<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 27, 1995
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. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 6
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 7
(CHECK APPROPRIATE BOX OR BOXES)
---------------
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, 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):
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) 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 20, 1995.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT OF MAXIMUM MAXIMUM
TITLE OF SECURITIES SHARES BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE* REGISTRATION FEE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock
(par value
$0.10 per share) .... 23,668,109 $9.51 $289,998 $100
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
*(1) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during
Registrant's previous fiscal year was 23,637,615 shares.
(3) None of the shares described in (2) above have been used for reduction
pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company
Act of 1940 in previous filings during Registrant's current fiscal year.
(4) 23,637,615 of the shares redeemed during Registrant's previous fiscal
year are being used for the reduction of the registration fee in this
amendment to the Registration Statement.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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............ Financial Highlights
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; Purchase of Shares;
Redemption of Shares; Shareholder
Services; Additional Information
Item 7. Purchase of Securities
Being Offered.......... Cover Page; Fee Table; Merrill Lynch
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 Objective 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; General
Information
Item 16. Investment Advisory and
Other Services......... Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and
Other Practices........ Portfolio Transactions and Brokerage;
Financial Statements
Item 18. Capital Stock and Other
Securities............. General Information
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered.......... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status.............. 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
- ----------
September 27, 1995
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. For more information on the
Fund's investment objective and policies, please see "Investment Objective and
Policies" on page 11.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select 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 other 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 September 27, 1995 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"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 Ratings Group ("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 125 other registered
investment companies. MLAM and FAM also offer portfolio management and
portfolio analysis services to individuals and institutions. As of August 31,
1995, the Manager and FAM had a total of approximately $188.9 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, 15
minutes after the close of business on the New York Stock Exchange (generally,
4:00 P.M., New York time), 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 CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on
Dividend
Reinvestments......... None None None None
Deferred Sales Charge
(as a percentage of
original purchase
price or redemption
proceeds, whichever is
lower)................ None(d) 4.0% during the 1% for one None(d)
first year, year
decreasing 1.0%
annually thereafter
to 0.0% after the
fourth year
Exchange Fee........... None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS)(E).........
Management Fees(f)..... 0.50% 0.50% 0.50% 0.50%
12b-1 Fees(g):
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(h).............. 0.11% 0.12% 0.12% 0.11%
Other.................. 0.21% 0.21% 0.21% 0.21%
----- ----- ----- -----
Total Other Expenses. 0.33% 0.34% 0.34% 0.33%
----- ----- ----- -----
Total Fund Operating
Expenses............... 0.83% 1.59% 1.64% 1.08%
===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including certain
retirement plans and certain investment programs. See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"--
page 30.
(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 31.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A or Class D purchases of $1,000,000 or more
may not be subject to an initial sales charge. See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares"--page 30.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain 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.
(e) Information for Class B and Class D shares is stated for the fiscal year
ended May 31, 1995. Information under "Other Expenses" for Class A and
Class C shares is estimated for the fiscal year ending May 31, 1996.
(f) See "Management of the Fund--Management and Advisory Arrangements"--page
26.
(g) See "Purchase of Shares--Distribution Plans"--page 35.
(h) See "Management of the Fund--Transfer Agency Services"--page 27.
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...................................... $48 $65 $84 $138
Class B...................................... $56 $70 $87 $189
Class C...................................... $27 $52 $89 $194
Class D...................................... $51 $73 $97 $166
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...................................... $48 $65 $84 $138
Class B...................................... $16 $50 $87 $189
Class C...................................... $17 $52 $89 $194
Class D...................................... $51 $73 $97 $166
</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
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.
(the "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 SM System is used
by more than 60 mutual funds advised by MLAM or an affiliate of MLAM, FAM.
Funds advised by MLAM or FAM which use the Merrill Lynch Select Pricing SM
System 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, are imposed directly against those classes and
not against all assets of the Fund and,
5
<PAGE>
accordingly, such charges do 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 are calculated in the same
manner at the same time and will differ only to the extent that account
maintenance and distribution fees and any incremental transfer agency costs
relating to a particular class are borne exclusively by that class. Each class
has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The distribution-
related revenues paid with respect to a class will not be used to finance the
distribution expenditures of another class. Sales personnel may receive
different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing SM System that the investor
believes is most beneficial under his or her 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 up to 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. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A and Class D share purchases of $1,000,000 or
more may not be subject to an initial sales charge but instead may be
subject to a 1.0% CDSC for one year. See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are modified. Also, Class
B shares of certain other MLAM-advised mutual funds into which exchanges
may be made have an eight-year conversion period. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund,
the conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will
be tacked onto the holding period for the shares acquired.
6
<PAGE>
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 of the Fund are offered to a limited group of investors and also
will be issued upon reinvestment of dividends on outstanding Class A
shares of the Fund. Eligible investors include certain retirement plans
and participants in certain investment programs. In addition, Class A
shares will be offered to Merrill Lynch & Co., Inc. ("ML&Co.") and its
subsidiaries (the term "subsidiaries", when used herein with respect to
ML&Co., includes the Manager, FAM and certain other entities directly
or indirectly wholly-owned and controlled by ML&Co.) and their
directors and employees, and to members of the Boards of MLAM-advised
mutual funds. The maximum initial sales charge is 4.00%, which is
reduced for purchases of $25,000 and over, and waived for purchases by
certain retirement plans in connection with certain investment
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but, if the initial sales charge is waived, such
purchases will be subject to a 1.0% CDSC 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 the conversion and holding periods for certain
retirement plans are 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
7
<PAGE>
initial sales charge is waived such purchases will be subject to a
CDSC of 1.0% if the shares are redeemed within one year after
purchase. The schedule of initial sales charges and reductions for
Class D shares is the same as the schedule for Class A shares, except
that there is no waiver for purchases by retirement plans in
connection with certain investment programs. 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 SM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class
A shares rather than Class D shares because there is an account maintenance
fee imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection
with purchases of Class B or Class C shares. Investors not qualifying for
reduced initial sales charges who expect to maintain their investment for an
extended period of time also may elect to purchase Class A or Class D shares,
because over time the accumulated ongoing account maintenance and distribution
fees on Class B or Class C shares may exceed the initial sales charge and, in
the case of Class D shares, the account maintenance fee. 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 of 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 of 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, 1995 are included in
the Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's most recent annual report to
shareholders which may be obtained, without charge, by calling or by writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from the
information provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------- ----------------------------------------------
FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
OCT. 21, 1994+ ENDED MAY 31, AUG. 2, 1991+
TO MAY 31, ----------------------------- TO MAY 31,
1995 1995 1994 1993 1992
--------------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 9.46 $ 9.53 $ 9.76 $ 9.92 $ 10.00
------ -------- -------- -------- --------
Investment income--net. .36 .46 .32 .40 .52
Realized and unrealized
gain (loss) on
investments--net...... .09 .04 (.24) (.16) (.08)
------ -------- -------- -------- --------
Total from investment
operations............. .45 .50 .08 .24 .44
------ -------- -------- -------- --------
Less dividends from in-
vestment income--net... (.36) (.47) (.31) (.40) (.52)
------ -------- -------- -------- --------
Net asset value, end of
period................. $ 9.55 $ 9.56 $ 9.53 $ 9.76 $ 9.92
====== ======== ======== ======== ========
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 4.85%# 5.48% .77% 2.48% 4.33%#
====== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of reim-
bursement and excluding
account maintenance and
distribution fees...... .87%* .84%* .71% .65% .61%*
====== ======== ======== ======== ========
Expenses, net of reim-
bursement.............. .87%* 1.59%* 1.46% 1.40% 1.36%*
====== ======== ======== ======== ========
Expenses................ .87%* 1.59%* 1.46% 1.40% 1.47%*
====== ======== ======== ======== ========
Investment income--net.. 6.18%* 4.88%* 3.20% 4.15% 6.07%*
====== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $ 345 $202,334 $374,376 $689,593 $887,110
====== ======== ======== ======== ========
Portfolio turnover...... 102.55% 102.55% 60.38% 104.71% 94.72%
====== ======== ======== ======== ========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
# Aggregate total investment return.
9
<PAGE>
<TABLE>
<CAPTION>
CLASS C CLASS D
-------------- ------------------------------------------
FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
OCT. 21, 1994+ ENDED MAY 31, AUG. 2, 1991+
TO MAY 31, -------------------------- TO MAY 31,
1995 1995 1994 1993 1992
-------------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 9.46 $ 9.53 $ 9.76 $ 9.92 $ 10.00
------ ------- ------- ------- -------
Investment income--net. .31 .51 .37 .45 .56
Realized and unrealized
gain (loss) on
investments--net...... .10 .03 (.24) (.16) (.08)
------ ------- ------- ------- -------
Total from investment
operations............. .41 .54 .13 .29 .48
------ ------- ------- ------- -------
Less dividends from in-
vestment income--net... (.31) (.52) (.36) (.45) (.56)
------ ------- ------- ------- -------
Net asset value, end of
period................. $ 9.56 $ 9.55 $ 9.53 $ 9.76 $ 9.92
====== ======= ======= ======= =======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 4.47%# 5.91% 1.28% 2.99% 4.75%#
====== ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of reim-
bursement and excluding
account maintenance and
distribution fees...... .88%* .83%* .71% .66% .62%*
====== ======= ======= ======= =======
Expenses, net of reim-
bursement.............. 1.68%* 1.08%* .96% .91% .87%*
====== ======= ======= ======= =======
Expenses................ 1.68%* 1.08%* .96% .91% .96%*
====== ======= ======= ======= =======
Investment income--net.. 5.51%* 5.44%* 3.69% 4.79% 6.54%*
====== ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $1,409 $16,993 $23,043 $51,398 $80,411
====== ======= ======= ======= =======
Portfolio turnover...... 102.55% 102.55% 60.38% 104.71% 94.72%
====== ======= ======= ======= =======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
# Aggregate total investment return.
10
<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 Ratings Group ("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."
11
<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
12
<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").
13
<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
14
<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
15
<PAGE>
amount which, together with other illiquid investments, does not exceed 10% of
the value of the Fund's total 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
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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 15%
of the Fund's total assets (or 10% of the Fund's total assets as presently
required by certain state laws).
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 15% of the total assets of the Fund (or 10% of the
total assets of the Fund as presently required by certain state laws), 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 15% of the Fund's total assets (or 10% of the
Fund's total assets as presently required by certain state laws) 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.
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
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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.
Restricted Securities. The Fund may purchase securities that are not
registered ("restricted securities") under the Securities Act of 1933, as
amended (the "Securities Act"), but can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act. However, the
Fund will not invest more than 15% of its total assets in illiquid
investments, which includes securities for which there is no readily available
market, securities subject to contractual restrictions on resale, certain
investments in asset-backed and receivable-backed securities and restricted
securities, unless the Fund's Board of Directors continuously determines,
based on the trading markets for the specific restricted security, that it is
liquid. The Board of
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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 these
securities purchased pursuant to Rule 144A, focusing on such factors, among
others, as valuation, liquidity and availability of information. These
investments in securities purchased pursuant to Rule 144A could have the effect
of increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
Investment Restrictions. The Fund's investment activities are subject to
further restrictions that are described in the Statement of Additional
Information. Investment restrictions and policies which are fundamental
policies may not be changed without the approval of the holders of a majority
of the Fund's outstanding voting securities (which for this purpose and under
the Investment Company Act of 1940, as amended (the "Investment Company Act")
means the lesser of (a) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are represented or (b) more than 50% of
the outstanding shares). Among its fundamental policies, the Fund may not
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
(excluding the U.S. Government and its agencies and instrumentalities).
Investment restrictions and policies that are non-fundamental policies may be
changed by the Board of Directors without shareholder approval. As a non-
fundamental policy, the Fund may not 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 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.
As a non-fundamental policy, the Fund will not invest in securities which
cannot readily be resold because of legal or contractual restrictions or which
are not readily marketable, including repurchase agreements and purchase and
sale contracts maturing in more than seven days, if, regarding all such
securities, more than 15% of its total assets (or 10% of its total assets as
presently required by certain state laws) taken at market value would be
invested in such securities. Notwithstanding the foregoing, the Fund may
purchase without regard to this limitation securities that are not registered
under 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 has
determined that securities which are freely tradeable in their primary market
offshore should be deemed liquid. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations.
25
<PAGE>
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 of the Manager and FAM; President and Director
of Princeton Services, Inc. ("Princeton Services"); Executive Vice
President of ML&Co.; Executive Vice President of 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 Director, LaSalle Street Fund.
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).
Harry Woolf--Member of the editorial board of Interdisciplinary Science
Reviews; Director, Alex. Brown Mutual Funds; Director, Advanced Technology
Laboratories, Family Health International and SpaceLabs Medical (medical
equipment manufacturing and marketing).
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which is owned and controlled by ML&Co., a financial services
holding company, acts as the investment adviser for the Fund and provides the
Fund with management and investment advisory services. The Manager or its
affiliate, FAM, acts as the investment adviser to more than 125 other
registered investment companies. The Manager also provides investment advisory
services to individual and institutional clients. As of August 31, 1995, the
Manager and FAM had a total of approximately $188.9 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.
- --------
* Interested person, as defined by the 1940 Act, of the Fund.
26
<PAGE>
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, 1995, the fee paid by the Fund to the Manager was
$1,463,526 (based on average net assets of approximately $293.0 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, 1995, the amount of such reimbursement was $119,474. For the fiscal
year ended May 31, 1995, the ratio of total expenses to average net assets was
1.59% and 1.08% for Class B and Class D shares, respectively; for the period
October 21, 1994 (commencement of operations) to May 31, 1995, the annualized
ratio of total expenses to average net assets was 0.87% and 1.68% for Class A
and Class C shares, respectively.
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.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the Investment Company Act which incorporates the Code of
Ethics of the Manager (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Manager and, as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (formerly called Financial Data
Services, Inc.) (the "Transfer Agent"), which is a wholly-owned subsidiary of
ML&Co., acts as the Fund's transfer agent pursuant to a transfer agency,
dividend disbursing agency and shareholder servicing agency agreement (the
"Transfer Agency Agreement"). Pursuant to the Transfer Agency Agreement, the
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening and maintenance of shareholder accounts. Pursuant to the
Transfer Agency Agreement, the 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 May 31, 1995, the Fund paid $344,157
27
<PAGE>
to the Transfer Agent pursuant to the Transfer Agency Agreement. At August 31,
1995, the Fund had 21 Class A shareholder accounts, 13,251 Class B shareholder
accounts, 41 Class C shareholder accounts and 625 Class D shareholder
accounts. At this level of accounts, the annual fee payable to the Transfer
Agent would aggregate approximately $193,194 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 offers its shares in four classes at a public offering price equal
to the next determined net asset value per share plus sales charges imposed
either at the time of purchase or on a deferred basis depending upon the class
of shares selected by the investor under the Merrill Lynch Select Pricing SM
System, as described below. The applicable offering price for purchase orders
is based upon the net asset value of the Fund next determined after receipt of
the purchase orders by the Distributor. As to purchase orders received by
securities dealers prior to the close of business on the New York Stock
Exchange (generally, 4:00 P.M., New York time) which includes orders received
after the close of business on the previous day, the applicable offering price
will be based on the net asset value determined as of 15 minutes after the
close of business on the New York Stock Exchange on that day, provided the
Distributor in turn receives the orders from the securities dealer prior to 30
minutes after the close of business on the New York Stock Exchange on that
day. If the purchase orders are not received by the Distributor prior to 30
minutes after the close of business on the New York Stock Exchange, 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 on Class D
28
<PAGE>
shares, are imposed directly against those classes and not against all assets
of the Fund and, accordingly, such charges do 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 are
calculated in the same manner at the same time and differ only to the extent
that account maintenance and distribution fees and any incremental transfer
agency costs relating to a particular class are borne exclusively by that
class. 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 up to 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, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A and Class D share purchases of $1,000,000 or
more may not be subject to an initial sales charge but instead will be
subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are 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.
29
<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, and on Class A share purchases by certain retirement
plan investors in connection with certain investment programs, made on or
after October 21, 1994. If the sales charge is waived in connection with a
purchase of $1,000,000 or more, 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.
During the period October 21, 1994 (commencement of operations for Class A
shares) to May 31, 1995, the Fund sold 68,974 Class A shares for aggregate net
proceeds to the Fund of $651,499. The gross sales charges for the sale of
Class A shares for that period were $91, of which $84 was received by Merrill
Lynch and $7 was received by the Distributor. During such period, the
Distributor did not receive CDSCs with respect to redemption within one year
after purchase of Class A shares purchased subject to front-end sales charge
waivers. During the fiscal year ended May 31, 1995, the Fund sold 403,735
Class D shares for aggregate net proceeds of $3,830,957. The gross sales
charges for the sale of Class D shares of the Fund for that period were
$29,513, of which $4,133 and $25,380 were received by the Distributor and
Merrill Lynch, respectively. During such period, the distributor did not
receive CDSCs with respect to redemption within one year after purchase of
Class D shares purchased subject to front-end sales charge waivers.
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
30
<PAGE>
shares of the Fund in a shareholder account are entitled to purchase
additional Class A shares of the Fund in that account. Certain employer
sponsored retirement or savings plans, including 401(k) plans, may purchase
Class A shares of the Fund at net asset value provided such plans meet the
required minimum number of eligible employees or required amount of assets
advised by MLAM or any of its affiliates. Class A shares are available at net
asset value to corporate warranty insurance reserve fund programs provided
that the program has $3 million or more initially invested in MLAM-advised
mutual funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA SM 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 are offered at net asset value to
ML&Co. and its subsidiaries and their directors and employees and to members
of the Boards of MLAM-advised investment companies, including the Fund.
Certain persons who acquired shares of certain MLAM-advised closed-end funds
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 closed-end funds that commenced operations
prior to October 21, 1994). For example, Class A shares of the Fund and
certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. who wish to
reinvest the net proceeds from a sale of certain of their shares of common
stock of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of such
funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class A and Class D shares are offered at net asset value to certain
employer sponsored retirement or savings plans and to Employee Access
Accounts SM available through employers which provide such plans.
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
31
<PAGE>
shares are subject to an account maintenance fee of 0.25% of net assets and
Class B shares are subject to a 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 the dealer's 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>
32
<PAGE>
During the fiscal year ended May 31, 1995, the Fund sold 3,506,784 Class B
shares for aggregate net proceeds of $33,206,006. During that period, the
Distributor received CDSCs of $672,278 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) for shares
purchased on or after October 21, 1994.
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the Merrill Lynch Mutual
Fund Adviser ("MFA") program, the time period that such Class A shares are
held in the MFA program will be included in determining the holding period of
Class B shares reacquired upon the termination of participation in the MFA
program (see "Shareholder Services--Exchange Privilege").
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 and for any Class B shares that were
acquired and held at the time of the redemption in an Employee Access
Account SM available through employers providing eligible 401(k) plans. 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.
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In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
During the period October 21, 1994 (commencement of operations of Class C
shares) to May 31, 1995, the Fund sold 231,275 Class C shares for aggregate net
proceeds of $2,187,668. During that period, the Distributor received CDSCs of
$1,343 with respect to redemptions of Class C shares, all of which were paid to
Merrill Lynch.
