c) The Fund shall bear the cost and expenses of qualification of the
Class D shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Fund
11
<PAGE>
and the Distributor pursuant to Section 5(c) hereof and the cost and expenses
payable to each such state for continuing qualification therein until the Fund
decides to discontinue such qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
---------------
(a) The Fund shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor against any loss, liability, claim,
damage or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by reason of any
person acquiring any Class D shares, which may be based upon the Securities Act,
or on any other statute or at common law, on the ground that the registration
statement or related prospectus and statement of additional information, as from
time to time amended and supplemented, or an annual or interim report to
shareholders of the Fund, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with, information
furnished to the Fund in connection therewith by or on behalf of the
Distributor; provided, however, that in no case (i) is the indemnity of the Fund
in favor of the Distributor and any such controlling persons to be deemed to
protect such Distributor or any such controlling persons thereof against any
liability to the
12
<PAGE>
Fund or its security holders to which the Distributor or any such controlling
persons would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of their duties or by reason of the
reckless disregard of their obligations and duties under this Agreement; or (ii)
is the Fund to be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against the Distributor or any such
controlling persons, unless the Distributor or such controlling persons, as the
case may be, shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon the Distributor or such controlling
persons (or after the Distributor or such controlling persons shall have
received notice of such service on any designated agent), but failure to notify
the Fund of any such claim shall not relieve it from any liability which it may
have to the person against whom such action is brought otherwise than on account
of its indemnity agreement contained in this paragraph. The Fund will be
entitled to participate at its own expense in the defense or, if it so elects,
to assume the defense of any suit brought to enforce any such liability, but if
the Fund elects to assume the defense, such defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or such controlling
person or persons, defendant or defendants in the suit. In the event the Fund
elects to assume the defense of any such suit and retain such counsel, the
13
<PAGE>
Distributor or such controlling person or persons, defendant or defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them, but in case the Fund does not elect to assume the defense of any such
suit, it will reimburse the Distributor or such controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Fund shall promptly notify the Distributor of the
commencement of any litigation or proceedings against it or any of its officers
or Directors in connection with the issuance or sale of any of the Class D
shares.
(b) The Distributor shall indemnify and hold harmless the Fund and each of
its Directors and officers and each person, if any, who controls the Fund
against any loss, liability, claim, damage or expense described in the foregoing
indemnity contained in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity with,
information furnished to the Fund in writing by or on behalf of the Distributor
for use in connection with the registration statement or related prospectus and
statement of additional information, as from time to time amended, or the annual
or interim reports to Class D shareholders. In case any action shall be brought
against the Fund or any person so indemnified, in respect of which indemnity may
be sought against the Distributor, the Distributor shall have the rights and
duties given to the Fund, and the Fund and each person so indemnified
14
<PAGE>
shall have the rights and duties given to the Distributor by the provisions of
subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Program.
-----------------------------------------
In connection with the Merrill Lynch Mutual Fund Adviser Program, the
Distributor and its affiliate, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, are authorized to offer and sell shares to the Fund, as agent for
the Fund, to participants in such program. The terms of this Agreement shall
apply to such sales, including terms as to the offering price of shares, the
proceeds to be paid to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the Distributor.
Section 11. Duration and Termination of this Agreement. This Agreement
------------------------------------------
shall become effective as of the date first above written and shall remain in
force until October 21, 1995 and thereafter, but only for so long as such
continuance is specifically approved at least annually by (i) the Directors or
by the vote of a majority of the outstanding voting securities of the Fund and
(ii) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Directors or by vote of a majority of the outstanding voting
securities of the Fund, or by the Distributor, on sixty days' written notice to
the other party. This
15
<PAGE>
Agreement shall automatically terminate in the event of its assignment.
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. Amendments of this Agreement. This Agreement may be amended
----------------------------
by the parties only if such amendment is specifically approved by (i) the
Directors or by the vote of a majority of outstanding voting securities of the
Fund and (ii) by the vote of a majority of those Directors of the Fund who are
not parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval.
Section 13. Governing Law. The provisions of this Agreement shall be
-------------
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC.
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH ADJUSTABLE
RATE SECURITIES FUND, INC.