Conversion of Class B Shares to Class D Shares. After approximately ten years
(the "Conversion Period"), Class B shares will be converted automatically 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-
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advised mutual funds and the Class B Retirement Plan was established), all
Class B shares of all MLAM-advised mutual funds held in that Class B Retirement
Plan will be converted into Class D shares of the appropriate funds. Subsequent
to such conversion, that Class B Retirement Plan will be sold Class D shares of
the appropriate funds at net asset value per share.
The Conversion Period also is modified for retirement plan investors which
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
through exchange of Class B shares (see "Shareholder Services--Exchange
Privilege"), then the holding period for such Class A shares will be "tacked"
to the holding period of the Class B shares originally held for purposes of
calculating the Conversion Period on Class B shares acquired upon termination
of participation in the MFA program.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual 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.
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For the fiscal year ended May 31, 1995, the Fund paid the Distributor
$2,051,491 pursuant to the Class B Distribution Plan (based on average net
assets subject to the Class B Distribution Plan of approximately $273.5
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal period October 21, 1994 (commencement of
operations for Class C shares) to May 31, 1995, the Fund paid the Distributor
$1,591 pursuant to the Class C Distribution Plan (based on average net assets
subject to the Class C Distribution Plan of approximately $329,930), all of
which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended May 31, 1995, the Fund paid the Distributor $46,862
pursuant to the Class D Distribution Plan (based on average net assets subject
to the Class D Distribution Plan of approximately $18.7 million), all of which
was paid to Merrill Lynch for providing account maintenance services in
connection with Class D shares. At August 31, 1995, the net assets of the Fund
subject to the Class B Distribution Plan aggregated approximately $182.8
million. At this asset level, the annual fee payable pursuant to the Class B
Distribution Plan would aggregate approximately $1.4 million. At August 31,
1995, the net assets of the Fund subject to the Class C Distribution Plan
aggregated approximately $1.1 million. At this asset level, the annual fee
payable pursuant to the Class C Distribution Plan would aggregate approximately
$8,496. At August 31, 1995, the net assets of the Fund subject to the Class D
Distribution Plan aggregated approximately $13.4 million. At this asset level,
the annual fee payable pursuant to the Class D Distribution Plan would
aggregate approximately $33,540.
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 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, 1994, for Class B shares, the fully allocated accrual
expenses incurred by the Distributor and Merrill Lynch exceeded fully allocated
accrual revenues for such period by approximately $4,722,000 (1.9% of Class B
net assets at that date). As of December 31, 1994, for Class B shares, direct
cash revenues for the period since commencement of the offering of Class B
shares exceeded direct cash expenses by $12,696,071 (5.2% of Class B net assets
at that date). As of May 31, 1995, for Class B shares, direct cash revenues for
the period since commencement of the offering of Class B shares exceeded direct
cash expenses by $13,321,221 (6.6% of Class B net assets at that date). Similar
fully allocated accrual data is not yet available with respect to Class C
shares which the Fund commenced offering to the public on October 21, 1994. As
of December 31, 1994, for Class C shares, direct cash expenses for the period
since commencement of the offering of Class C shares exceeded direct cash
revenues by $1,096 (0.28% of Class C net assets at that date). As of May 31,
1995, for Class C shares, direct cash revenues for the period since
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<PAGE>
commencement of the offering of Class C shares exceeded direct cash expenses by
$1,696 (0.12% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with 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.
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.
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REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Fund's Transfer Agent, Merrill Lynch Financial Data Services,
Inc., 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 Merrill Lynch Financial Data Services, Inc., 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 an "eligible guarantor institution" (including, for
example, Merrill Lynch branch offices and certain other financial institutions)
as such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934,
as amended, the existence and validity of which may be verified by the Transfer
Agent through the use of industry publications. 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. Normally,
this delay will not exceed 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 close of business on the
New York Stock Exchange (generally, 4:00 P.M., New York time) on the day
received and such request is received by the Fund from such dealer not later
than 30 minutes after the close of business on the New York Stock Exchange on
the same day. Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 30 minutes after the close of business on
the New York Stock Exchange 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 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.
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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 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. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he or she be issued certificates for his or her shares and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to
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be transferred will not take delivery of shares of the Fund, a shareholder
must either redeem the shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch
for those shares.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. There is currently no limitation
on the number of times a shareholder may exercise the exchange privilege. The
exchange privilege may be modified or terminated in accordance with the rules
of the Securities and Exchange Commission.
Under the Merrill Lynch Select Pricing System SM, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-
advised mutual fund if the shareholder holds any Class A shares of the second
fund in his or her account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second
fund. If the Class A shareholder wants to exchange Class A shares for shares
of a second MLAM-advised mutual fund, and the shareholder does not hold Class
A shares of the second fund in his or her account at the time of the exchange
and is not otherwise eligible to acquire Class A shares of the second fund,
the shareholder will receive Class D shares of the second fund as a result of
the exchange. Class D shares also may be exchanged for Class A shares of a
second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares
of the Fund is "tacked" to the holding period of the newly acquired shares of
the other Fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares
are held in a money market fund, however, will not count toward satisfaction
of the holding period requirement for reduction of any CDSC imposed on such
shares, if any, and, with respect to Class B shares, toward satisfaction of
the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class
B shares of the Fund acquired through use of the exchange privilege will be
subject to the
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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 of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
The exchange privilege is modified with respect to certain retirement plans
which participate in the MFA program. Such retirement plans may exchange Class
B, Class C or Class D shares that have been held for at least one year for
Class A shares of the same fund on the basis of relative net asset values in
connection with the commencement of participation in the MFA program, i.e., no
CDSC will apply. The one-year holding period does not apply to shares
reacquired through reinvestment of dividends. Upon termination of participation
in the MFA program, Class A shares will be re-exchanged for the class of shares
originally held. For purposes of computing any CDSC that may be payable upon
redemption of Class B or Class C shares so reacquired, or the Conversion Period
for Class B shares so reacquired, the holding period for the Class A shares
will be "tacked" to the holding period for the Class B or Class C shares
originally held. The Fund's exchange privilege also is modified with respect to
purchases of Class A and Class D shares by non-retirement plan investors under
the MFA program. First, the initial allocation of assets is made under the MFA
program. Then, any subsequent exchange under the MFA program of Class A or
Class D shares of a 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 or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to the investor's bank account on
either a monthly or quarterly basis. A Class A or Class D shareholder whose
shares are held within a CMA(R), CBA(R) or Retirement Account may elect to have
shares redeemed on a monthly, 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 or her regular bank account. Investors
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who maintain CMA(R) or CBA (R) accounts may arrange to have periodic
investments made in the Fund in their CMA(R) or CBA (R) accounts or in certain
related accounts in amounts of $100 or more through the CMA(R)/CBA (R)
Automated Investment Program.
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 shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders 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.
42
<PAGE>
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.
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), that 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 treatment as a RIC 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.
43
<PAGE>
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
44
<PAGE>
Magazine, U.S. News and World Report, Business Week, Forbes Magazine, Fortune
Magazine, or other industry publications. In addition, from time to time the
Fund may include its 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
indicative 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, 1995, the Fund's portfolio turnover rate was
102.55%. (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
45
<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 of 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 "Determination
of Net Asset Value" below. 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.
From time to time, the Fund may declare a special distribution at or about the
end of the calender year in order to comply with a Federal income tax
requirement that certain percentages of its ordinary income and capital gains
be distributed during the calendar year.
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, 15 minutes after the close of business on the New York
Stock Exchange (generally, 4:00 P.M., New York time), 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. During the
fiscal year ended May 31, 1995, the Fund paid $800 to MLSPS for such service.
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 (although not necessarily meet) immediately after
the payment of dividends or distributions, which will differ by approximately
the amount of the expense accrual differentials between the classes.
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
46
<PAGE>
A, Class B, Class C and Class D Common Stock. Class A and Class C each consists
of 100,000,000 shares and Class B and Class D each consists 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 that Class B, Class C and Class D shares bear certain expenses related
to the account maintenance associated with such shares, and Class B and Class C
shares bear certain expenses related to the distribution of such shares. Each
class has exclusive voting rights with respect to matters relating to account
maintenance and distribution expenditures, as applicable. See "Purchase of
Shares." The Fund has received an order from the Commission permitting the
issuance and sale of multiple classes of common stock. The 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 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, 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:
Merrill Lynch Financial Data Services, Inc.
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 Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.
47
<PAGE>
[THIS PAGE IS INTENTIONALLY LEFT BLANK.]
48
<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.
- -------------------------------------------------------------------------------
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 Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of
paper if necessary.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... 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 Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- -------------------------------------------------------------------------------
49
<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:
Merrill Lynch Adjustable Rate
Securities Fund, Inc. .....................................
c/o Merrill Lynch Financial Data Dealer Name and Address
Services, Inc.
P.O. Box 45289 By ..................................
Jacksonville, FL 32232-5289 Authorized Signature of Dealer
[_][_][_] [_][_][_][_] .............
Branch-Code F/C No. F/C Last Name
[_][_][_] [_][_][_][_][_]
Dealer's Customer A/C No.
50
<PAGE>
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.--AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL PLAN OR THE
AUTOMATIC INVESTMENT PLAN 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 MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
AMENDING OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
...............................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
51
<PAGE>
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account 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.
MERRILL LYNCH FINANCIAL DATA AUTHORIZATION TO HONOR ACH DEBITS
SERVICES, INC. DRAWN BY MERRILL LYNCH FINANCIAL
DATA SERVICES, INC.
You are hereby authorized to draw an
ACH debit each month on my bank To...............................Bank
account for investment in Merrill (Investor's Bank)
Lynch Adjustable Rate Securities
Fund, Inc. as indicated below: Bank Address.........................
Amount of each check or ACH debit
$................................. City...... State...... Zip Code......
Account Number ................... As a convenience to me, I hereby
request and authorize you to pay and
Please date and invest ACH debits on charge to my account ACH debits
the 20th of each month beginning drawn on my account by and payable
to Merrill Lynch Financial Data
..................................... Services, Inc. I agree that your
rights in respect of each such debit
............... (month) shall be the same as if it were a
check drawn on you and signed
or as soon as possible thereafter. personally by me. This authority is
to remain in effect until revoked by
I agree that you are drawing these me in writing. Until you receive
ACH debits voluntarily at my request such notice, you shall be fully
and that you shall not be liable for protected in honoring any such
any loss arising from any delay in debit. I further agree that if any
preparing or failure to prepare any such debit be dishonored, whether
such debit. If I change banks or with or without cause and whether
desire to terminate or suspend this intentionally or inadvertently, you
program, I agree to notify you shall be under no liability.
promptly in writing. I hereby
authorize you to take any action to ............ .....................
correct erroneous ACH debits of my Date Signature of
bank account or purchases of fund Depositor
shares including liquidating shares
of the Fund and crediting my bank ............ .....................
account. I further agree that if a Bank Signature of Depositor
debit is not honored upon Account (If joint account,
presentation, Merrill Lynch Financial Number both must sign)
Data Services, Inc. is authorized to
discontinue immediately the Automatic
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
dishonored debit.
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
52
<PAGE>
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53
<PAGE>
[THIS PAGE IS INTENTIONALLY LEFT BLANK.]
54
<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
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
Counsel
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
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<S> <C>
Prospectus Summary and Fee Table.......................................... 2
Merrill Lynch Select PricingSM System.................................... 5
Financial Highlights...................................................... 9
Investment Objective and Policies......................................... 11
Types of Issuers/Quality Standards....................................... 12
Description of Adjustable Rate Securities................................ 13
Description of Other Securities.......................................... 16
Description of Money Market Securities................................... 17
Special Considerations and Risk Factors.................................. 18
Portfolio Strategies Involving Interest Rate Transactions, Options and
Futures............................................................... 19
Other Investment Policies and Practices.................................. 23
Management of the Fund.................................................... 26
Directors................................................................ 26
Management and Advisory Arrangements..................................... 26
Code of Ethics........................................................... 27
Transfer Agency Services................................................. 27
Purchase of Shares........................................................ 28
Initial Sales Charge Alternatives--Class A and Class D Shares............ 30
Deferred Sales Charge Alternatives--Class B and Class C Shares........... 31
Distribution Plans....................................................... 35
Limitations on the Payment of Deferred Sales Charges..................... 37
Redemption of Shares...................................................... 37
Redemption............................................................... 38
Repurchase............................................................... 38
Reinstatement Privilege--Class A and Class D Shares...................... 39
Shareholder Services...................................................... 39
Investment Account....................................................... 39
Exchange Privilege....................................................... 40
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 41
Systematic Withdrawal.................................................... 41
Automatic Investment Plans............................................... 41
Taxes..................................................................... 42
Performance Data.......................................................... 43
Portfolio Transactions.................................................... 45
Portfolio Turnover....................................................... 45
Additional Information.................................................... 45
Dividends and Distributions.............................................. 45
Determination of Net Asset Value......................................... 46
Organization of the Fund................................................. 46
Shareholder Inquiries.................................................... 47
Shareholder Reports...................................................... 47
Authorization Form........................................................ 49
</TABLE>
Code #13937--0995
LOGO MERRILL LYNCH
Merrill Lynch Adjustable Rate
Securities Fund, Inc.
[ART]
PROSPECTUS
September 27, 1995
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 PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
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 September
27, 1995 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "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 September 27, 1995
<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.
Government 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
3
<PAGE>
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
4
<PAGE>
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.
5
<PAGE>
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
6
<PAGE>
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.
7
<PAGE>
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, the American Stock
Exchange, the Philadelphia Stock Exchange, the Pacific Stock Exchange, the New
York Stock Exchange or the 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.
8
<PAGE>
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
9
<PAGE>
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 (5) below,
the Fund may lend securities from its portfolio to approved borrowers and
receive collateral in cash or securities issued or
10
<PAGE>
guaranteed by the U.S. 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.
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. Make any investment inconsistent with the Fund's classification as a
diversified company under the 1940 Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
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 1940 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.
11
<PAGE>
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 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 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 (each, 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 50% of its
total assets in securities of issuers that are restricted as to
disposition, including Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities, asset-
backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those individual
officers and directors of the Fund, the officers and general partner of the
Manager, the directors of such general partner or the officers and
directors of any subsidiary thereof each owning beneficially more than one-
half of one percent of the securities of such issuer own in the aggregate
more than 5% of the securities of such issuer.
12
<PAGE>
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.
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.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each executive officer and Director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (63)--President and Director (1)(2)--President of the Manager
(which term as used herein includes the Manager's corporate predecessors) since
1977; President of Fund Asset Management, L.P. ("FAM") (which term as used
herein includes FAM's corporate predecessors) since 1977; President and
Director of Princeton Services, Inc. ("Princeton Services") since 1993;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") since 1990;
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").
13
<PAGE>
Joe Grills (60)--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; Director, LaSalle Street Fund.
Walter Mintz (66)--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 (64)--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 (62)--Director (2)--24 Federal Street, Boston,
Massachusetts 02110. Principal of Fernwood Associates (financial consultants).
Harry Woolf (72)--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;
Director, Advanced Technology Laboratories, Family Health International and
SpaceLabs Medical (medical equipment manufacturing and marketing).
Terry K. Glenn (55)--Executive Vice President (1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director since 1991; President of Princeton Administrators, L.P.
since 1988.
Gerald M. Richard (46)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Manager and FAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of the Distributor since
1984 and Vice President since 1981.
Jeffrey B. Hewson (44)--Vice President (1)(2)--Vice President of the Manager
since 1989 and Portfolio Manager of the Manager since 1985; Senior Consultant,
Price Waterhouse 1981 to 1985.
Gregory Mark Maunz (43)--Vice President (1)(2)--Vice President of the
Manager since 1985 and Portfolio Manager of the Manager since 1984.
Theodore J. Magnani (33)--Vice President (1)--Vice President of the Manager
since 1992.
Donald C. Burke (35)--Vice President (1)(2)--Vice President and Director of
Taxation of the Manager since 1990; employee of Deloitte & Touche LLP from
1982 to 1990.
Michael J. Hennewinkel (43)--Secretary (1)(2)--Vice President of the Manager
since 1985 and attorney associated with the Manager and FAM 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 August 31, 1995, the officers and Directors of the Fund as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At that date, Mr. Zeikel, an officer and Director of
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<PAGE>
the Fund, and the other officers of the Fund, owned less than 1% of the
outstanding common stock of ML&Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Manager (each an
"unaffiliated Director") a fee of $5,000 per year plus $250 per meeting
attended, together with such Director's actual out-of-pocket expenses relating
to attendance at meetings. The Fund also pays members of its Audit Committee,
which consists of all of the unaffiliated Directors, an additional $1,000 per
year plus $500 for each Committee meeting attended. For the fiscal year ended
May 31, 1995, fees and expenses paid to unaffiliated Directors aggregated
$49,070.
The following table sets forth for the fiscal year ended May 31, 1995,
compensation paid by the Fund to the unaffiliated Directors and, for the
calendar year ending December 31, 1994, the aggregate compensation paid by all
investment companies advised by MLAM and its affiliate, FAM (MLAM/FAM Advised
Funds"), to the unaffiliated Directors.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM FUND AND
NAME AGGREGATE RETIREMENT BENEFITS MLAM/FAM ADVISED
OF COMPENSATION ACCRUED AS PART FUNDS PAID TO
IRECTORD FROM FUND OF FUND EXPENSE DIRECTORS
- -------- ------------ ------------------- ------------------
<S> <C> <C> <C>
Joe Grills(1) $9,750 None $156,000
Walter Mintz(1) $9,750 None $156,000
Melvin R. Seiden(1) $9,750 None $156,000
Stephan B. Swensrud(1) $9,750 None $164,000
Harry Woolf(1) $9,750 None $156,000
</TABLE>
- --------
(1) In addition to the Fund, the Directors serve on the boards of other
MLAM/FAM Advised Funds as follows: Mr. Grills (36 funds and portfolios);
Mr. Mintz (36 funds and portfolios); Mr. Seiden (36 funds and portfolios);
Mr. Swensrud (46 funds and portfolios); and Mr. Woolf (36 funds and
portfolios).
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, 1995, the total
management fees paid to the Manager aggregated $1,463,526. For the fiscal year
ended May 31, 1994, the total management fees
15
<PAGE>
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.
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 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, 1995, 1994 and 1993,
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, Commission fees, expenses of
registering the shares under Federal, state or foreign laws, fees and expenses
of unaffiliated Directors, accounting and pricing costs (including the daily
calculation of net asset value, insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other
expenses properly payable by the Fund). 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."
The Manager is a limited partnership, the partners of which are ML&Co. and
Princeton Services. ML&Co. and Princeton Services are "controlling persons" of
the Manager as defined under the 1940 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.
16
<PAGE>
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System: shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and
Class C are sold to investors choosing the deferred sales charge alternatives.
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid. Each
class has different exchange privileges. See "Shareholder Services--Exchange
Privilege."
The Merrill Lynch Select PricingSM System is used by more than 60 mutual
funds advised by the Manager or its affiliate, FAM. Funds advised by the
Manager or FAM which use the Merrill Lynch Select PricingSM System are
referred to herein as "MLAM-advised mutual funds."
The Fund has entered into four separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Management
Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
During the fiscal year ended May 31, 1993, the Fund sold 5,909,926 of its
Class A shares for aggregate net proceeds to the Fund of $58,465,229. The
gross sales charge for the sale of its 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 Class A shares for aggregate net proceeds to the
Fund of $13,269,165. The gross sales charge for the sale of its 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. During the period October 21,
1994 (commencement of operations) to May 31, 1995, the Fund sold 68,974 Class
A shares for aggregate net proceeds to the Fund of $651,499. The gross sales
charge for the sale of its Class A shares for that period was $91 of which $84
was received by Merrill Lynch and $7 was received by the Distributor. During
the fiscal year ended May 31, 1995, the Fund sold 403,735 Class D shares for
aggregate net proceeds to the Fund of $3,830,957. The gross sales charge for
the sale of its Class D shares for that period was $29,513, of which $25,380
was received by Merrill Lynch and $4,133 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
17
<PAGE>
"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 purchase 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 advised by FAM or the Manager who
purchased such closed-end fund shares prior to October 21, 1994 (the date the
Merrill Lynch Select PricingSM System commenced operations) and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to buy Class A shares) or Class D shares of the Fund and other 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.
18
<PAGE>
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, recordkeeping 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 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
19
<PAGE>
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 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.
Employee Access Accounts SM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through employers that
provide employer sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
Purchase Privileges of Certain Persons. Directors of the Fund, members of
the Board of other MLAM-advised investment companies, directors and employees
of ML& Co. and its subsidiaries (the term "subsidiaries," when used herein
with respect to ML& Co., includes MLAM, FAM and certain other entities
directly or indirectly wholly-owned and controlled by ML& Co.), and any trust,
pension, profit-sharing or other benefit plan for such persons, may purchase
Class A shares of the Fund at net asset value.
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; and 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 are 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; and second, such purchase of Class D shares must be
made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.
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
20
<PAGE>
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 the shares of such other
fund were subject to a sales charge either at the time of purchase or on a
deferred basis; and 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
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
1940 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 1940 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 1940 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
21
<PAGE>
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. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
22
<PAGE>
The following table sets forth comparative information as of May 31, 1995
with respect to the Class B and Class C shares of the Fund, indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and the Distributor's voluntary maximum for the period August 2,
1991 (commencement of operations) to May 31, 1995, with respect to Class B
shares, and under the NASD maximum sales charge rule for the period October
21, 1994 (commencement of operations) to May 31, 1995, with respect to Class C
shares.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF MAY 31, 1995
--------------------------------------------------------------------------------
(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
CLASS B SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
- ------- ---------- --------- ----------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule As
Adopted................ $ 994,390 $62,149 $15,850 $77,999 $18,680 $59,319 $1,012
Under Distributor's
Voluntary Waiver....... $ 994,390 $62,149 $ 4,728 $66,877 $18,680 $48,197 $1,012
CLASS C (NOT IN
THOUSANDS)
- ---------------
Under NASD Rule as
Adopted................ $1,287,807 $80,488 $ 2,613 $83,101 $ 2,437 $80,664 $7,751
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since August 2, 1991
(commencement of operations) and all eligible Class C shares sold since
October 21, 1994 (commencement of operations) other than shares acquired
through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to
July 7, 1993, under the distribution plan in effect at that time, at a
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 CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum or, with respect to
the Class B shares, the voluntary maximum.
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.
23
<PAGE>
DEFERRED SALES CHARGES--CLASS B AND CLASS C 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 fiscal years ended May 31, 1993,
1994 and 1995, the Distributor received CDSCs of $3,964,093, $2,010,325 and
$672,278, respectively, with respect to redemptions of Class B shares, all of
which was paid to Merrill Lynch. For the fiscal period October 21, 1994
(commencement of operations) to May 31, 1995, the Distributor received CDSCs
of $1,343 with respect to redemptions of Class C shares, 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 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. The CDSC is also waived for any Class B
shares that were acquired and held at the time of redemption by Employee
Access Accounts available through employers that provide Eligible 401(k)
Plans. The initial minimum for such accounts is $500, except that the initial
minimum for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
24
<PAGE>
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 (including Merrill
Lynch) 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.
For the fiscal years ended May 31, 1993, 1994 and 1995, 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.
25
<PAGE>
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 all classes of the Fund is determined by
the Manager once daily, Monday through Friday, as of 15 minutes after the close
of business on the New York Stock Exchange (generally, 4:00 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 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 classes will tend to converge (although not necessarily
meet) immediately after the payment of dividends or distributions, which will
differ by approximately the amount of the expense accrual differential between
the classes.
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<PAGE>
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 15 minutes after the
close of business on the New York Stock Exchange (generally, 4:00 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 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
27
<PAGE>
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(R) or CBA(R) account
may arrange to have periodic investments made in the Fund, in their CMA(R) or
CBA(R) accounts or in certain related accounts in the amount of $100 or more
($1 for retirement accounts) through the CMA(R) or CBA(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.
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.
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<PAGE>
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 or her Class A or
Class D shares. Redemptions will be made at net asset value as determined as of
15 minutes after the close of business on the New York Stock Exchange
(generally, 4:00 P.M., New York time) 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 CMA (R)/CBA (R)
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
CMA (R)/CBA (R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA (R)/CBA (R) Systematic Redemption
Program, eligible shareholders should contact their Financial Consultant.
RETIREMENT PLANS
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
29
<PAGE>
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 SM System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund but does not hold Class A shares of the second fund in his
or her account at the time of the exchange and is not otherwise eligible to
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 are 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 are
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 at least 15
days. It is contemplated that the exchange privilege may be applicable to
other new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D 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
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<PAGE>
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% CDSC that generally
would apply to a redemption would not apply to the exchange. Three years later
the investor may decide to redeem the Class B shares of Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since by "tacking"
the two and a half year holding period of 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.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Adviser ("MFA") program.
Such retirement plans may exchange Class B, Class C or Class D shares that have
been held for at least one year for Class A shares of the same fund on the
basis of relative net asset values in connection with the commencement of
participation in the MFA program, i.e., no CDSC will apply. The one-year
holding period does not apply to shares acquired through reinvestment of
dividends. Upon termination of participation in the MFA program, Class A shares
will be re-exchanged for the class of shares originally held. For purposes of
computing any CDSC that may be payable upon redemption of Class B or Class C
shares so reacquired, or the Conversion Period for Class B shares so
reacquired, the holding period for the Class A shares will be "tacked" to the
holding period for the Class B or Class C shares originally held.
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% CDSC 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
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<PAGE>
Lynch Institutional Fund will be payable. If, instead of such redemption the
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 CDSC.
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 Arizona 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 Arizona income taxes as is
consistent with prudent investment
management.
Merrill Lynch Arkansas Municipal Bond
Fund................................ A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Arkansas income taxes as
is consistent with prudent investment
management.
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<PAGE>
Merrill Lynch Asset Growth Fund,
Inc. ............................... High total investment return, consis-
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,
Inc. ............................... A high level of current income through
investment primarily in United States
fixed income securities.
Merrill Lynch Balanced Fund for
Investment and Retirement, Inc. .... 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,
Inc. ............................... Capital appreciation and, secondarily,
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 California Municipal
Bond Fund........................... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and California income taxes as is 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 Colorado Municipal Bond
Fund................................ A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Colorado income taxes as
is consistent with prudent investment
management.
Merrill Lynch Connecticut Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Connecticut income taxes
as is consistent with prudent invest-
ment management.
Merrill Lynch Corporate Bond Fund,
Inc. ............................... Current income from three separate di-
versified portfolios of fixed income
securities.
Merrill Lynch Developing Capital
Markets Fund, Inc. ................. Long-term capital appreciation through
investment in securities, principally
equities, of issuers in countries hav-
ing 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
Trust .............................. High current return through investments
in U.S. Government and Government
agency securities, including GNMA
mortgage-backed certificates and other
mortgage-backed Government securities.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund........ A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal 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 Florida Municipal Bond
Fund................................ A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal income taxes as is consistent
with prudent investment management
while seeking to offer shareholders
the opportunity to own securities ex-
empt from Florida intangible personal
property taxes.
Merrill Lynch Fund for Tomorrow,
Inc. ............................... Long-term growth through investment in
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 Fundamental Value
Portfolio (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as custodian).... A portfolio of Merrill Lynch Asset
Builder Program, Inc., a series fund,
whose objective is provide capital ap-
preciation and income by investing in
securities, with at least 65% of the
portfolio's assets being invested in
equities.
Merrill Lynch Global Allocation 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.
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<PAGE>
Merrill Lynch Global Convertible
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.
Merrill Lynch Global Opportunity
Portfolio (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as custodian).... A portfolio of Merrill Lynch Asset
Builder Program, Inc., a series fund,
whose objective is to provide a high
total investment return through an in-
vestment policy utilizing United
States and foreign equity, debt and
money market securities, the combina-
tion of which will vary depending upon
changing market and economic trends.
Merrill Lynch Global Resources
Trust .............................. Long-term growth and protection of cap-
ital from investment in securities of
domestic and foreign companies that
possess substantial natural resource
assets.
Merrill Lynch Global SmallCap 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,
Inc. ............................... Capital appreciation and current income
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.
36
<PAGE>
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,
Inc. ............................... Capital appreciation by investing pri-
marily in Latin American equity and
debt securities.
Merrill Lynch Maryland Municipal Bond
Fund................................ A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Maryland income taxes as
is consistent with prudent investment
management.
Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund........ A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal 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 Massachusetts 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 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.
37
<PAGE>
Merrill Lynch Michigan Municipal Bond
Fund ............................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Michigan income taxes as
is consistent with prudent investment
management.
Merrill Lynch Minnesota Municipal
Bond Fund .......................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Minnesota personal income
taxes as is consistent with prudent
investment management.
Merrill Lynch Municipal Bond Fund,
Inc. ............................... Tax-exempt income from three separate
diversified portfolios of municipal
bonds.
Merrill Lynch Municipal Intermediate
Term Fund .......................... Currently the only portfolio of Merrill
Lynch Municipal Series Trust, a series
fund, whose objective is to provide as
high a level 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.
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 Jersey Municipal
Bond Fund .......................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and New Jersey income taxes as
is consistent with prudent investment
management.
Merrill Lynch New Mexico Municipal
Bond Fund........................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and New Mexico income taxes as
is consistent with prudent investment
management.
38
<PAGE>
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 York Municipal Bond
Fund ............................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal, New York State and New York
City income taxes as is consistent
with prudent investment management.
Merrill Lynch North
Carolina Municipal Bond Fund ....... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and North Carolina income
taxes as is consistent with prudent
investment management.
Merrill Lynch Ohio Municipal Bond
Fund ............................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide 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.
39
<PAGE>
Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund........ A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a
portfolio of intermediate-term
investment grade Pennsylvania
Municipal Bonds.
Merrill Lynch Pennsylvania Municipal
Bond Fund .......................... A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Pennsylvania 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 Quality Bond Portfolio
(available only for exchanges by
certain individual retirement
accounts for which Merrill Lynch
acts as custodian)............. A portfolio of Merrill Lynch Asset
Builder Program, Inc., a series fund,
whose objective is to provide a high
level of current income through in-
vestment in a diversified portfolio of
debt obligations, such as corporate
bonds and notes, convertible securi-
ties, preferred stocks and governmen-
tal obligations.
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.
Merrill Lynch Special Value Fund,
Inc. ............................... Long-term growth of capital from in-
vestments in securities, primarily
common stock, of relatively small com-
panies believed to have special in-
vestment value and emerging growth
companies regardless of size.
Merrill Lynch Strategic Dividend
Fund ............................... Long-term total return from investment
in dividend paying common stocks which
yield more than Standard & Poor's 500
Composite Stock Price Index.
40
<PAGE>
Merrill Lynch Technology Fund,
Inc. ............................... Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and serv-
ices in technology.
Merrill Lynch Texas Municipal 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 U.S. Government
Securities Portfolio (available
only for exchanges by certain
individual retirement accounts for
which Merrill Lynch acts as
custodian)..................... A portfolio of Merrill Lynch Asset
Builder Program, Inc., a series fund,
whose objective is to provide a high
current return through investments in
U.S. Government and government agency
securities, including GNMA mortgage-
backed certificates and other mort-
gage-backed government securities.
Merrill Lynch Utility Income Fund,
Inc. ............................... High current income through investment
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,
Inc. ............................... High current income by investing in a
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 shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to
43
<PAGE>
shareholders 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, purchase or sell options and futures. In general, unless
an election is available to the Fund or an exception applies, such options and
futures contracts that are "Section 1256 contracts" will be "marked to market"
for Federal income tax purposes at the end of each taxable year, i.e., each
such option or futures contract will be treated as sold for its fair market
value on the last day of the taxable year, and any gain or loss attributable to
Section 1256 contracts will be 60% long-term and 40% short-term capital gain or
loss. The mark-to-market rules outlined above, however, will not apply to
certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options and futures contracts. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures
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), that 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 treatment as a RIC 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 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 A, Class B, Class C
and Class D shares of the Fund for the periods indicated.
46
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
------------------------- ------------------------- ------------------------- -------------------------
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
EXPRESSED VALUE OF A EXPRESSED VALUE OF A EXPRESSED VALUE OF A EXPRESSED VALUE OF A
AS A HYPOTHETICAL AS A HYPOTHETICAL AS A HYPOTHETICAL AS A HYPOTHETICAL
PERCENTAGE $1,000 PERCENTAGE $1,000 PERCENTAGE $1,000 PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF THE $1,000 OF THE $1,000 OF THE $1,000 OF THE
PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ended
May 31, 1995.... 1.48% $1,014.80 1.67% $1,016.70
Inception (August
2, 1991) to May
31, 1995*....... 3.17% $1,126.80 2.78% $1,110.90
Inception (Octo-
ber 21, 1994) to
May 31, 1995**.. 1.09% $1,006.60 5.78% $1,034.70
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED MAY
31,
- --------------
1995............ 5.48% $1,054.80 5.91% $1,059.10
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
Inception
(October 21,
1994) to May 31,
1995**.......... 4.85% $1,048.50 4.47% $1,044.70
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception (August
2, 1991) to May
31, 1995*....... 12.68% $1,126.80 11.09% $1,110.90
Inception
(October 21,
1994) to May 31,
1995**.......... 0.66% $1,006.60 3.47% $1,034.70
<CAPTION>
YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30 days ended May
31, 1995........ 5.77% 5.51% 5.46% 6.03%
</TABLE>
- --------
* Information as to Class B and Class D shares is presented only for the
period August 2, 1991 to May 31, 1995. Prior to August 2, 1991, no Class B or
Class D shares were publicly issued.
** Information as to Class A and Class C shares is presented only for the
period October 21, 1994 to May 31, 1995. Prior to October 21, 1994, no Class
A or Class C shares were publicly issued.
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
47
<PAGE>
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 consists of 100,000,000 shares
and Class B and Class D each consists 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.
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.
48
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on May 31, 1995, is as set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net Assets....................... $344,607 $202,333,797 $1,409,236 $16,992,902
======== ============ ========== ===========
Number of Shares Outstanding..... 36,067 21,173,475 147,451 1,779,040
======== ============ ========== ===========
Net Asset Value Per Share (net
assets divided by number of
shares
outstanding) ................... $ 9.55 $ 9.56 $ 9.56 $ 9.55
Sales Charge for Class A and
Class D shares: 4.00% of
offering price (4.17% of net
amount invested*)............... 0.40 ** ** 0.40
-------- ------------ ---------- -----------
Offering Price................... $ 9.95 $ 9.56 $ 9.56 $ 9.95
======== ============ ========== ===========
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes the maximum sales
charge is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC upon redemption. See "Purchase of Shares--Deferred
Sales Charge Alternatives--Class B and Class C Shares" in the Prospectus and
"Redemption of Shares--Deferred Sales Charges--Class B and Class C Shares"
herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, have
been selected as the independent auditors of the Fund. The 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.
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
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). 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
49
<PAGE>
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 of the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the 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 1, 1995.
50
<PAGE>
APPENDIX A
RATINGS OF DEBT SECURITIES
DESCRIPTION OF CORPORATE DEBT RATINGS OF MOODY'S INVESTORS SERVICE, INC.
("MOODY'S")
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in
the future.
Baa Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal repayments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investments. Assurance of interest and principal repayments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's 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.
51
<PAGE>
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers.
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
--Leading market positions in well-established industries.
--High rates of return on funds employed.
--Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
--Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of short-term promissory obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations are
supported by the credit of another entity or entities, in assigning ratings to
such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment. Moody's
makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement.
DESCRIPTION OF CORPORATE DEBT RATINGS OF STANDARD & POOR'S RATINGS GROUP
("STANDARD & POOR'S")
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers or lessees.
52
<PAGE>
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than for debt in higher rated
categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and
repay principal. BB indicates the least degree of speculation and C the
highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest payments and
principal repayments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB-
rating.
B Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category
is also used for debt subordinated to senior debt that is assigned an
actual or implied BB or BB- rating.
CCC Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
53
<PAGE>
CC The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal repayments are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
The D rating also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.
PLUS (+) OR MINUS (-):
The ratings from AA to CCC may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
c The letter c indicates that the holder's option to tender the security
for purchase may be canceled under certain prestated conditions
enumerated in the tender option documents.
L The letter L indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
federally insured and interest is adequately collateralized. In the case
of certificates of deposit, the letter L indicates that the deposit,
combined with other deposits being held in the same right and capacity,
will be honored for principal and accrued pre-default interest up to the
federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a successor
insured institution, upon maturity.
p The letter p indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by
the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment
on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment with respect to
such likelihood and risk.
* Continuance of the rating is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "Investment Grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for
54
<PAGE>
obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal repayments are not made on the date
due, even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period.