CLASS D SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
--------------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with Merrill Lynch Adjustable Rate Securities Fund, Inc., a Maryland corporation
(the "Fund"), pursuant to which it acts as the distributor for the sale of Class
D shares of common stock, par value $0.10 per share (herein referred to as
"Class D shares"), of the Fund and as such has the right to distribute Class D
shares of the Fund for resale. The Fund is an open-end investment company
registered under the Investment Company Act of 1940, as amended, and its Class D
shares being offered to the public are registered under the Securities Act of
1933, as amended. You have received a copy of the Class D Shares Distribution
Agreement (the "Distribution Agreement") between ourself and the Fund and
reference is made herein to certain provisions of such Distribution Agreement.
The terms "Prospectus" and "Statement of Additional Information" used herein
refer to the prospectus and statement of additional information, respectively,
on file with the Securities and Exchange Commission which is part of the most
recent effective registration statement pursuant to the Securities Act of 1933,
as amended. We offer to sell to you, as a member of the Selected Dealers Group,
Class D shares of the Fund upon the following terms and conditions:
1. In all sales of these Class D shares to the public, you shall act as
dealer for your own account and in no transaction shall you have any authority
to act as agent for the Fund, for us or for any other member of the Selected
Dealers Group, except in connection with the Merrill Lynch Mutual Fund Adviser
program and such other special programs as we from time to time agree, in which
case you shall have authority to offer and sell shares, as agent for the Fund,
to participants in such program.
2. Orders received from you will be accepted through us only at the public
offering price applicable to each order, as set forth in the current Prospectus
and Statement of Additional Information of the Fund. The procedure relating to
the handling of orders shall be subject to Section 5 hereof and instructions
1
<PAGE>
which we or the Fund shall forward from time to time to you. All orders are
subject to acceptance or rejection by the Distributor or the Fund in the sole
discretion of either. The minimum initial and subsequent purchase requirements
are as set forth in the current Prospectus and Statement of Additional
Information of the Fund.
3. The sales charges for sales to the public, computed as percentages of
the public offering price and the amount invested, and the related discount to
Selected Dealers are as follows:
<TABLE>
<CAPTION>
Discount to
Selected
Sales Charge Dealers as
Sales Charge as Percentage* Percentage
as Percentage of the Net of the
of the Amount Offering
Amount of Purchase Offering Price Invested Price
- ------------------ --------------- -------------- -----------
<S> <C> <C> <C>
Less than $25,000...... 4.00% 4.17% 3.75%
$25,000 but less
than $50,000.......... 3.75% 3.40% 3.50%
$50,000 but less
than $100,000......... 3.25% 3.36% 3.00%
$100,000 but less
than $250,000......... 2.50% 2.56% 2.25%
$250,000 but less
than $1,000,000....... 1.50% 1.52% 1.25%
$1,000,000 and over**.. 0.00% 0.00% 0.00%
</TABLE>
___________________
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchases may be subject to a contingent deferred sales charge as
set forth in the current Prospectus and Statement of Additional Information.
2
<PAGE>
The term "purchase" 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 Class D shares for his or their own account and to
single purchases by a trustee or other fiduciary purchasing Class D 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, as
amended, but does not include purchases by any such company which has not been
in existence for at least six months or which has no purpose other than the
purchase of Class D shares of the Fund or Class D 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.
The reduced sales charges are applicable through a right of accumulation under
which eligible investors are permitted to purchase Class D shares of the Fund 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 Class A, Class B, Class C and Class D shares of the Fund and of any other
investment company with an initial sales charge for which the Distributor acts
as the distributor. For any such right of accumulation to be made available,
the Distributor must be provided at the time of purchase, by the purchaser or
you, with sufficient information to permit confirmation of qualification, and
acceptance of the purchase order is subject to such confirmation.
The reduced sales charges are applicable to purchases aggregating $10,000 or
more of Class A shares or of Class D shares of any other investment company with
an initial sales charge for which the Distributor acts as the distributor made
through you within a thirteen-month period starting with the first purchase
pursuant to a Letter of Intention in the form provided in the Prospectus. A
purchase not originally made pursuant to a Letter of Intention may be included
under a subsequent letter executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. If
the intended amount of shares is not purchased within the thirteen-month period,
an appropriate price adjustment will be made pursuant to the terms of the Letter
of Intention.
You agree to advise us promptly at our request as to amounts of any sales made
by you to the public qualifying for reduced sales charges. Further information
as to the reduced sales charges pursuant to the right of accumulation or a
Letter of Intention is set forth in the Prospectus and Statement of Additional
Information.