A commercial paper rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to Standard & Poor's by the issuer or obtained by Standard & Poor's
from other sources it considers reliable. Standard & Poor's does not perform an
audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
55
<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, 1995, 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 three-year
period then ended and the period August 2, 1991 (commencement of operations) to
May 31, 1992. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and 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,
1995 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Adjustable Rate Securities Fund, Inc. as of May 31, 1995, the results of its
operations, the changes in its net assets, and the financial highlights for
each of the respective stated periods in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
June 30, 1995
56
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
57
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
Face Value Percent of
Index Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable Rate* Constant $ 4,113,070 Bear Stearns Secured Investors,
Mortgage-Backed Maturity Inc. II, Pass-Through 91-1-A, 8.321%
Obligations** Treasury due 11/25/2021 $ 4,190,354 $ 4,133,635 1.87%
Indexed Federal Home Loan Mortgage Corporation:
Obligations 2,818,588 #645073, 7.809% due 5/01/2015 2,866,151 2,882,006 1.30
4,943,717 #606108, 7.552% due 9/01/2019 5,045,554 5,169,274 2.34
3,460,364 #755194, 7.099% due 3/01/2020 3,470,052 3,452,267 1.56
67,270 #785173, 8.163% due 8/01/2020 68,825 67,322 0.03
6,302,611 #845139, 7.689% due 3/01/2022 6,400,287 6,494,651 2.94
8,882,145 #845535, 7.313% due 10/01/2023 9,055,911 9,234,655 4.18
14,463,701 #845889, 5.597% due 9/01/2024 14,593,336 14,949,536 6.76
10,708,447 #755170, 7.516% due 8/01/2031 11,069,857 10,987,830 4.97
Federal National Mortgage Association:
656,306 #21041, 7.61% due 10/01/2013 675,175 656,798 0.30
2,214,770 #21059, 7.60% due 11/01/2013 2,278,445 2,226,531 1.01
1,625,153 #20293, 7.88% due 9/01/2015 1,671,876 1,626,372 0.74
6,288,582 #142069, 6.808% due 12/01/2021 6,418,284 6,390,772 2.89
6,285,394 #200009, 7.601% due 2/01/2023 6,308,868 6,438,601 2.91
13,321,739 #291252, 5.744% due 8/01/2024 13,494,694 13,796,326 6.24
18,525,108 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-35-A1,
7.793% due 10/01/2022 18,988,236 19,063,494 8.62
5,579,390 Resolution Trust Corporation, REMIC
(a) 92-6-B4, 7.442% due 11/25/2025 5,716,866 5,616,005 2.54
Cost of Funds 6,835,342 DLJ Mortgage Acceptance Corp., REMIC
Indexed (a) 91-6-A1, 7.811% due 9/01/2021 6,952,290 6,822,526 3.09
Obligations 1,203,446 Resolution Trust Corporation, REMIC
(a) 91-M3-A, 7.864% due 2/25/2020 1,161,326 1,162,830 0.53
London Federal National Mortgage Association:
Interbank 6,037,505 #307622, 7.595% due 4/01/2023 6,214,810 6,246,931 2.82
Offered Rate 4,652,938 #291256, 6.74% due 8/01/2024 4,743,755 4,815,791 2.18
Indexed 9,629,831 #305729, 6.378% due 2/01/2025 9,921,333 9,954,838 4.50
Obligations Resolution Trust Corporation, REMIC
(a):
6,510,700 91-M7-B, 8.125% due 1/25/2021 6,510,700 6,571,738 2.97
15,004,156 92-C1-B, 8.125% due 8/25/2023 14,451,077 15,304,239 6.92
12,000,000 Saxon Mortgage Securities Corporation,
REMIC (a) 92-3-B, 6.805% due
11/25/2022 12,270,781 12,090,000 5.47
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 174,538,843 176,154,968 79.68
Derivative 27,162,904 Capstead Mortgage Securities Corporation
Mortgage-Backed II, REMIC (a) 93-I-A3, 0.50% due
Obligations** 9/25/2023 378,828 226,672 0.10
- --Interest 85,870,075 DLJ Mortgage Acceptance Corp., REMIC
Only (b) (a) 92-6-A1, 0.64% due 7/25/2022 1,349,776 1,279,464 0.58
111,736 Federal Home Loan Mortgage Corporation,
REMIC (a)(c) 92-1363-C, 265.793% due
8/15/2022 1,561,278 419,010 0.19
</TABLE>
58
<PAGE>
<TABLE>
<S> <S> <C> <S> <C> <C> <C>
1,512 Federal National Mortgage Association,
REMIC (a) 90-142-K, 1,163% due 7/25/2014 75,022 9,221 0.00
304 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-1-A9,
42,989% due 2/25/2022 47,477 72,490 0.03
25,559,664 Residential Funding Mortgage Securities
I, Inc., REMIC (a) 92-S3-A9, 0.50%
due 1/25/2007 2,060,013 71,874 0.03
Sears Mortgage Securities Corp.,
REMIC (a):
6,169 91-K-A4, 5,774% due 9/25/2021 842,221 680,049 0.31
55,174,079 92-12-A3, 0.52% due 7/25/2022 672,377 482,773 0.22
Total Investments in Derivative
Mortgage-Backed Obligations--
Interest Only 6,986,992 3,241,553 1.46
Fixed Rate 8,419,764 Kidder Peabody Acceptance Corporation,
Mortgage-Backed REMIC (a) 93-M1-A2, 7.15% due
Obligations** 4/25/2025 8,383,340 8,325,041 3.77
7,093,656 Resolution Trust Corporation, REMIC
(a) 92-CHF-B, 7.15% due 12/25/2020 7,180,093 7,060,404 3.19
Total Investments in Fixed Rate
Mortgage-Backed Obligations 15,563,433 15,385,445 6.96
Total Investments in Mortgage-Backed
Obligations 197,089,268 194,781,966 88.10
Short-Term Repurchase 14,600,000 Nikko Securities International, Inc.,
Securities Agreements*** purchased on 5/31/1995 to yield 6.17%
to 6/01/1995 14,600,000 14,600,000 6.61
10,000,000 PaineWebber Group, Inc., purchased on
5/31/1995 to yield 6.17% to 6/01/1995 10,000,000 10,000,000 4.52
Total Short-Term Securities 24,600,000 24,600,000 11.13
Total Investments $221,689,268 219,381,966 99.23
============
Other Assets Less Liabilities 1,698,576 0.77
------------ -------
Net Assets $221,080,542 100.00%
============ =======
</TABLE>
[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.
(a) Real Estate Mortgage Investment Conduits (REMIC).
(b) Securities which receive some or all of the interest portion
of the underlying collateral and little or no principal.
Interest only securities have either a nominal or a notional
amount of principal.
(c) Adjustable rate coupon that resets inversely to changes in
the London Interbank Offered Rate.
See Notes to Financial Statements.
59
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of May 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$221,689,268) (Note 1a) $219,381,966
Receivables:
Capital shares sold $ 1,904,767
Interest 1,368,415
Principal paydowns 890,213 4,163,395
------------
Deferred organization expenses (Note 1g) 27,632
Prepaid registration fees and other assets (Note 1g) 81,940
------------
Total assets 223,654,933
------------
Liabilities: Payables:
Capital shares redeemed 1,600,564
Dividends to shareholders (Note 1h) 454,952
Distributor (Note 2) 134,911
Investment adviser (Note 2) 94,771 2,285,198
------------
Accrued expenses and other liabilities 289,193
------------
Total liabilities 2,574,391
------------
Net Assets: Net assets $221,080,542
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $ 3,607
Class B Common Stock, $0.10 par value, 200,000,000 shares
authorized 2,117,347
Class C Common Stock, $0.10 par value, 100,000,000 shares
authorized 14,745
Class D Common Stock, $0.10 par value, 200,000,000 shares
authorized 177,904
Paid-in capital in excess of par 254,124,404
Undistributed investment income--net 80,308
Accumulated realized capital losses on investments--net (Note 5) (33,130,471)
Unrealized depreciation on investments--net (2,307,302)
------------
Net assets $221,080,542
============
Net Asset Class A--Based on net assets of $344,607 and 36,067 shares
Value: outstanding $ 9.55
============
Class B--Based on net assets of $202,333,797 and 21,173,475
shares outstanding $ 9.56
============
Class C--Based on net assets of $1,409,236 and 147,451 shares
outstanding $ 9.56
============
Class D--Based on net assets of $16,992,902 and 1,779,040 shares
outstanding $ 9.55
============
See Notes to Financial Statements.
</TABLE>
60
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended May 31, 1995
<S> <S> <C>
Investment Interest and discount earned, net of premium amortization $ 18,944,393
Income (Note 1f):
Expenses: Account maintenance and distribution fees--Class B (Note 2) 2,051,491
Investment advisory fees (Note 2) 1,463,526
Transfer agent fees--Class B (Note 2) 324,267
Professional fees 159,271
Printing and shareholder reports 156,492
Accounting services (Note 2) 119,474
Registration fees (Note 1g) 84,290
Directors' fees and expenses 49,070
Account maintenance fees--Class D (Note 2) 46,862
Custodian fees 37,663
Amortization of organization expenses (Note 1g) 23,565
Transfer agent fees--Class D (Note 2) 19,367
Pricing fees 2,607
Account maintenance and distribution fees--Class C (Note 2) 1,591
Transfer agent fees--Class A (Note 2) 265
Transfer agent fees--Class C (Note 2) 258
Other 21,327
------------
Total expenses 4,561,386
------------
Investment income--net 14,383,007
------------
Realized & Realized loss on investments--net (9,607,152)
Unrealized Change in unrealized depreciation on investments--net 8,689,257
Loss on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 13,465,112
- --Net (Notes 1c, ============
1f & 3):
See Notes to Financial Statements.
</TABLE>
61
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended May 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 14,383,007 $ 17,527,708
Realized loss on investments--net (9,607,152) (19,663,874)
Change in unrealized depreciation on investments--net 8,689,257 8,608,834
------------ ------------
Net increase in net assets resulting from operations 13,465,112 6,472,668
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (14,494) (1,245,307)
(Notes 1h): Class B (13,293,732) (15,919,448)
Class C (11,227) --
Class D (1,017,584) --
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (14,337,037) (17,164,755)
------------ ------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (175,466,828) (332,880,261)
(Note 4): ------------ ------------
Net Assets: Total decrease in net assets (176,338,753) (343,572,348)
Beginning of year 397,419,295 740,991,643
------------ ------------
End of year* $221,080,542 $397,419,295
============ ============
<FN>
*Undistributed investment income--net $ 80,308 $ 362,953
============ ============
See Notes to Financial Statements.
</TABLE>
62
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A Class B
For the For the
The following per share data and ratios Period Period
have been derived from information provided Oct. 21, Aug. 2,
in the financial statements. 1994++ to For the Year 1991++ to
May 31, Ended May 31, May 31,
Increase (Decrease) in Net Asset Value: 1995 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.46 $ 9.53 $ 9.76 $ 9.92 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .36 .46 .32 .40 .52
Realized and unrealized gain (loss) on
investments--net .09 .04 (.24) (.16) (.08)
-------- -------- -------- -------- --------
Total from investment operations .45 .50 .08 .24 .44
-------- -------- -------- -------- --------
Less dividends from investment income--net (.36) (.47) (.31) (.40) (.52)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.55 $ 9.56 $ 9.53 $ 9.76 $ 9.92
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 4.85%+++ 5.48% .77% 2.48% 4.33%+++
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement and
Net Assets: excluding account maintenance and
distribution fees .87%* .84%* .71% .65% .61%*
======== ======== ======== ======== ========
Expenses, net of reimbursement .87%* 1.59%* 1.46% 1.40% 1.36%*
======== ======== ======== ======== ========
Expenses .87%* 1.59%* 1.46% 1.40% 1.47%*
======== ======== ======== ======== ========
Investment income--net 6.18%* 4.88%* 3.20% 4.15% 6.07%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 345 $202,334 $374,376 $689,593 $887,110
Data: ======== ======== ======== ======== ========
Portfolio turnover 102.55% 102.55% 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>
63
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class C Class D
For the For the
The following per share data and ratios Period Period
have been derived from information provided Oct. 21, Aug. 2,
in the financial statements. 1994++ to For the Year 1991++ to
May 31, Ended May 31, May 31,
Increase (Decrease) in Net Asset Value: 1995 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.46 $ 9.53 $ 9.76 $ 9.92 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .31 .51 .37 .45 .56
Realized and unrealized gain (loss) on
investments--net .10 .03 (.24) (.16) (.08)
-------- -------- -------- -------- --------
Total from investment operations .41 .54 .13 .29 .48
-------- -------- -------- -------- --------
Less dividends from investment income--net (.31) (.52) (.36) (.45) (.56)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.56 $ 9.55 $ 9.53 $ 9.76 $ 9.92
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 4.47%+++ 5.91% 1.28% 2.99% 4.75%+++
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement and
Net Assets: excluding account maintenance and
distribution fees .88%* .83%* .71% .66% .62%*
======== ======== ======== ======== ========
Expenses, net of reimbursement 1.68%* 1.08%* .96% .91% .87%*
======== ======== ======== ======== ========
Expenses 1.68%* 1.08%* .96% .91% .96%*
======== ======== ======== ======== ========
Investment income--net 5.51%* 5.44%* 3.69% 4.79% 6.54%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in
Data: thousands) $ 1,409 $ 16,993 $ 23,043 $ 51,398 $ 80,411
======== ======== ======== ======== ========
Portfolio turnover 102.55% 102.55% 60.38% 104.71% 94.72%
======== ======== ======== ======== ========
</TABLE>
[FN]
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
64
<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
diversified, open-end management investment company. The Fund offers
four classes of shares under the Merrill Lynch Select Pricing SM
System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its
account maintenance and distribution expenditures. The following is
a summary of significant accounting policies followed by the Fund.
(a) Valuation of 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 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. 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
securities pursuant to repurchase agreements with a member bank of
the Federal 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 securities and, if necessary, receives additions to such
securities daily to ensure that the contract is fully collateralized.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Options--The Fund is authorized to purchase and write covered call
and put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing
investments.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and related options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral 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
65
<PAGE>
margins and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized 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.
NOTES TO FINANCIAL STATEMENTS (continued)
(e) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(f) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
discount 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.
(j) Reclassification--Generally accepted accounting principles
require that certain differences between undistributed net
investment income for financial reporting and tax purposes, if
permanent, be reclassified to accumulated net realized capital
losses and paid-in capital. Accordingly, current year's permanent
book/tax differences of $38,785 have been reclassified from
undistributed net investment income to accumulated net realized
capital losses and paid-in capital. These reclassifications have no
effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the 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. The Investment
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.
Pursuant to the distribution plans ("the Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
66
<PAGE>
For the year ended May 31, 1995, MLFD earned underwriting discounts
and MLPF&S earned dealer concessions on sales of the Fund's Class A
and Class D Shares as follows:
MLFD MLPF&S
Class A $ 7 $ 84
Class D $4,133 $25,380
For the year ended May 31, 1995, MLPF&S received contingent deferred
sales charges of $672,278 and $1,343 relating to transactions in
Class B and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLPF&S, MLFDS, ML & Co., and/or MLFD.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended May 31, 1995 were $276,876,698 and $440,089,628,
respectively.
Net realized and unrealized losses as of May 31, 1995 were as
follows:
Realized Unrealized
Losses Losses
Long-term investments $ (9,607,152) $ (2,307,302)
------------ -------------
As of May 31, 1995, net unrealized depreciation for Federal income
tax purposes aggregated $2,686,488, of which $2,328,872 related to
appreciated securities and $5,015,360 related to depreciated
securities. The aggregate cost of investments at May 31, 1995 for
Federal income tax purposes was $222,068,454.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $175,466,828 and $332,880,261 for the years ended May 31, 1995
and May 31, 1994, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Period Dollar
October 21, 1994++ to May 31, 1995 Shares Amount
Shares sold 68,974 $ 651,499
Shares issued to shareholders in
reinvestment of dividends 60 570
------------ -------------
Total issued 69,034 652,069
Shares redeemed (32,967) (310,911)
------------ -------------
Net increase 36,067 $ 341,158
============ =============
[FN]
++Commencement of Operations.
Class B Shares for the Year Dollar
Ended May 31, 1995 Shares Amount
Shares sold 3,506,784 $ 33,206,006
Shares issued to shareholders in
reinvestment of dividends 809,890 7,574,701
------------ -------------
Total issued 4,316,674 40,780,707
Automatic conversion of shares (364) (3,468)
Shares redeemed (22,411,721) (211,944,078)
------------ -------------
Net decrease (18,095,411) $(171,166,839)
============ =============
Class B Shares for the Year Dollar
Ended May 31, 1994 Shares Amount
Shares sold 4,768,628 $ 46,269,096
Shares issued to shareholders in
reinvestment of dividends 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 C Shares for the Period Dollar
October 21, 1994++ to May 31, 1995 Shares Amount
Shares sold 231,275 $ 2,187,668
Shares issued to shareholders in
reinvestment of dividends 794 7,491
------------ -------------
Total issued 232,069 2,195,159
Shares redeemed (84,618) (795,090)
------------ -------------
Net increase 147,451 $ 1,400,069
============ =============
[FN]
++Commencement of Operations.
67
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Class D Shares for the Year Ended Dollar
May 31, 1995 Shares Amount
Shares sold 403,735 $ 3,830,957
Automatic conversion of shares 364 3,468
Shares issued to shareholders in
reinvestment of dividends 65,091 614,664
------------ -------------
Total issued 469,190 4,449,089
Shares redeemed (1,108,309) (10,490,305)
------------ -------------
Net decrease (639,119) $ (6,041,216)
============ =============
Class D Shares for the Year Ended Dollar
May 31, 1994 Shares Amount
Shares sold 1,365,792 $ 13,269,165
Shares issued to shareholders in
reinvestment of dividends 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)
============ =============
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. There were
2,010,429 shares redesignated, amounting to $21,918,414.
5. Capital Loss Carryforward:
At May 31, 1995, the Fund had a net capital loss carryforward of
approximately $24,866,000, of which $20,978,000 expires in 2002 and
$3,888,000 expires in 2003. This amount will be available to offset
like amounts of any future taxable gains.
68
<PAGE>
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69
<PAGE>
[THIS PAGE IS INTENTIONALLY LEFT BLANK.]
70
<PAGE>
[THIS PAGE IS INTENTIONALLY LEFT BLANK.]
71
<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
Investment Restrictions.................................................. 11
Management of the Fund.................................................... 13
Directors and Officers................................................... 13
Compensation of Directors................................................ 15
Management and Advisory Arrangements..................................... 15
Purchase of Shares........................................................ 16
Initial Sales Charge Alternatives--Class A and Class D Shares............ 17
Reduced Initial Sales Charge............................................. 18
Distribution Plans....................................................... 21
Limitations on the Payment of Deferred Sales Charges..................... 22
Redemption of Shares...................................................... 23
Deferred Sales Charges--Class B and Class C Shares....................... 24
Portfolio Transactions.................................................... 25
Portfolio Turnover....................................................... 26
Determination of Net Asset Value.......................................... 26
Shareholder Services...................................................... 27
Investment Account....................................................... 27
Automatic Investment Plan................................................ 28
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 28
Systematic Withdrawal Plans--Class A and Class D Shares.................. 28
Retirement Plans......................................................... 29
Exchange Privilege....................................................... 30
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....................................................... 48
Description of Shares.................................................... 48
Computation of Offering Price Per Share.................................. 49
Independent Auditors..................................................... 49
Custodian................................................................ 49
Transfer Agent........................................................... 49
Legal Counsel............................................................ 49
Reports to Shareholders.................................................. 49
Additional Information................................................... 50
Security Ownership of Certain Beneficial Owners.......................... 50
Appendix A--Ratings of Debt Securities and Preferred Stock................ 51
Independent Auditors' Report.............................................. 56
Schedule of Investments................................................... 58
Statement of Assets and Liabilities....................................... 60
Statement of Operations................................................... 61
Statements of Changes in Net Assets....................................... 62
Financial Highlights...................................................... 63
Notes to Financial Statements............................................. 65
</TABLE>
Code #13938-0995
LOGO MERRILL LYNCH
Merrill Lynch Adjustable Rate
Securities Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
September 27, 1995
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, 1994 and 1995 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, 1995
Statement of Assets and Liabilities as of May 31, 1995
Statement of Operations for the year ended May 31, 1995
Statements of Changes in Net Assets for the years ended May 31, 1995
and 1994
Financial Highlights for the years ended May 31, 1993, 1994 and 1995
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, dated May 31, 1991, of Registrant.(a)
(c) --Articles Supplementary, dated October 17, 1994, of Registrant.(a)
(d) --Articles of Amendment, dated October 17, 1994, of Registrant.
2 --By-Laws of Registrant.(a)
3 --None.
4 (a) --Portions of the Articles of Incorporation and the By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant.(c)
5(a) --Management Agreement between Registrant and Merrill Lynch Asset
Management, Inc.(a)
(b) --Supplement to Management Agreement between Registrant and Merrill
Lynch Asset Management, L.P.(b)
6(a) --Form of Class A Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Selected Dealers
Agreement).(b)
(b) --Class B Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.(a)
(c) --Form of Class C Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Selected Dealers
Agreement).(b)
(d) --Form of Class D Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Selected Dealers
Agreement).(b)
7 --None.
8 --Custody Agreement between Registrant and The Bank of New York.(a)
9 --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc.(a)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10 --Opinion of Brown & Wood, counsel to the Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for
Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management, Inc.(a)
14 --None.
15(a) --Amended and Restated Class B Shares Distribution Plan of
Registrant.(a)
(b) --Form of Class C Distribution Plan Sub-Agreement of Registrant.(b)
(c) --Form of Class D Distribution Plan Sub-Agreement of Registrant.(b)
16(a) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to item 22 relating to Class D
shares.(a)
(b) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to item 22 relating to Class B
shares.(a)
(c) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to item 22 relating to Class A
shares.
(d) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to item 22 relating to Class C
shares.
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
</TABLE>
- --------
(a) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") phase-in requirements.
(b) Previously filed as an exhibit to Post-Effective Amendment No. 5 to the
Registration Statement.
(c) 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.
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
HOLDERS AT
TITLE OF CLASS AUGUST 31, 1995
-------------- ---------------
<S> <C>
Class A shares of Common Stock, par value $0.10 per share... 18
Class B shares of Common Stock, par value $0.10 per share... 13,554
Class C shares of Common Stock, par value $0.10 per share... 35
Class D shares of Common Stock, par value $0.10 per share... 637
</TABLE>
Note: The number of holders shown above includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
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) 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 open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Balanced Fund for Investment and Retirement, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund,
Inc., Merrill Lynch Fund for Tomorrow, Inc., Merrill Lynch Global 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 SmallCap Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill
C-3
<PAGE>
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Series Trust, 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.; and for the following
closed-end investment companies: Convertible Holdings, Inc., Merrill Lynch High
Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund,
Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch 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. and The Municipal Fund Accumulation Program, Inc.; and for the
following closed-end investment companies: Apex Municipal Fund, Inc., Corporate
High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers
Fund, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., MuniAssets Fund, 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 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
Merrill Lynch 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, 1993 for his or her 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. Glenn, Giordano,
Harvey, Kirstein and Monagle 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; Limited
Partner of FAM
Princeton Services, Inc.
("Princeton Services"). General Partner General Partner of FAM
Arthur Zeikel........... President President and Chief Investment Officer of
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 the Transfer Agent; President of
Princeton Administrators
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
Richard L. Reller....... 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
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 two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
Convertible Holdings, Inc., The Corporate Fund Accumulation Program, Inc.,
MuniAssets Fund, Inc., and The Municipal Fund Accumulation Program, Inc.; and
MLFD also acts as the principal underwriter for the following closed-end
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and
Merrill Lynch Senior Floating Rate 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, Brady, 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
Debra W. Landsman-Yaros. 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 1940 Act and the rules thereunder will be maintained at the
offices of the Registrant, 800 Scudders Mill Road, Plainsboro, New Jersey 08536
and the Transfer Agent, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-
6484.
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 to each person to whom a prospectus is
delivered 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 THE
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933
AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE TOWNSHIP OF PLAINSBORO, AND THE STATE OF NEW JERSEY, ON THE 26TH DAY OF
SEPTEMBER, 1995.
Merrill Lynch Adjustable Rate
Securities Fund, Inc.
(Registrant)
By /s/ Gerald M. Richard
----------------------------------
(GERALD M. RICHARD, TREASURER)
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 DATE(S) INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Arthur Zeikel* President and
- ------------------------------------- Director (Principal
(ARTHUR ZEIKEL) Executive Officer)
/s/ Gerald M. Richard Treasurer (Principal September 26, 1995
- ------------------------------------- Financial and
(GERALD M. RICHARD) Accounting Officer)
Joe Grills* 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)
*By /s/ Gerald M. Richard September 26, 1995
---------------------------------
(GERALD M. RICHARD,
ATTORNEY-IN-FACT)
</TABLE>
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
1(a) --Articles of Incorporation of Registrant.(a)
(b) --Articles of Amendment, dated May 31, 1991, of Registrant.(a)
(c) --Articles Supplementary, dated October 17, 1994, of
Registrant.(a)
(d) --Articles of Amendment, dated October 17, 1994, of Registrant.
2 --By-Laws of Registrant.(a)
3 --None.
4(a) --Portions of the Articles of Incorporation and the By-Laws of
the Registrant defining the rights of holders of shares of the
Registrant.(c)
5(a) --Management Agreement between Registrant and Merrill Lynch
Asset Management, Inc.(a)
(b) --Supplement to Management Agreement between Registrant and
Merrill Lynch Asset Management, L.P.(b)
6(a) --Form of Class A Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Selected
Dealers Agreement).(b)
(b) --Class B Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(a)
(c) --Form of Class C Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Selected
Dealers Agreement).(b)
(d) --Form of Class D Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Selected
Dealers Agreement).(b)
7 --None.
8 --Custody Agreement between Registrant and The Bank of New
York.(a)
9 --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial
Data Services, Inc.(a)
10 --Opinion of Brown & Wood, counsel to the Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for
Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management, Inc.(a)
14 --None.
15(a) --Amended and Restated Class B Shares Distribution Plan of
Registrant.(a)
(b) --Form of Class C Distribution Plan Sub-Agreement of
Registrant.(b)
(c) --Form of Class D Distribution Plan Sub-Agreement of
Registrant.(b)
16(a) --Schedule for computation of each performance quotation
provided in the Registration Statement in response to item 22
relating to Class D shares.(a)
(b) --Schedule for computation of each performance quotation
provided in the Registration Statement in response to item 22
relating to Class B shares.(a)
(c) --Schedule for computation of each performance quotation
provided in the Registration Statement in response to item 22
relating to Class A shares.
(d) --Schedule for computation of each performance quotation
provided in the Registration Statement in response to item 22
relating to Class C shares.
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
</TABLE>
- --------
(a) Refiled pursuant to the Electronic Data Gathering Analysis and Retrieval
("EDGAR") phase-in requirements.
(b) Previously filed as an exhibit to Post-Effective Amendment No. 5 to the
Registration Statement.
(c) 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.
<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
<PAGE>
EXHIBIT 99.1(a)
ARTICLES OF INCORPORATION
OF
MERRILL LYNCH ADJUSTABLE RATE FUND, INC.
* * * *
ARTICLE I
THE UNDERSIGNED, BRIAN M. KAPLOWITZ, whose post-office address is One World
Trade Center, New York, New York 10048, being at least eighteen years of age,
does hereby act as an incorporator, under and by virtue of the General Laws of
the State of Maryland authorizing the formation of corporations and with the
intention of forming a corporation.
ARTICLE II
NAME
----
The name of the corporation is MERRILL LYNCH ADJUSTABLE RATE FUND, INC.
ARTICLE III
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the corporation is formed and the business
or objects to be transacted, carried on and promoted by it are as follows:
(1) To conduct and carry on the business of an investment company of the
management type.
<PAGE>
(2) To hold, invest and reinvest its assets in securities, and in
connection therewith to hold part or all of its assets in cash.
(3) To issue and sell shares of its own capital stock in such amounts and
on such terms and conditions, for such purposes and for such amount or kind of
consideration now or hereafter permitted by the General Laws of the State of
Maryland and by these Articles of Incorporation, as its Board of Directors may
determine; provided, however, that the value of the consideration per share to
be received by the Corporation upon the sale or other disposition of any shares
of its capital stock shall not be less than the net asset value per share of
such capital stock outstanding at the time of such event.
(4) To redeem, purchase or otherwise acquire, hold, dispose of, resell,
transfer, reissue or cancel (all without the vote or consent of the stockholders
of the Corporation) shares of its capital stock, in any manner and to the extent
now or hereafter permitted by the General Laws of the State of Maryland and by
these Articles of Incorporation.
(5) To do any and all such further acts or things and to exercise any and
all such further powers or rights as may be necessary, incidental, relative,
conducive, appropriate or desirable for the accomplishment, carrying out or
attainment of all or any of the foregoing purposes or objects.
2
<PAGE>
The Corporation shall be authorized to exercise and enjoy all of the powers,
rights and privileges granted to, or conferred upon, corporations by the General
Laws of the State of Maryland now or hereafter in force, and the enumeration of
the foregoing shall not be deemed to exclude any powers, rights or privileges so
granted or conferred.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post-office address of the principal office of the Corporation in the
State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
this State is The Corporation Trust Incorporated, a corporation of this State,
and the post-office address of the resident agent is 32 South Street, Baltimore,
Maryland 21202.
ARTICLE V
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the Corporation shall
have authority to issue is Two Hundred Million (200,000,000) shares, of the par
value of Ten Cents ($.10) per share and of the aggregate par value of Twenty
Million Dollars ($20,000,000). The capital stock initially is classified into
two classes, consisting of One Hundred Million (100,000,000) shares
3
<PAGE>
of Class A Common Stock and One Hundred Million (100,000,000) shares of Class B
Common Stock.
(2) The Board of Directors may classify and reclassify any unissued shares
of capital stock into one or more additional or other classes or series as may
be established from time to time by setting or changing in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series.
(3) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, the holders of each class or series of capital stock shall be entitled to
dividends and distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and distributions paid
with respect to the various classes or series of capital stock may vary among
such classes and series. Expenses related to the distribution of, and other
identified expenses that should properly be allocated to, the shares of a
particular class or series of capital stock may be charged to and borne solely
by such class or series and the bearing of expenses solely by a class or series
of capital stock may be appropriately re-
4
<PAGE>
flected (in a manner determined by the Board of Directors) and cause differences
in the net asset value attributable to, and the dividend, redemption and
liquidation rights of, the shares of each class or series of capital stock.
(4) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, on each matter submitted to a vote of stockholders, each holder of a
share of capital stock of the Corporation shall be entitled to one vote for each
share standing in such holder's name on the books of the Corporation,
irrespective of the class or series thereof, and all shares of all classes and
series shall vote together as a single class; provided, however, that (a) as to
any matter with respect to which a separate vote of any class or series is
required by the Investment Company Act of 1940, as amended, and in effect from
time to time, or any rules, regulations or orders issued thereunder, or by the
Maryland General Corporation Law, such requirement as to a separate vote by that
class or series shall apply in lieu of a general vote of all classes and series
as described above, (b) in the event that the separate vote requirements
referred to in (a) above apply with respect to one or more classes or series,
then, subject to paragraph (c) below, the shares of all other classes and series
not entitled to a separate class vote shall vote as a single class, and (c) as
to any matter which does not affect the interest of a particular class or
series,
5
<PAGE>
such class or series shall not be entitled to any vote and only the holders of
shares of the one or more affected classes and series shall be entitled to vote.
(5) Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes of all classes or
series of capital stock of the Corporation (or of any class or series entitled
to vote thereon as a separate class or series) to take or authorize any action,
the corporation is hereby authorized (subject to the requirements of the
Investment Company Act of 1940, as amended, and in effect from time to time, and
any rules, regulations and orders issued thereunder) to take such action upon
the concurrence of a majority of the aggregate number of shares of capital stock
of the Corporation entitled to vote thereon (or a majority of the aggregate
number of shares of a class or series entitled to vote thereon as a separate
class or series).
(6) Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, in the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of all classes and
series of capital stock of the Corporation shall be entitled, after payment or
provision for payment of the debts and other liabilities of the Corporation, to
share ratably in the remaining net assets of the Corporation.
6
<PAGE>
(7) Any fractional shares shall carry proportionately all the rights of a
whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends.
(8) All persons who shall acquire stock in the Corporation shall acquire
the same subject to the provisions of the charter and By-Laws of the
Corporation. As used in the charter of the Corporation, the terms "charter" and
"Articles of Incorporation" shall mean and include the Articles of Incorporation
of the Corporation as amended, supplemented and restated from time to time by
Articles of Amendment, Articles Supplementary, Articles of Restatement or
otherwise.
ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE DIRECTORS
AND STOCKHOLDERS
-------------------------------------
(1) The number of directors of the Corporation shall be three (3), which
number may be increased pursuant to the By-Laws of the Corporation but shall
never be less than three (3). The names of the directors who shall act until
the first annual meeting or until their successors are duly elected and qualify
are:
Philip L. Kirstein
Michael J. Hennewinkel
Susan B. Baker
7
<PAGE>
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, whether now
or hereafter authorized, for such consideration as the Board of Directors may
deem advisable, subject to such limitations as may be set forth in these
Articles of Incorporation or in the By-Laws of the Corporation or in the General
Laws of the State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder, have any
right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the Corporation which it may issue or sell
(whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation
acquired by it after the issue thereof, or otherwise) other than such right, if
any, as the Board of Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall be indemnified
by the Corporation to the full extent permitted by the General Laws of the State
of Maryland, subject to the requirements of the Investment Company Act of 1940,
as amended. No amendment of these Articles of Incorporation or repeal of any
provision hereof shall limit or eliminate the benefits provided to directors and
officers under this provision in connection with any act or omission that
occurred prior to such amendment or repeal.
8
<PAGE>
(5) To the fullest extent permitted by the General Laws of the State of
Maryland, subject to the requirements of the Investment Company Act of 1940, as
amended, no director or officer of the Corporation shall be personally liable to
the Corporation or its security holders for money damages. No amendment of these
Articles of Incorporation or repeal of any provision hereof shall limit or
eliminate the benefits provided to directors and officers under this provision
in connection with any act or omission that occurred prior to such amendment or
repeal.
(6) The Board of Directors of the Corporation may make, alter or repeal
from time to time any of the By-Laws of the Corporation except any particular
By-Law which is specified as not subject to alteration or repeal by the Board of
Directors, subject to the requirements of the Investment Company Act of 1940, as
amended.
ARTICLE VII
REDEMPTION
----------
Each holder of shares of capital stock of the Corporation shall be entitled
to require the Corporation to redeem all or any part of the shares of capital
stock of the Corporation standing in the name of such holder on the books of the
Corporation, and all shares of capital stock issued by the Corporation shall be
subject to redemption by the Corporation, at the redemption price of such shares
as in effect from time to time as may be determined by the Board of Directors of
the Corporation in accordance
9
<PAGE>
with the provisions hereof, subject to the right of the Board of Directors of
the Corporation to suspend the right of redemption of shares of capital stock of
the Corporation or postpone the date of payment of such redemption price in
accordance with provisions of applicable law. The redemption price of shares of
capital stock of the Corporation shall be the net asset value thereof as
determined by the Board of Directors of the Corporation from time to time in
accordance with the provisions of applicable law, less such redemption fee or
other charge, if any, as may be fixed by resolution of the Board of Directors of
the Corporation. Payment of the redemption price shall be made in cash by the
Corporation at such time and in such manner as may be determined from time to
time by the Board of Directors of the corporation.
ARTICLE VIII
DETERMINATION BINDING
---------------------
Any determination made in good faith, so far as accounting matters are
involved, in accordance with accepted accounting practice by or pursuant to the
direction of the Board of Directors, as to the amount of assets, obligations or
liabilities of the Corporation, as to the amount of net income of the
Corporation from dividends and interest for any period or amounts at any time
legally available for the payment of dividends, as to the amount of any reserves
or charges set up and the propriety
10
<PAGE>
thereof, as to the time of or purpose for creating reserves or as to the use,
alteration or cancellation of any reserves or charges (whether or not any
obligation or liability for which such reserves or charges shall have been
created, shall have been paid or discharged or shall be then or thereafter
required to be paid or discharged), as to the price of any security owned by the
Corporation or as to any other matters relating to the issuance, sale,
redemption or other acquisition or disposition of securities or shares of
capital stock of the Corporation, and any reasonable determination made in good
faith by the Board of Directors as to whether any transaction constitutes a
purchase of securities on "margin," a sale of securities "short," or an
underwriting or the sale of, or a participation in any underwriting or selling
group in connection with the public distribution of, any securities, shall be
final and conclusive, and shall be binding upon the Corporation and all holders
of its capital stock, past, present and future, and shares of the capital stock
of the Corporation are issued and sold on the condition and understanding,
evidenced by the purchase of shares of capital stock or acceptance of share
certificates, that any and all such determinations shall be binding as
aforesaid. No provision of these Articles of Incorporation shall be effective
to (a) require a waiver of compliance with any provision of the Securities Act
of 1933, as amended, or the Investment Company Act of 1940, as amended, or of
any valid rule, regulation or order of the Securi-
11
<PAGE>
ties and Exchange commission thereunder or (b) protect or purport to protect any
director or officer of the Corporation against any liability to the Corporation
or its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
ARTICLE IX
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
ARTICLE X
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation, in any manner now or
hereafter prescribed by statute, including any amendment which alters the
contract rights, as expressly set forth in the charter, of any outstanding stock
and substantially adversely affects the stockholder's rights, and all rights
conferred upon stockholders herein are granted subject to this reservation.
12
<PAGE>
IN WITNESS WHEREOF, the undersigned incorporator of MERRILL LYNCH
ADJUSTABLE RATE FUND, INC. hereby executes the foregoing Articles of
Incorporation and acknowledges the same to be his act.
Dated the 18th day of April, 1991.
/s/ Brian M. Kaplowitz
----------------------
Brian M. Kaplowitz
13
<PAGE>
EXHIBIT 99.1(b)
MERRILL LYNCH ADJUSTABLE RATE FUND, INC.
ARTICLES OF AMENDMENT
MERRILL LYNCH ADJUSTABLE RATE FUND, INC., a Maryland corporation having its
principal office C/O The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202 (hereinafter called the Corporation), hereby certifies
to the State Department of Assessments and Taxation of Maryland, that:
FIRST: The charter of the Corporation is hereby amended by striking out
Article II of the Articles of Incorporation and inserting in lieu thereof the
following:
ARTICLE II
NAME
----
The name of the Corporation is MERRILL LYNCH ADJUSTABLE RATE SECURITIES
FUND, INC.
SECOND: The amendment to the charter of the Corporation herein made was
duly approved by unanimous written consent of the board of directors on May 31,
1991; and that at the time of the approval by the directors there were no shares
of stock of the Corporation entitled to vote on the matter either outstanding or
subscribed for.