3
<PAGE>
4. You shall not place orders for any of the Class D shares unless you have
already received purchase orders for such Class D shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class D shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class D shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class D shares of the Fund which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for Class D shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and subject to the
compensation provisions of Section 3 hereof and (ii) to tender Class D shares
directly to the Fund or its agent for redemption subject to the applicable terms
and conditions set forth in Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from your customers so as
to profit yourself as a result of such withholding: e.g., by a change in the
- -
"net asset value" from that used in determining the offering price to your
customers.
7. If any Class D shares sold to you under the terms of this Agreement are
repurchased by the Fund or by us for the account of the Fund or are tendered for
redemption within seven business days after the date of the confirmation of the
original purchase by you, it is agreed that you shall forfeit your right to, and
refund to us, any discount received by you on such Class D shares.
8. No person is authorized to make any representations concerning Class D
shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class D
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no liability
or
4
<PAGE>
responsibility to you in these respects unless expressly assumed in connection
therewith.
9. You agree to deliver to each of the purchasers making purchases from you
a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you agree
thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to suspend sales
or withdraw the offering of Class D shares entirely or to certain persons or
entities in a class or classes specified by us. Each party hereto has the right
to cancel this agreement upon notice to the other party.
11. We shall have full authority to take such action as we may deem advisable
in respect of all matters pertaining to the continuous offering. We shall be
under no liability to you except for lack of good faith and for obligations
expressly assumed by us herein. Nothing contained in this paragraph is intended
to operate as, and the provisions of this paragraph shall not in any way
whatsoever constitute, a waiver by you of compliance with any provision of the
Securities Act of 1933, as amended, or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.
12. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.
13. Upon application to us, we will inform you as to the states in which we
believe the Class D shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell Class D shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class D shares, if necessary.
14. All communications to us should be sent to the address below. Any notice
to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
15. Your first order placed pursuant to this Agreement for the purchase of
Class D shares of the Fund will represent your acceptance of this Agreement.
5
<PAGE>
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By __________________________________
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:____________________________________________
By:___________________________________________________
Address:______________________________________________
______________________________________________________
Date: ____________________________________________
6
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Adjustable Rate Securities Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 4 to Registration
Statement No. 33-40332 of our report dated June 30, 1994 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
October 10, 1994
<PAGE>
EXHIBIT 99.15(C)
[DRAFT: 8.26.94]
CLASS C DISTRIBUTION PLAN
OF
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 21st day of October 1994, by and between
Merrill Lynch Adjustable Rate Securities Fund, Inc., a Maryland corporation (the
"Fund"), and Merrill Lynch Funds Distributor, Inc., a Delaware corporation
("MLFD").
W I T N E S S E T H:
-------------------
WHEREAS, the Fund is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund proposes to enter into a Class C Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Fund in the offer and sale of Class C
shares of common stock, par value $0.10 per share (the "Class C shares"), of the
Fund to the public; and
WHEREAS, the Fund desires to adopt this Class C Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Fund will pay an account maintenance fee and a distribution fee to
MLFD with respect to the Fund's Class C shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the terms
of, the Plan in accordance with Rule 12b-1 under the Investment Company Act on
the following terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class C shares
<PAGE>
to compensate MLFD and securities firms with which MLFD enters into related
agreements pursuant to Paragraph 3 hereof ("Sub-Agreements") for providing
account maintenance activities with respect to Class C shareholders of the Fund.
Expenditures under the Plan may consist of payments to financial consultants for
maintaining accounts in connection with Class C shares of the Fund and payment
of expenses incurred in connection with such account maintenance activities
including the costs of making services available to shareholders including
assistance in connection with inquiries related to shareholder accounts.
2. The Fund shall pay MLFD a distribution fee under the Plan at the end of
each month at the annual rate of 0.55% of average daily net assets of the Fund
relating to Class C shares to compensate MLFD and securities firms with which
MLFD enters into related Sub-Agreements for providing sales and promotional
activities and services. Such activities and services will relate to the sale,
promotion and marketing of the Class C shares of the Fund. Such expenditures
may consist of sales commissions to financial consultants for selling Class C
shares of the Fund, compensation, sales incentives and payments to sales and
marketing personnel, and the payment of expenses incurred in its sales and
promotional activities, including advertising expenditures related to the Fund
and the costs of preparing and distributing promotional materials. The
distribution fee may also be used to pay the financing costs of carrying the
unreimbursed expenditures described in this Paragraph 2. Payment of the
distribution fee described in this Paragraph 2 shall be subject to any
limitations set forth in any applicable regulation of the National Association
of Securities Dealers, Inc.
3. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distribution fee to such Securities Firms as compensation for the above-
mentioned activities and services. Such Sub-Agreement shall provide that the
Securities Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting requirements set forth in
Paragraph 4 hereof.
4. MLFD shall provide the Fund for review by the Board of Directors, and
the Directors shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period.
2
<PAGE>
5. This Plan shall not take effect until it has been approved by a vote of
at least a majority, as defined in the Investment Company Act, of the
outstanding Class C voting securities of the Fund.
6. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Directors of
the Fund and (b) those Directors of the Fund who are not "interested persons" of
the Fund, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on the Plan and such related
agreements.
7. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding Class C voting
securities of the Fund.
9. The Plan may not be amended to increase materially the rate of payments
provided for herein unless such amendment is approved by at least a majority, as
defined in the Investment Company Act, of the outstanding Class C voting
securities of the Fund, and by the Directors of the Fund in the manner provided
for in Paragraph 6 hereof, and no material amendment to the Plan shall be made
unless approved in the manner provided for approval and annual renewal in
Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomination of Directors
who are not interested persons, as defined in the Investment Company Act, of the
Fund shall be committed to the discretion of the Directors who are not
interested persons.
11. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 4 hereof, for a period of not less
than six years from the date of the Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Distribution Plan
as of the date first above written.
MERRILL LYNCH ADJUSTABLE
RATE SECURITIES FUND, INC.
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
4
<PAGE>
[DRAFT: 8.26.94]
CLASS C SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 21st day of October 1994, by and between Merrill
Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD"), and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation ("Securities
Firm").
W I T N E S S E T H :
--------------------
WHEREAS, MLFD has entered into an agreement with Merrill Lynch Adjustable
Rate Securities Fund, Inc., a Maryland corporation (the "Fund"), pursuant to
which it acts as the exclusive distributor for the sale of Class C shares of
common stock, par value $0.10 per share (the "Class C shares"), of the Fund; and
WHEREAS, MLFD and the Fund have entered into a Class C Shares Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Act"), pursuant to which MLFD receives an account
maintenance fee from the Fund at the annual rate of 0.25% of average daily net
assets of the Fund relating to Class C shares for account maintenance activities
related to Class C shares of the Fund and a distribution fee from the Fund at
the annual rate of 0.55% of average daily net assets of the Fund relating to
Class C shares for providing sales and promotional activities and services
related to the distribution of Class C shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and sales and promotional activities and services for the
Fund's Class C shareholders and the Securities Firm is willing to perform such
activities and services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities and
services with respect to the Class C shares of the Fund and incur expenditures
in connection with such activities and services of the types referred to in
Paragraph 1 of the Plan.
2. The Securities Firm shall provide sales and promotional activities and
services with respect to the sale of the Class C shares of the Fund, and incur
distribution expenditures, of the types referred to in Paragraph 2 of the Plan.
<PAGE>
3. As compensation for its activities and services performed under this
Agreement, MLFD shall pay the Securities Firm an account maintenance fee and a
distribution fee at the end of each calendar month in an amount agreed upon by
the parties hereto.
4. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Act, and have no direct or indirect financial interest in the operation
of the Plan, this Agreement or any agreements related to the Plan or this
Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings
called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as such continuance
is specifically approved at least annually in the manner provided for approval
of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
Title:
2
<PAGE>
EXHIBIT 15(D)
[DRAFT: 8.25.94]
CLASS D DISTRIBUTION PLAN
OF
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 21st day of October 1994, by and between
Merrill Lynch Adjustable Rate Securities Fund, Inc., a Maryland corporation (the
"Fund"), and Merrill Lynch Funds Distributor, Inc., a Delaware corporation
("MLFD").