IN WITNESS WHEREOF, Merrill Lynch Adjustable Rate Fund, Inc. has caused
these articles to be signed in its name and on its
<PAGE>
behalf by its President and attested by its Secretary on May 31, 1991.
MERRILL LYNCH ADJUSTABLE RATE FUND, INC.
By /s/ Philip L. Kirstein
-----------------------------
Attest:
/s/ Michael J.Hennewinkel
- ---------------------------------
Michael J. Hennewinkel, Secretary
THE UNDERSIGNED, President of MERRILL LYNCH ADJUSTABLE RATE FUND, INC., who
executed on behalf of said Corporation the foregoing Articles of Amendment, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said Corporation, the foregoing Articles of Amendment to be the act of
said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ Philip L. Kirstein
----------------------
Philip L. Kirstein
2
<PAGE>
EXHIBIT 99.1(c)
STATE DEPARTMENT OF ASSESSMENTS
AND TAXATION
APPROVED FOR RECORD
10/21/94 at 8:30 a.m.
- -------- ---------
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND INC.
ARTICLES SUPPLEMENTARY TO ARTICLES OF INCORPORATION
INCREASING THE AUTHORIZED CAPITAL STOCK OF THE
CORPORATION AND CREATING TWO ADDITIONAL CLASSES
OF COMMON STOCK
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC., a Maryland corporation
having its principal Maryland office c/o The Corporation Trust Incorporated, 32
South Street, Baltimore, Maryland 21202 (hereinafter called the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation, that:
FIRST: The Corporation is registered as an open-end company under the
Investment Company Act of 1940, as amended, with authority to issue THREE
HUNDRED MILLION (300,000,000) shares of capital stock. The Corporation has two
classes of capital stock consisting of ONE HUNDRED MILLION (100,000,000) shares
of Class D Common Stock and TWO HUNDRED MILLION (200,000,000) shares of Class B
Common Stock. All shares of all classes and series of the Corporation's
capital stock have a par value of Ten Cents ($.10) per share and an aggregate
par value of THIRTY MILLION Dollars ($30,000,000).
SECOND: The Board of Directors of the Corporation, acting in accordance
with Section 2-105(c) of the Maryland Corporations and Associations Code,
hereby increases the total number of authorized shares of Class B Common Stock
of the Corporation by THREE HUNDRED MILLION (300,000,000) shares.
THIRD: After this increase in the number of authorized shares of capital
stock of the Corporation, the Corporation will have authority to issue SIX
HUNDRED MILLION (600,000,000) shares of capital stock and the capital stock
will consist of ONE HUNDRED MILLION (100,000,000) shares of Class D Common
Stock and FIVE HUNDRED MILLION (500,000,000) shares of Class B common Stock.
FOURTH: After this increase in the number of authorized shares of capital
stock of the Corporation, all shares of all classes and series of the
Corporation's capital stock will have a par value of Ten Cents ($.10) per share
and an aggregate par value of SIXTY MILLION Dollars ($60,000,000).
FIFTH: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by its charter, the Board of Directors has reclassified ONE
HUNDRED MILLION (100,000,000) authorized and unissued shares of the Class B
Common Stock of the Corporation as Class C Common Stock of par value of Ten
Cents
<PAGE>
($.10) per share and of the aggregate par value of TEN MILLION Dollars
($10,000,000).
SIXTH; The preferences, designations, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of Class C Common Stock are as follows:
The Class C Common Stock of the Corporation shall represent the same
interest in the Corporation and have identical preferences, designations,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption as the Class B
Common Stock as of the date of these Articles Supplementary, except as
otherwise set forth in the Corporation's charter and further except that:
(i) Expenses related to the distribution of the Class C Common Stock shall
be borne solely by such class and such class shall have exclusive voting rights
with respect to matters relating to the expenses being borne solely by such
class;
(ii) Such distribution expenses borne solely by Class C Common Stock shall
be appropriately reflected (in the manner determined by the Board of Directors)
in the net asset value, dividends, distribution and liquidation rights of the
shares of such class; and
(iii) Class C Common Stock shall not be reclassified into Class D shares.
SEVENTH: Pursuant to authority expressly vested in the Board of Directors
of the Corporation by its charter, the Board of Directors has reclassified ONE
HUNDRED MILLION (100,000,000) authorized and unissued shares of the Class B
Common Stock of the Corporation as Class A Common Stock of par value of Ten
Cents ($.10) per share and of the aggregate par value of TEN MILLION Dollars
($10,000,000).
EIGHTH: The preferences, designations, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of Class A Common Stock are as follows:
The Class A Common Stock of the Corporation shall represent the same
interest in the Corporation and have identical preferences, designations,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption as the Class B
Common Stock as of the date of these Articles Supplementary,
2
<PAGE>
except as otherwise set forth in the Corporation's charter and further except
that:
(i) Expenses related to the distribution of the Class A Common Stock shall
be borne solely by such class and such class shall have exclusive voting rights
with respect to matters relating to the expenses being borne solely by such
class;
(ii) Such distribution expenses borne solely by Class A Common Stock shall
be appropriately reflected (in the manner determined by the Board of Directors)
in the net asset value, dividends, distribution and liquidation rights of the
shares of such class; and
(iii) Class A Common Stock shall not be reclassified into Class D shares.
NINTH: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by its charter, the Board of Directors has reclassified ONE
HUNDRED MILLION (100,000,000) authorized and unissued shares of the Class B
Common Stock of the Corporation as Class D Common Stock of par value of Ten
Cents ($.10) per share and of the aggregate par value of TEN MILLION Dollars
($10,000,000).
TENTH: The preferences, designations, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of Class D Common Stock are as follows:
The Class D Common Stock of the Corporation shall represent the same
interest in the Corporation and have identical preferences, designations,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption as the Class B
Common Stock as of the date of these Articles Supplementary, except as
otherwise set forth in the Corporation's charter and further except that:
(i) Expenses related to the distribution of the Class D Common Stock shall
be borne solely by such class and such class shall have exclusive voting rights
with respect to matters relating to the expenses being borne solely by such
class; and
(ii) Such distribution expenses borne solely by Class D Common Stock shall
be appropriately reflected (in the manner determined by the Board of Directors)
in the net asset value, dividends, distribution and liquidation rights of the
shares of such class.
3
<PAGE>
IN WITNESS WHEREOF, MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC. has
caused these Articles Supplementary to be signed in its name and on its behalf
by its President and attested by its Secretary on October 17th, 1994.
----
MERRILL LYNCH ADJUSTABLE RATE SECURITIES
FUND, INC.
By /s/ Arthur Zeikel
--------------------------------------
Arthur Zeikel
President
Attest:
/s/ Michael J. Hennewinkel
- ---------------------------------
Michael J. Hennewinkel, Secretary
THE UNDERSIGNED, President of MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND,
INC., who executed on behalf of said Corporation the foregoing Articles
Supplementary, of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said Corporation, the foregoing Articles Supplementary
to be the corporate act of said Corporation and further certifies that, to the
best of his knowledge, information and belief, the matters and facts set forth
therein with respect to the authorization and approval thereof are true in all
material respects, and that this statement is made under the penalties for
perjury.
/s/ Arthur Zeikel
-----------------
Arthur Zeikel
President
4
<PAGE>
EXHIBIT 99.1(d)
STATE DEPARTMENT OF ASSESSMENTS
AND TAXATION
APPROVED FOR RECORD
10-19-94 at 3:19 p.m.
-------- ---------
Effective 10-21-94
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC., a Maryland corporation
having its principal Maryland office c/o The Corporation Trust Incorporated, 32
South Street, Baltimore, Maryland 21202 (hereinafter called the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of Maryland
that:
FIRST: The charter of the corporation is hereby amended
by adding the following provision at the end of Article V:
(10) The Board of Directors may classify and reclassify any issued shares of
capital stock into one or more additional or other classes or series as may be
established from time to time by setting or changing in any one or more respects
the designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption of such shares of stock and pursuant to such classification or
reclassification to increase or decrease the number of authorized shares of any
existing class or series; provided, however, that any such classification or
reclassification shall not substantially adversely affect the rights of holders
of such issued shares. The Board's authority pursuant to this paragraph shall
include, but not be limited to, the power to vary among all the holders of a
particular class or series (a) the length of time shares must be held prior to
reclassification to shares of another class or series (the "Holding Period(s)"),
(b) the manner in which the time for such Holding Period(s) is determined and
(c) the class or series into which the particular class or series is being
reclassified; provided, however, that, subject to the first sentence of this
section, with respect to holders of the Corporation's shares issued on or after
the date of the Corporation's first effective prospectus which sets forth
Holding Period(s) (the "First Holding Period Prospectus"), the Holding
Period(s), the manner in which the time for such Holding Period(s) is determined
and the class or series into which the particular class or series is being
reclassified shall be disclosed in the Corporation's prospectus or statement of
additional information in effect at the time such shares, which are the subject
of the reclassification, were issued; and provided, further, that, subject to
the first sentence of this section, with respect to holders of the Corporation's
Class B shares issued prior to the date of the
<PAGE>
Corporation's First Holding Period Prospectus, the Holding Period shall be ten
(10) years for retirement plan (as recognized by the Internal Revenue Code of
1986, as amended from time to time) holders of issued Class B shares purchased
without a contingent deferred sales charge (a "CDSC-Waived Retirement Plan")
and shall be the Holding Period set forth in the Corporation's First Holding
Period Prospectus, for all other holders of issued Class B shares; Class B
shares held by a CDSC-Waived Retirement Plan shall be reclassified to Class D
shares in the month following the month in which the first Class B share of any
mutual fund advised by Merrill Lynch Asset Management, L.P., Fund Asset
Management, L.P., or their affiliates or successors, held by such CDSC-Waived
Retirement Plan has been held for the ten (10) year Holding Period established
by the Corporation's Board of Directors for such CDSC-Waived Retirement Plan
Class B shareholder; and the Class B shares of every shareholder other than
CDSC-Waived Retirement Plans shall be reclassified to Class D shares in the
month following the month in which such shares have been held for the Holding
Period established by the Corporation's Board of Directors for shareholders
other than CDSC-Waived Retirement Plans in the Corporation's First Holding
Period Prospectus.
SECOND: The foregoing amendment has been effected in the manner and by
the vote required by the Corporation's charter and the laws of the State of
Maryland. Pursuant to Section 2-604 of the Maryland Corporations and
Associations Code, the amendment was advised by the Board of Directors of the
Corporation and approved by the stockholders.
THIRD: The charter of the Corporation is hereby amended by substituting
the words "Class D" in each place where the words "Class A" appear.
FOURTH: The foregoing amendment has been effected in the manner and by
the vote required by the Corporation's charter and the laws of the State of
Maryland. The amendment is limited to a change expressly permitted by Section
2-605(a)(4) of the Maryland Corporations and Associations Code to be made
without action by the stockholders and was approved by a majority of the entire
Board of Directors of the Corporation. The Corporation is registered as an
open-end company under the Investment Company Act of 1940, as amended.
FIFTH: Except as amended hereby, the Corporation's charter shall remain
in full force and effect.
SIXTH: The authorized capital stock of the Corporation has not been
increased by these Articles of Amendment.
2
<PAGE>
SEVENTH: These Articles of Amendment shall be effective at the very
beginning of the day on October 21, 1994.
The President acknowledges these Articles of Amendment to be the corporate
act of the Corporation and states that to the best of his knowledge, information
and belief, the matters set forth in these Articles of Amendment with respect to
the authorization and approval of the amendment of the Corporation's charter are
true in all material respects, and that this statement is made under the
penalties for perjury.
3
<PAGE>
IN WITNESS WHEREOF, MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC. has
caused these Articles of Amendment to be signed in its name and on its behalf by
its President, a duly authorized officer of the Corporation, and attested by its
Secretary as of the 17th day October, 1994.
----
MERRILL LYNCH ADJUSTABLE RATE SECURITIES
FUND, INC,
/S/ Arthur Zeikel
----------------------
Arthur Zeikel
President
Attest:
/s/ Michael J. Hennewinkel
- --------------------------
Michael J. Hennewinkel
Secretary
4
<PAGE>
EXHIBIT 99.2
BY-LAWS
OF
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
ARTICLE I
Offices
-------
Section 1. Principal Office. The principal office of the Corporation
----------------
shall be in the City of Baltimore, State of Maryland.
Section 2. Principal-Executive Office. The principal executive office of
--------------------------
the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
Section 3. Other Offices. The Corporation may have such other offices in
-------------
such places as the Board of Directors may from time to time determine.
ARTICLE II
Meetings of Stockholders
------------------------
Section 1. Annual Meeting. The Corporation shall not be required to hold an
--------------
annual meeting of its stockholders in any year in which none of the following is
required to be acted on by the holders of the capital stock under the Investment
Company Act of 1940, as amended: (a) election of directors, (b) approval of the
Corporation's investment advisory agreement; (c) ratification of the selection
of independent public accountants; and (d) approval of the Corporation's
distribution agreement. In the
<PAGE>
event that the Corporation shall be required to hold an annual meeting of
stockholders by the Investment Company Act of 1940, as amended, such meeting
shall be held: (a) at a date and time set by the Board of Directors in
accordance with the Investment company Act of 1940, as amended, if the purpose
of the meeting is to elect directors or to approve an investment advisory
agreement or distribution agreement; and (b) on a date fixed by the board of
directors during the month of October (i) in the fiscal year immediately
following the fiscal year in which independent accountants were appointed if the
purpose of the meeting is to ratify the selection of such independent
accountants, or (ii) in any fiscal year if an annual meeting is to be held for
any reason other than as specified in the foregoing. Any stockholders' meeting
held in accordance with the preceding sentence shall for all purposes constitute
the annual meeting of stockholders for the fiscal year of the Corporation in
which the meeting is held. At any such meeting, the stockholders shall elect
directors to hold the offices of any directors who have held office for more
than one year or who have been elected by the board of directors to fill
vacancies which result from any cause.
Section 2. Special Meetings. Special meetings of the stockholders, unless
----------------
otherwise provided by law or by the Articles of Incorporation, may be called for
any purpose or purposes by a majority of the Board of Directors, the President,
or on the written request of the holders of at least 10% of the outstanding
2
<PAGE>
shares of capital stock of the Corporation entitled to vote at such meeting.
Section 3. Place of Meetings. Meetings of the stockholders shall be held
-----------------
at such place within the United States as the Board of Directors may from time
to time determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of the place, date
------------------------------------
and time of the holding of each stockholders' meeting and, if the meeting is a
special meeting, the purpose or purposes of the special meeting, shall be given
personally or by mail, not less than ten nor more than ninety days before the
date of such meeting, to each stockholder entitled to vote at such meeting and
to each other stockholder entitled to notice of the meeting. Notice by mail
shall be deemed to be duly given when deposited in the United States mail
addressed to the stockholder at his address as it appears on the records of the
Corporation, with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who shall,
either before or after the meeting, submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or the adjournment is for more than
one hundred and twenty days after the original record date, notice of such
adjourned meeting need not be given
3
<PAGE>
if the time and place to which the meeting shall be adjourned were announced at
the meeting at which the adjournment is taken.
Section 5. Quorum. At all meetings of the stockholders, the holders of a
------
majority of the shares of stock of the Corporation entitled to vote at the
meeting, present in person or by proxy, shall constitute a quorum for the
transaction of any business, except as otherwise provided by statute or by the
Articles of Incorporation. In the absence of a quorum no business may be
transacted, except that the holders of a majority of the shares of stock present
in person or by proxy and entitled to vote may adjourn the meeting from time to
time, without notice other than announcement thereat except as otherwise
required by these By-Laws, until the holders of the requisite amount of shares
of stock shall be so present. At any such adjourned meeting at which a quorum
may be present any business may be transacted which might have been transacted
at the meeting as originally called. The absence from any meeting, in person or
by proxy, of holders of the number of shares of stock of the Corporation in
excess of a majority thereof which may be required by the laws of the State of
Maryland, the Investment Company Act of 1940, as amended , or other applicable
statute, the Articles of Incorporation, or these By-Laws, for action upon any
given matter shall not prevent action at such meeting upon any other matter or
matters which may properly come before the meeting, if there shall be present
thereat, in person or by proxy, holders of the
4
<PAGE>
number of shares of stock of the Corporation required for action in respect of
such other matter or matters.
Section 6. Organization. At each meeting of the stockholders, the Chairman
------------
of the Board (if one has been designated by the Board), or in his absence or
inability to act, the President, or in the absence or inability to act of the
Chairman of the Board and the President, a Vice President, shall act as
chairman of the meeting. The Secretary, or in his absence or inability to act,
any person appointed by the chairman of the meeting, shall act as secretary of
the meeting and keep the minutes thereof.
Section 7. Order of Business. The order of business at all meetings of the
-----------------
stockholders shall be as determined by the chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute or the Articles
------
of Incorporation, each holder of record of shares of stock of the Corporation
having voting power shall be entitled at each meeting of the stockholders to
one vote for every share of such stock standing in his name on the record of
stockholders of the Corporation as of the record date determined pursuant to
Section 9 of this Article or if such record date shall not have been so fixed,
then at the later of (i) the close of business on the day on which notice of
the meeting is mailed or (ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for
5
<PAGE>
him by a proxy signed by such stockholder or his attorney-in-fact. No proxy
shall be valid after the expiration of eleven months from the date thereof,
unless otherwise provided in the proxy. Every proxy shall be revocable at the
pleasure of the stockholder executing it, except in those cases where such proxy
states that it is irrevocable and where an irrevocable proxy is permitted by
law. Except as otherwise provided by statute, the Articles of Incorporation or
these By-Laws, any corporate action to be taken by vote of the stockholders
shall be authorized by a majority of the total votes cast at a meeting of
stockholders by the holders of shares present in person or represented by proxy
and entitled to vote on such action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable, any
such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his proxy, if there be such proxy, and
shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors may set a record
---------------------
date for the purpose of determining stockholders entitled to vote at any meeting
of the stockholders. The record date, which may not be prior to the close of
business on the day the record date is fixed, shall be not more than ninety nor
less than ten days before the date of the meeting of the stockholders.
6
<PAGE>
All persons who were holders of record of shares at such time, and not others,
shall be entitled to vote at such meeting and any adjournment thereof.
Section 10. Inspectors. The Board may, in advance of any meeting of
----------
stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting may, and on the
request of any stockholder entitled to vote thereat shall, appoint inspectors.
Each inspector, before entering upon the discharge of his duties, shall take
and sign an oath to execute faithfully the duties of inspector at such meeting
with strict impartiality and according to the best of his ability. The
inspectors shall determine the number of shares outstanding and the voting
powers of each, the number of shares represented at the meeting, the existence
of a quorum, the validity and effect of proxies, and shall receive votes,
ballots or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all stockholders. On request of the chairman
of the meeting or any stockholder entitled to vote thereat, the inspectors
shall make a report in writing of any challenge, request or matter determined
by them and shall execute a certificate of any fact found by them. No director
or candidate
7
<PAGE>
for the office of director shall act as inspector of an election of directors.
Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting. Except as
------------------------------------------
otherwise provided by statute or the Articles of Incorporation, any action
required to be taken at any meeting of stockholders, or any action which may be
taken at any meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if the following are filed with the
records of stockholders meetings: (i) a unanimous written consent which sets
forth the action and is signed by each stockholder entitled to vote on the
matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote thereat.
ARTICLE III
Board of Directors
------------------
Section 1. General Powers. Except as otherwise provided in the Articles of
--------------
Incorporation, the business and affairs of the Corporation shall be managed
under the direction of the Board of Directors. All powers of the Corporation
may be exercised by or under authority of the Board of Directors except as
conferred on or reserved to the stockholders by law or by the Articles of
Incorporation or these By-Laws.
Section 2. Number of Directors. The number of directors shall be fixed from
-------------------
time to time by resolution of the Board of
8
<PAGE>
Directors adopted by a majority of the Directors then in office; provided,
however, that the number of directors shall in no event be less than three nor
more than fifteen except that the Corporation may have two directors if there is
no stock outstanding, or so long as there are less than three stockholders. Any
vacancy created by an increase in Directors may be filled in accordance with
Section 6 of this Article III. No reduction in the number of directors shall
have the effect of removing any director from office prior to the expiration of
his term unless such director is specifically removed pursuant to Section 5 of
this Article III at the time of such decrease. Directors need not be
stockholders.
Section 3. Election and Term of Directors. Directors shall be elected
------------------------------
annually, by written ballot at a meeting of stockholders held for that purpose;
provided, however, that if no meeting of the stockholders of the Corporation is
required to be held in a particular year pursuant to Section 1 of Article II of
these By-Laws, directors shall be elected at the next meeting held. The term of
office of each director shall be from the time of his election and qualification
until the election of directors next succeeding his election and until his
successor shall have been elected and shall have qualified, or until his death,
or until he shall have resigned, or have been removed as hereinafter provided in
these By-Laws, or as otherwise provided by statute or the Articles of
Incorporation.
9
<PAGE>
Section 4. Resignation. A director of the Corporation may resign at any
-----------
time by giving written notice of his resignation to the Board or the Chairman of
the Board or the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Section 5. Removal of Directors. Any director of the Corporation may be
--------------------
removed by the stockholders by a vote of a majority of the votes entitled to be
cast for the election of directors.
Section 6. Vacancies. Any vacancies in the Board, whether arising from
---------
death, resignation, removal, an increase in the number of directors or any other
cause, shall be filled by a vote of the majority of the Board of Directors then
in office even though such majority is less than a quorum, provided that no
vacancies shall be filled by action of the remaining directors, if after the
filling of said vacancy or vacancies, less than two-thirds of the directors then
holding office shall have been elected by the stockholders of the Corporation.
In the event that at any time there is a vacancy in any office of a director
which vacancy may not be filled by the remaining directors, a special meeting of
the stockholders shall be held as promptly as possible and in any event within
sixty days, for the purpose of
10
<PAGE>
filling said vacancy or vacancies. Any directors elected or appointed to fill a
vacancy shall hold office only until the next meeting of stockholders of the
Corporation and until a successor shall have been chosen and qualifies or until
his earlier resignation or removal.
Section 7. Place of Meetings. Meetings of the Board may be held at such
-----------------
place as the Board may from time to time determine or as shall be specified in
the notice of such meeting.
Section 8. Regular Meeting. Regular meetings of the Board may be held
---------------
without notice at such time and place as may be determined by the Board of
Directors.
Section 9. Special Meetings. Special meetings of the Board may be called by
----------------
two or more directors of the Corporation or by the Chairman of the Board or the
President.
Section 10. Telephone Meetings. Members of the Board of Directors or of
------------------
any committee thereof may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Subject to the provisions of
the Investment Company Act of 1940, as amended, participation in a meeting by
these means constitutes presence in person at the meeting.
Section 11. Notice of Special Meetings. Notice of each special meeting of
--------------------------
the Board shall be given by the Secretary as hereinafter provided, in which
notice shall be stated the time
11
<PAGE>
and place of the meeting. Notice of each such meeting shall be delivered to
each director, either personally or by telephone or any standard form of
telecommunication, at least twenty-four hours before the time at which such
meeting is to be held, or by first-class mail, postage prepaid, addressed to him
at his residence or usual place of business, at least three days before the day
on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any special meeting
----------------------------
need not be given to any director who shall, either before or after the meeting,
sign a written waiver of notice which is filed with the records of the meeting
or who shall attend such meeting. Except as otherwise specifically required by
these By-Laws, a notice or waiver or notice of any meeting need not state the
purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two, of the
-----------------
members of the entire Board shall be present in person at any meeting of the
Board in order to constitute a quorum for the transaction of business at such
meeting, and except as otherwise expressly required by statute, the Articles of
Incorporation, these By-Laws, the Investment Company Act of 1940, as amended, or
other applicable statute, the act of a majority of the directors present at any
meeting at which a quorum is present shall be the act of the Board. In the
absence of a quorum at any meeting of the Board, a majority of the directors
present thereat may adjourn such meeting to another
12
<PAGE>
time and place until a quorum shall be present thereat. Notice of the time and
place of any such adjourned meeting shall be given to the directors who were
not present at the time of the adjournment and, unless such time and place were
announced at the meeting at which the adjournment was taken, to the other
directors. At any adjourned meeting at which a quorum is present, any business
may be transacted which might have been transacted at the meeting as originally
called.
Section 14. Organization. The Board may, by resolution adopted by a
------------
majority of the entire Board, designate a Chairman of the Board, who shall
preside at each meeting of the Board. In the absence or inability of the
Chairman of the Board to preside at a meeting, the President or, in his absence
of inability to act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside thereat. The
Secretary (or, in his absence or inability to act, any person appointed by the
Chairman) shall act as secretary of the meeting and keep the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a Meeting. Subject to
-------------------------------------------------
the provisions of the Investment Company Act of 1940, as amended, any action
required or permitted to be taken at any meeting of the Board of Directors or
of any committee thereof may be taken without a meeting if all members of the
Board or committee, as the case may be, consent thereto in
13
<PAGE>
writing, and the writings or writing are filed with the minutes of the
proceedings of the Board or committee.
Section 16. Compensation. Directors may receive compensation for services
------------
to the Corporation in their capacities as directors or otherwise in such manner
and in such amounts as may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of the Board of
-------------------
Directors to direct that the purchase, sale, retention and disposal of portfolio
securities and the other investment practices of the Corporation are at all
times consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
Prospectus of the Corporation included in the Registration Statement of the
Corporation, as recited in the current Prospectus and Statement of Additional
Information of the corporation, as filed from time to time with the Securities
and Exchange Commission and as required by the Investment Company Act of 1940,
as amended. The Board however, may delegate the duty of management of the
assets and the administration of its day to day operations to an individual or
corporate management company and/or investment adviser pursuant to a written
contract or contracts which have obtained the requisite approvals, including the
requisite approvals of renewals thereof, of the Board of Directors and/or the
stockholders of the Corporation in accor-
14
<PAGE>
dance with the provisions of the Investment Company Act of 1940, as amended.
ARTICLE IV
Committees
----------
Section 1. Executive Committee. The Board may, by resolution adopted by a
--------- ---------
majority of the entire board, designate an Executive Committee consisting of two
or more of the directors of the corporation, which committee shall have and may
exercise all the powers and authority of the Board with respect to all matters
other than:
(a) the submission to stockholders of any action requiring authorization of
stockholders pursuant to statute or the Articles of Incorporation;
(b) the filling of vacancies on the Board of Directors;
(c) the fixing of compensation of the directors for serving
on the Board or on any committee of the Board, including the Executive
Committee;
(d) the approval or termination of any contract with an investment adviser
or principal underwriter, as such terms are defined in the Investment Company
Act of 1940, as amended, or the taking of any other action required to be taken
by the Board of Directors by the Investment Company Act of 1940, as amended;
(e) the amendment or repeal of these By-Laws or the adoption of new By-
Laws;
15
<PAGE>
(f) the amendment or repeal of any resolution of the Board which by its
terms may be amended or repealed only by the Board;
(g) the declaration of dividends and the issuance of capital stock of the
Corporation; and
(h) the approval of any merger or share exchange which does not require
stockholder approval.
The Executive Committee shall keep written minutes of its proceedings and
shall report such minutes to the Board. All such proceedings shall be subject
to revision or alteration by the Board; provided, however, that third parties
shall not be prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of Directors may from
-----------------------------
time to time, by resolution adopted by a majority of the whole Board, designate
one or more other committees of the Board, each such committee to consist of two
or more directors and to have such powers and duties as the Board of Directors
may, by resolution, prescribe.
Section 3. General. One-third, but not less than two, of the members of any
-------
committee shall be present in person at any meeting of such committee in order
to constitute a quorum for the transaction of business at such meeting, and the
act of a majority present shall be the act of such committee. The Board may
designate a chairman of any committee and such chairman or any two members of
any committee may fix the time and place of its meetings unless the Board shall
otherwise provide. In the
16
<PAGE>
absence or disqualification of any member of any committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. The Board shall have the power at any time to change the
membership of any committee, to fill all vacancies, to designate alternate
members to replace any absent or disqualified member, or to dissolve any such
committee. Nothing herein shall be deemed to prevent the Board from appointing
one or more committees consisting in whole or in part of persons who are not
directors of the Corporation; provided, however, that no such committee shall
have or may exercise any authority or power of the Board in the management of
the business or affairs of the Corporation.
ARTICLE V
Officers, Agents and Employees
------------------------------
Section 1. Number of Qualifications. The officers of the Corporation shall
------------------------
be a President, a Secretary and a Treasurer, each of whom shall be elected by
the Board of Directors. The Board of Directors may elect or appoint one or more
Vice Presidents and may also appoint such other officers, agents and employees
as it may deem necessary or proper. Any two or more offices may be held by the
same person, except the offices of
17
<PAGE>
President and Vice President, but no officer shall execute, acknowledge or
verify any instrument in more than one capacity. Such officers shall be elected
by the Board of Directors each year at a meeting of the Board of Directors, each
to hold office for the ensuing year and until his successor shall have been duly
elected and shall have qualified, or until his death, or until he shall have
resigned, or have been removed, as hereinafter provided in these By-Laws. The
Board may from time to time elect, or delegate to the President the power to
appoint, such officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries) and such
agents, as may be necessary or desirable for the business of the Corporation.
Such officers and agents shall have such duties and shall hold their offices for
such terms as may be prescribed by the Board or by the appointing authority.
Section 2. Resignations. Any officer of the Corporation may resign at any
------------
time by giving written notice of resignation to the Board, the Chairman of the
Board, President or the Secretary. Any such resignation shall take effect at
the time specified therein or, if the time when it shall become effective shall
not be specified therein, immediately upon its receipt; and, unless otherwise
specified therein, the acceptance of such resignation shall be necessary to make
it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent or
-------------------------------------
employee of the Corporation may be removed by
18
<PAGE>
the Board of Directors with or without cause at any time, and the Board may
delegate such power of removal as to agents and employees not elected or
appointed by the Board of Directors. Such removal shall be without prejudice to
such person's contract rights, if any, but the appointment of any person as an
officer, agent or employee of the Corporation shall not of itself create
contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising from death,
---------
resignation, removal or any other cause, may be filled for the unexpired portion
of the term of the office which shall be vacant, in the manner prescribed in
these By-Laws for the regular election or appointment to such office.
Section 5. Compensation. The compensation of the officers of the
------------
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer in respect of other officers under his control.
Section 6. Bonds or Other Security. If required by the Board, any officer,
-----------------------
agent or employee of the Corporation shall give a bond or other security for the
faithful performance of his duties, in such amount and with such surety or
sureties as the Board may require.
Section 7. President. The President shall be the chief executive officer of
---------
the Corporation. In the absence of the Chairman of the Board (or if there be
none), he shall preside at all meetings of the stockholders and of the Board
Directors. He
19
<PAGE>
shall have, subject to the control of the Board of Directors, general charge of
the business and affairs of the Corporation. He may employ and discharge
employees and agents of the Corporation, except such as shall be appointed by
the Board, and he may delegate these powers.
Section 8. Vice President. Each Vice President shall have such powers and
--------------
perform such duties as the Board of Directors or the President may from time to
time prescribe.
Section 9. Treasurer. The Treasurer shall
---------
(a) have charge and custody of, and be responsible for, all the funds and
securities of the Corporation, except those which the Corporation has placed in
the custody of a bank or trust company or member of a national securities
exchange (as that term is defined in the Securities Exchange Act of 1934, as
amended) pursuant to a written agreement designating such bank or trust company
or member of a national securities exchange as custodian of the property of the
Corporation;
(b) keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation;
(c) cause all moneys and other valuable to be deposited to the credit of
the Corporation;
(d) receive, and give receipts for, moneys due and payable, to the
Corporation from any source whatsoever;
20
<PAGE>
(e) disburse the funds of the Corporation and supervise the investment of
its funds as ordered or authorized by the Board, taking proper vouchers
therefor; and
(f) in general, perform all the duties incident to the office of Treasurer
and such other duties as from time to time may be assigned to him by the Board
or the President.
Section 10. Secretary. The Secretary shall
---------
(a) keep or cause to be kept in one or more books provided for the purpose,
the minutes of all meetings of the Board, the committees of the Board and the
stockholders;
(b) see that all notices are duly given in accordance with the provisions
of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and affix
and attest the seal to all stock certificates of the Corporation (unless the
seal of the Corporation on such certificates shall be a facsimile, as
hereinafter provided) and affix and attest the seal to all other documents to be
executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept and
filed; and
(e) in general, perform all the duties incident to the office of Secretary
and such other duties as from time to time may be assigned to him by the Board
or the President.
21
<PAGE>
Section 11. Delegation of Duties. In case of the absence of any officer
--------------------
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.
ARTICLE VI
Indemnification
---------------
Each officer and director of the Corporation shall be indemnified by the
Corporation to the full extent permitted under the General Laws of the State of
Maryland, except that such indemnity shall not protect any such person against
any liability to the Corporation or any stockholder thereof to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. Absent a court determination that an officer or director seeking
indemnification was not liable on the merits or guilty of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office, the decision by the Corporation to indemnify such person
must be based upon the reasonable determination of independent legal counsel or
the vote of a majority of a quorum of the directors who are neither "interested
persons," as defined in Section 2(a)(19) of the Investment Company Act of 1940,
as amended, nor parties to the
22
<PAGE>
proceeding ("non-party independent directors"), after review of the facts, that
such officer or director is not guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Each officer and director of the Corporation claiming indemnification within
the scope of this Article VI shall be entitled to advances from the Corporation
for payment of the reasonable expenses incurred by him in connection with
proceedings to which he is a party in the manner and to the full extent
permitted under the General Laws of the State of Maryland; provided, however,
that the person seeking indemnification shall provide to the Corporation a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Corporation has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Corporation for his undertaking; (b) the Corporation is insured against losses
arising by reason of the advance; (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Corporation at
the time the advance is proposed to be made, that there is reason to
23
<PAGE>
believe that the person seeking indemnification will ultimately be found to be
entitled to indemnification.
The Corporation may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland, from liability arising from his activities as officer or
director of the Corporation. The Corporation, however, may not purchase
insurance on behalf of any officer or director of the Corporation that protects
or purports to protect such person from liability to the Corporation or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
The Corporation may indemnify, make advances or purchase insurance to the
extent provided in this Article VI on behalf of an employee or agent who is not
an officer or director of the Corporation.
ARTICLE VII
Capital Stock
-------------
Section 1. Stock Certificates. Each holder of stock of the Corporation
------------------
shall be entitled upon request to have a certificate or certificates, in such
form as shall be approved by the Board, representing the number of shares of
stock of the Corporation owned by him, provided, however, that certificates for
fractional
24
<PAGE>
shares will not be delivered in any case. The certificates representing shares
of stock shall be signed by or in the name of the Corporation by the President
or a Vice President and by the Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer and sealed with the seal of the
Corporation. Any or all of the signatures or the seal on the certificate may
be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate shall be issued, it may be issued by the Corporation with the same
effect as if such officer, transfer agent or registrar were still in office at
the date of issue.
Section 2. Books of Account and Record of Stockholders. There shall be
-------------------------------------------
kept at the principal executive office of the Corporation correct and complete
books and records of account of all the business and transactions of the
Corporation. There shall be made available upon request of any stockholder, in
accordance with Maryland law, a record containing the number of shares of stock
issued during a specified period not to exceed twelve months and the
consideration received by the Corporation for each such share.
Section 3. Transfers of Shares. Transfers of shares of stock of the
-------------------
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his
25
<PAGE>
attorney thereunto authorized by power of attorney duly executed and filed with
the Secretary or with a transfer agent or transfer clerk, and on surrender of
the certificate or certificates, if issued, for such shares properly endorsed or
accompanied by a duly executed stock transfer power and the payment of all taxes
thereon. Except as otherwise provided by law, the Corporation shall be entitled
to recognize the exclusive right of a person in whose name any share or shares
stand on the record of stockholders as the owner of such share or shares for all
purposes, including, without limitation, the rights to receive dividends or
other distributions, and to vote as such owner, and the Corporation shall not be
bound to recognize any equitable or legal claim to or interest in any such share
or shares on the part of any other person.
Section 4. Regulations. The Board may make such additional rules and
-----------
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any
-----------------------------------------
certificates representing shares of stock of the
26
<PAGE>
Corporation shall immediately notify the Corporation of any loss, destruction or
mutilation of such certificate, and the Corporation may issue a new certificate
of stock in the place of any certificate theretofore issued by it which the
owner thereof shall allege to have been lost or destroyed or which shall have
been mutilated, and the Board may, in its discretion, require such owner or his
legal representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the Board in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under the laws of the State of Maryland.
Section 6. Fixing of a Record Date for Dividends and Distributions. The
-------------------------------------------------------
Board may fix, in advance, a date not more than ninety days preceding the date
fixed for the payment of any dividend or the making of any distribution or the
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution,
27
<PAGE>
allotment, rights or interests, and in such case only the stockholders of record
at the time so fixed shall be entitled to receive such dividend, distribution,
allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder of the
--------------------------------------
Corporation or his agent may inspect and copy during usual business hours the
Corporation's By-Laws, minutes of the proceedings of its stockholders, annual
statements of its affairs, and voting trust agreements on file at its principal
office.
ARTICLE VIII
Seal
----
The seal of the Corporation shall be circular in form and shall bear, in
addition to any other emblem or device approved by the Board of Directors, the
name of the Corporation, the year of its incorporation and the words "Corporate
Seal" and "Maryland." Said seal may be used by causing it or a facsimile thereof
to be impressed or affixed or in any other manner reproduced.
ARTICLE IX
Fiscal Year
-----------
Unless otherwise determined by the Board, the fiscal year of the Corporation
shall end on the 31st day of May.