W I T N E S S E T H :
--------------------
WHEREAS, the Fund is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund proposes to enter into a Class D Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Fund in the offer and sale of Class D
shares of common stock, par value $0.10 per share (the "Class D shares"), of the
Fund to the public; and
WHEREAS, the Fund desires to adopt this Class D Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Fund will pay an account maintenance fee to MLFD with respect to the
Fund's Class D shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the terms
of, the Plan in accordance with Rule 12b-1 under the Investment Company Act on
the following terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class D shares
<PAGE>
to compensate MLFD and securities firms with which MLFD enters into related
agreements ("Sub-Agreements") pursuant to Paragraph 2 hereof for providing
account maintenance activities with respect to Class D shareholders of the Fund.
Expenditures under the Plan may consist of payments to financial consultants for
maintaining accounts in connection with Class D shares of the Fund and payment
of expenses incurred in connection with such account maintenance activities
including the costs of making services available to shareholders including
assistance in connection with inquiries related to shareholder accounts.
2. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities of the type referred to in Paragraph 1. MLFD may reallocate all
or a portion of its account maintenance fee to such Securities Firms as
compensation for the above-mentioned activities. Such Sub-Agreement shall
provide that the Securities Firms shall provide MLFD with such information as is
reasonably necessary to permit MLFD to comply with the reporting requirements
set forth in Paragraph 3 hereof.
3. MLFD shall provide the Fund for review by the Board of Directors, and
the Directors shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee during such period.
4. This Plan shall not take effect until it has been approved by a vote of
at least a majority, as defined in the Investment Company Act, of the
outstanding Class D voting securities of the Fund.
5. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Directors of
the Fund and (b) those Directors of the Fund who are not "interested persons" of
the Fund, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on the Plan and such related
agreements.
6. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 5.
2
<PAGE>
7. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding Class D voting
securities of the Fund.
8. The Plan may not be amended to increase materially the rate of payments
provided for in Paragraph 1 hereof unless such amendment is approved by at least
a majority, as defined in the Investment Company Act, of the outstanding Class D
voting securities of the Fund, and by the Directors of the Fund in the manner
provided for in Paragraph 5 hereof, and no material amendment to the Plan shall
be made unless approved in the manner provided for approval and annual renewal
in Paragraph 5 hereof.
9. While the Plan is in effect, the selection and nomination of Directors
who are not interested persons, as defined in the Investment Company Act, of the
Fund shall be committed to the discretion of the Directors who are not
interested persons.
10. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 3 hereof, for a period of not less
than six years from the date of the Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this Distribution Plan
as of the date first above written.
MERRILL LYNCH ADJUSTABLE
RATE SECURITIES FUND, INC.
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
3
<PAGE>
[DRAFT: 8.26.94]
CLASS D SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 21st day of October 1994, by and between Merrill
Lynch Funds Distributor, Inc. a Delaware corporation ("MLFD"), and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation ("Securities
Firm").
W I T N E S S E T H :
--------------------
WHEREAS, MLFD has entered into an agreement with Merrill Lynch Adjustable
Rate Securities Fund, Inc., a Maryland corporation (the "Fund"), pursuant to
which it acts as the exclusive distributor for the sale of Class D shares of
common stock, par value $0.10 per share (the "Class D shares"), of the Fund; and
WHEREAS, MLFD and the Fund have entered into a Class D Shares Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Act"), pursuant to which MLFD receives an account
maintenance fee from the Fund at the annual rate of 0.25% of average daily net
assets of the Fund relating to Class D shares for providing account maintenance
activities and services with respect to Class D shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and services, including assistance in connection with
inquiries related to shareholder accounts, for the Fund's Class D shareholders
and the Securities Firm is willing to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities and
services with respect to the Class D shares of the Fund and incur expenditures
in connection with such activities and services, of the types referred to in
Paragraph 1 of the Plan.
2. As compensation for its services performed under this Agreement, MLFD
shall pay the Securities Firm a fee at the end of each calendar month in an
amount agreed upon by the parties hereto.
3. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule
<PAGE>
12b-1 regarding the disbursement of the fee during such period referred to in
Paragraph 3 of the Plan.
4. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Act, and have no direct or indirect financial interest in the operation
of the Plan, this Agreement or any agreements related to the Plan or this
Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings
called for the purpose of voting on this Agreement.
5. This Agreement shall continue in effect for as long as such continuance
is specifically approved at least annually in the manner provided for approval
of the Plan in Paragraph 5.
6. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
2