28
<PAGE>
ARTICLE X
Depositories and Custodians
---------------------------
Section 1. Depositories. The funds of the Corporation shall be deposited
------------
with such banks or other depositories as the Board of Directors of the
Corporation may from time to time determine.
Section 2. Custodians. All securities and other investments shall be
----------
deposited in the safe keeping of such banks or other companies as the Board of
Directors of the Corporation may from time to time determine. Every arrangement
entered into with any bank or other company for the safe keeping of the
securities and investments of the Corporation shall contain provisions complying
with the Investment Company Act of 1940, as amended, and the general rules and
regulations thereunder.
ARTICLE XI
Execution of Instruments
------------------------
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts, acceptances,
--------------------------
bills of exchange and other orders or obligations for the payment of money shall
be signed by such officer or officers or person or persons as the Board of
Directors by resolution shall from time to time designate.
Section 2. Sale or Transfer of Securities. Stock certificates, bonds or
------------------------------
other securities at any time owned by the Corporation may be held on behalf of
the Corporation or sold,
29
<PAGE>
transferred or otherwise disposed of subject to any limits imposed by these By-
Laws and pursuant to authorization by the Board and, when so authorized to be
held on behalf of the Corporation or sold, transferred or otherwise disposed of,
may be transferred from the name of the Corporation by the signature of the
President or a Vice President or the Treasurer or pursuant to any procedure
approved by the Board of Directors, subject to applicable law.
ARTICLE XII
Independent Public Accountants
------------------------------
The firm of independent public accountants which shall sign or certify the
financial statements of the Corporation which are filed with the Securities and
Exchange Commission shall be selected annually by the Board of Directors and, if
required by the provisions of the Investment Company Act of 1940, as amended,
ratified by the stockholders.
ARTICLE XIII
Annual Statement
----------------
The books of account of the Corporation shall be examined by an independent
firm of public accountants at the close of each annual period of the Corporation
and at such other times as may be directed by the Board. A report to the
stockholders based upon each such examination shall be mailed to each
stockholder of
30
<PAGE>
the Corporation of record on such date with respect to each report as may be
determined by the Board, at his address as the same appears on the books of the
Corporation. Such annual statement shall also be available at the annual
meeting of stockholders, if any, and, within 20 days after the meeting (or, in
the absence of an annual meeting, within 20 days after the end of the month of
July following the end of the fiscal year), be placed on file at the
Corporation's principal office. Each such report shall show the assets and
liabilities of the Corporation as of the close of the annual or quarterly period
covered by the report and the securities in which the funds of the Corporation
were then invested. Such report shall also show the Corporation's income and
expenses for the period from the end of the Corporation's preceding fiscal year
to the close of the annual or quarterly period covered by the report and any
other information required by the Investment Company Act of 1940, as amended,
and shall set forth such other matters as the Board or such firm of independent
public accountants shall determine.
ARTICLE XIV
Amendments
----------
These By-Laws or any of them may be amended, altered or repealed at any
regular meeting of the stockholders or at any special meeting of the
stockholders at which a quorum is present or represented, provided that notice
of the proposed amendment,
31
<PAGE>
alteration or repeal be contained in the notice of such special meeting. These
By-Laws may also be amended, altered or repealed by the affirmative vote of a
majority of the Board of Directors at any regular or special meeting of the
Board of Directors, except any particular By-Law which is specified as not
subject to alteration or repeal by the Board of Directors, subject to the
requirements of the Investment Company Act of 1940, as amended.
32
<PAGE>
EXHIBIT 99.5(a)
MANAGEMENT AGREEMENT
AGREEMENT made this l1th day of June, 1991, by and between MERRILL LYNCH
ADJUSTABLE RATE SECURITIES FUND, INC., a Maryland corporation (hereinafter
referred to as the "Fund"), and MERRILL LYNCH ASSET MANAGEMENT, INC., a Delaware
corporation (hereinafter referred to as the "Manager").
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 (hereinafter
referred to as the "Investment Company Act"); and
WHEREAS, the Manager is engaged principally in rendering management and
investment advisory-services and is registered as an investment adviser under
the Investment Advisers Act of 1940; and
WHEREAS, the Fund desires to retain the Manager to render management and
investment advisory services to the Fund in the manner and on the terms
hereinafter set forth; and
WHEREAS, the Manager is willing to provide management and investment
advisory services to the Fund on the terms and conditions hereinafter set forth;
<PAGE>
NOW, THEREFORE, in consideration of the promises and the covenants
hereinafter contained, the Fund and the Manager hereby agree as follows:
ARTICLE I
---------
Duties of the Manager
---------------------
The Fund hereby employs the Manager to act as an investment manager and
investment adviser of the Fund and to furnish or arrange for affiliates to
furnish, the management and investment advisory services described below,
subject to policies of, review by and overall control of the Board of Directors
of the Fund (the "Directors"), for the period and on the terms and conditions
set forth in this Agreement. The Manager hereby accepts such employment and
agrees during such period, at its own expense, to render, or arrange for the
rendering of, such services and to assume the obligations herein set forth for
the compensation provided for herein. The Manager and its affiliates shall for
all purposes herein be deemed to be an independent contractor and shall, unless
otherwise expressly provided or authorized, have no authority to act for or
represent the Fund in any way or otherwise be deemed an agent of the Fund.
(a) Management Services. The Manager shall perform (or arrange for the
-------------------
performance by affiliates of) the management and administrative services
necessary for the operation of the Fund including administering shareholder
accounts and handling shareholder relations. The Manager shall provide the
Fund with
2
<PAGE>
office space, equipment and facilities and such other services as the
Manager, subject to review by the Directors, shall from time to time determine
to be necessary or useful to perform its obligations under this Agreement. The
Manager shall also, on behalf of the Fund, conduct relations with custodians,
depositories, transfer agents, dividend disbursing agents, other shareholder
service agents, accountants, attorneys, underwriters, brokers and dealers,
corporate fiduciaries, insurers, banks and such other persons in any such other
capacity deemed to be necessary or desirable. The Manager shall generally
monitor the Fund's compliance with investment policies and restrictions as set
forth in the currently effective prospectus and statement of additional
information relating to the shares of the Fund under the Securities Act of
1933, as amended (the "Prospectus" and "Statement of Additional Information",
respectively). The Manager shall make reports to the Directors of its
performance of obligations hereunder and furnish advice and recommendations
with respect to such other aspects of the business and affairs of the Fund as
it shall determine to be desirable.
(b) Investment Advisory Services. The Manager shall provide (or arrange
----------------------------
for affiliates to provide) the Fund with such investment research, advice and
supervision as the latter may from time to time consider necessary for the
proper supervision of the assets of the Fund, shall furnish continuously an
investment program for the Fund and shall determine from time to
3
<PAGE>
time which securities shall be purchased, sold or exchanged and what portion
of the assets of the Fund shall be held in the various securities in which the
Fund invests, options, futures, options on futures or cash, subject always to
the restrictions set forth in the Articles of Incorporation and By-Laws of the
Fund, as amended from time to time, the provisions of the Investment Company
Act and the statements relating to the Fund's investment objectives, investment
policies and investment restrictions as the same are set forth in the
Prospectus and Statement of Additional Information. The Manager shall also
make decisions for the Fund as to the manner in which voting rights, rights to
consent to corporate action and any other rights pertaining to the Fund's
portfolio securities shall be exercised. Should the Directors at any time,
however, make any definite determination as to investment policy and notify the
Manager thereof in writing, the Manager shall be bound by such determination
for the period, if any, specified in such notice or until similarly notified
that such determination has been revoked. The Manager shall take, on behalf of
the Fund, all actions which it deems necessary to implement the investment
policies determined as provided above, and in particular to place all orders
for the purchase or sale of portfolio securities for the Fund's account with
brokers or dealers selected by it, and to that end, the Manager is authorized
as the agent of the Fund to give instructions to the Custodian of the Fund as
to deliveries
4
<PAGE>
of securities and payments of cash for the account of the Fund. In
connection with the selection of such brokers or dealers and the placing of
such orders with respect to assets of the Fund, the Manager is directed at all
times to seek to obtain execution and price within the policy guidelines
determined by the Directors as set forth in the Prospectus and Statement of
Additional Information. Subject to this requirement and the provisions of the
Investment Company Act, the Securities Exchange Act of 1934, as amended, and
other applicable provisions of law, the Manager may select brokers or dealers
with which it or the Fund is affiliated.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
(a) The Manager. The Manager assumes and shall pay for maintaining the
-----------
staff and personnel necessary to perform its obligations under this Agreement,
and shall at its own expense, provide the office space, equipment and
facilities which it is obligated to provide under Article I hereof, and shall
pay all compensation of officers of the Fund and all Directors who are
affiliated persons of the Manager.
(b) The Fund. The Fund assumes and shall pay or cause to be paid all other
--------
expenses of the Fund (except for the expenses paid by the Distributor),
including, without limitation: redemption expenses, expenses of portfolio
transactions, expenses of registering shares under federal and state securities
laws,
5
<PAGE>
pricing costs (including the daily calculation of net asset value), expenses
of printing shareholder reports, stock certificates, prospectuses and
statements of additional information, Securities and Exchange Commission fees,
interest, taxes, custodian and transfer agency fees, fees and actual
out-of-pocket expenses of Directors who are not affiliated persons of the
Manager, fees for legal and auditing services, litigation expenses, costs of
printing proxies and other expenses related to shareholder meetings, and other
expenses properly payable by the Fund. It is also understood that the Fund
will reimburse the Manager for its costs in providing accounting services to
the Fund. The Distributor will pay certain of the expenses of the Fund incurred
in connection with the continuous offering of Fund shares.
ARTICLE III
-----------
Compensation of the Manager
---------------------------
(a) Investment Management Fee. For the services rendered, the facilities
-------------------------
furnished and expenses assumed by the Manager, the Fund shall pay to the Manager
at the end of each calendar month a fee based upon the average daily value of
the net assets of the Fund, as determined and computed in accordance with the
description of the determination of net asset value contained in the Prospectus
and Statement of Additional Information, at the annual rate of 0.50 of 1.0%
(0.50%) of the average daily net assets of the Fund, commencing on the day
following effectiveness hereof.
6
<PAGE>
If this Agreement becomes effective subsequent to the first day of a month
or shall terminate before the last day of a month, compensation for that part
of the month this Agreement is in effect shall be prorated in a manner
consistent with the calculation of the fee as set forth above. Subject to the
provisions of subsection (b) hereof, payment of the Manager's compensation for
the preceding month shall be made as promptly as possible after completion of
the computations contemplated by subsection (b) hereof. During any period when
the determination of net asset value is suspended by the Directors, the net
asset value of a share as of the last business day prior to such suspension
shall for this purpose be deemed to be the net asset value at the close of each
succeeding business day until it is again determined.
(b) Expense Limitations. In the event the operating expenses of the Fund,
-------------------
including amounts payable to the Manager pursuant to subsection (a) hereof, for
any fiscal year ending on a date on which this Agreement is in effect exceed the
expense limitations applicable to the Fund imposed by applicable state
securities laws or regulations thereunder, as such limitations may be raised or
lowered from time to time, the Manager shall reduce its management fee by the
extent of such excess and, if required pursuant to any such laws or regulations,
will reimburse the Fund in the amount of such excess; provided, however, to the
extent permitted by law, there shall be excluded from such expenses the amount
of any interest, taxes, brokerage
7
<PAGE>
commissions, distribution fees and extraordinary expenses (including but not
limited to legal claims and liabilities and litigation costs and any
indemnification related thereto) paid or payable by the Fund. Whenever the
expenses of the Fund exceed a pro rata portion of the applicable annual expense
limitations, the estimated amount of reimbursement under such limitations shall
be applicable as an offset against the monthly payment of the management fee
due to the Manager. Should two or more such expense limitations be applicable
as at the end of the last business day of the month, that expense limitation
which results in the largest reduction in the Manager's fee shall be applicable.
ARTICLE IV
----------
Limitation of Liability of the Manager
--------------------------------------
The Manager shall not be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in the
management of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties hereunder. As used in this Article IV, the term
"Manager" shall include any affiliates of the Manager performing services for
the Fund contemplated hereby and directors, officers and employees of the
Manager and such affiliates.
8
<PAGE>
ARTICLE V
---------
Activities of the Manager
-------------------------
The services of the Manager to the Fund are not to be deemed to be
exclusive, and the Manager and any person controlled by or under common control
with the Manager (for purposes of Article V referred to as "affiliates") is
free to render services to others. It is understood that Directors, officers,
employees and shareholders of the Fund are or may become interested in the
Manager and its affiliates, as directors, officers, employees and shareholders
or otherwise and that directors, officers, employees and shareholders of the
Manager and its affiliates are or may become similarly interested in the Fund,
and that the Manager and directors, officers, employees, partners and
shareholders of its affiliates may become interested in the Fund as shareholder
or otherwise.
ARTICLE VI
----------
Duration and Termination of this Contract
-----------------------------------------
This Agreement shall become effective as of the date of the commencement of
operations of the Fund and shall remain in force until May 31, 1993 and
thereafter, but only 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) a majority of those
Directors who are not parties to this Agreement or interested persons of
9
<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 Manager, on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment.
ARTICLE VII
-----------
Amendments of this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the vote of a majority of outstanding voting
securities of the Fund, and (ii) 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.
ARTICLE VIII
------------
Definitions of Certain Terms
----------------------------
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 and the Rules and Regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
the Investment Company Act.
10
<PAGE>
ARTICLE IX
----------
Governing Law
-------------
This Agreement shall be construed in accordance with laws of the State of
New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws 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.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND,
INC.
By /s/ Arthur Zeikel
--------------------------------
MERRILL LYNCH ASSET MANAGEMENT,INC.
By /s/ Terry K. Glenn
---------------------------------
11
<PAGE>
EXHIBIT 99.6(b)
CLASS B SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the l1th day of June, 1991, 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 Fund's Class B shares
in order to promote the growth of the Fund and facilitate the distribution of
its Class B 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 B shares of common stock of the Fund (sometimes herein referred to as
"Class B shares") to
<PAGE>
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 principal underwriter and
distributor of the Class B 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 B 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 B 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 rights granted to the Distributor to purchase Class B
shares from the Fund shall not apply to Class B shares of the Fund 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 B
shares of any such company by the Fund.
2
<PAGE>
(c) Such exclusive rights also shall not apply to Class B shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
(d) Such exclusive rights also shall not apply to Class B shares issued by
the Fund pursuant to any reinstatement privilege afforded redeeming
shareholders.
Section 3. Purchase of Class B Shares from the Fund.
----------------------------------------
(a) Prior to the continuous offering of the Class B shares, commencing on a
date agreed upon by the Fund and the Distributor, it is contemplated that the
Distributor will solicit subscriptions for Class B shares during a subscription
period which shall last for such period as may be agreed upon by the parties
hereto. The subscriptions will be payable within five business days after the
termination of the subscription period, at which time the Fund will commence
operations.
(b) After the Fund commences operations, the Fund will commence an offering
of its Class B shares and thereafter the Distributor shall have the right to buy
from the Fund the Class B shares needed, but not more than the Class B shares
needed (except for clerical errors in transmission) to fill unconditional orders
for Class B shares of the Fund placed with the Distributor by investors or
securities dealers. The price which the Distributor shall pay for the Class B
shares so purchased from the Fund shall be the net asset value, determined as
set forth in Section 3(d) hereof.
3
<PAGE>
(c) The Class B shares are to be resold by the Distributor to investors at
net asset value, as set forth in Section 3(d) hereof, or to securities dealers
having agreements with the Distributor upon the terms and conditions set forth
in Section 7 hereof.
(d) The net asset value of Class B 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 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"), and guidelines established by the Board of Directors.
(e) The Fund shall have the right to suspend the sale of its Class B 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 B 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 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 B shares received by
the Distributor. Any order
4
<PAGE>
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 B 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 B 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 B Shares by the Fund.
------------------------------------------------------
(a) Any of the outstanding Class B shares may be tendered for redemption at
any time, and the Fund agrees to repurchase or redeem the Class B 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 of the Fund. The price to be paid to redeem or
repurchase the Class B shares shall be equal to the net asset value calculated
in accordance with the provisions of Section 3(d) hereof, less the redemption
fee or other charge, if any, set forth in the prospectus and statement of
additional
5
<PAGE>
information of the Fund. All payments by the Fund hereunder shall be made in
the manner set forth below.
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 contingent deferred sales
charge 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 B shares or payment may be suspended at times when
the New York Stock Exchange is closed, when trading on said Exchange is closed,
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
6
<PAGE>
distribution of Class B 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 such number of copies of its prospectus and statement of
additional information as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to the 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 B 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 B 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 B(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 B 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 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 B 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
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 B shares; provided, that the Fund shall approve the forms of
agreements with dealers. Class B shares sold to selected dealers shall be for
resale by such dealers only at net asset value determined as set forth in
Section 3(d) hereof. The form of agreement with selected dealers to be used
during the subscription period described in Section 3(a) is attached hereto as
Exhibit A and the initial form of agreement with selected dealers to be used in
the continuous offering of the shares is attached hereto as Exhibit B.
(b) Within the United States, the Distributor shall offer and sell Class B
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
9
<PAGE>
materials to Class B 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 B 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 B 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 B Shares Distribution Plan pursuant
to Rule 12b-1 under the Investment Company Act remains in effect, any expenses
incurred by the Distributor hereunder may be paid from amounts recovered by it
from the Fund under such Plan.
10
<PAGE>
(c) The Fund shall bear the cost and expenses of qualification of the
Class B 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 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 B 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 B
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
11
<PAGE>
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 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
12
<PAGE>
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, 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 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 B 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 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
13
<PAGE>
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 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.
Section 10. Duration and Termination of this Agreement.
-------------------------------------------
This Agreement shall become effective as of the date first above written and
shall remain in force until May 31, 1993 and thereafter, but only 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.
14
<PAGE>
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 11. 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 12. 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.
15
<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: /s/ Arthur Zeikel
---------------------------------
MERRILL LYNCH FUND DISTRIBUTOR, INC.
By: /s/ Gerald M. Richard
---------------------------------
16
<PAGE>
EXHIBIT A
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
CLASS B SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
FOR SUBSCRIPTION PERIOD
-----------------------
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
B shares of common stock, par value $0.10 per share (herein referred to as
"Class B shares"), of the Fund, and as such has the right to distribute Class B
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 B
shares being offered to the public are registered under the Securities Act of
1933, as amended. Such Class B shares and certain of the terms on which they
are being offered are more fully described in the enclosed Prospectus and
Statement of Additional Information. You have received a copy of the Class B
shares Distribution Agreement (the "Distribution Agreement") between ourself and
the Fund and reference is made herein to certain provisions of such Distribution
Agreement. This Agreement relates solely to the subscription period described
in Section 3(a) of such Distribution Agreement. Subject to the foregoing, as
principal, we offer to sell to you, as a member of the Selected Dealers Group,
Class B shares of the Fund upon the following terms and conditions:
1. The subscription period referred to in Section 3(a) of the Distribution
Agreement will continue through July 26, 1991. The subscription period may be
extended upon agreement between the Fund and the Distributor. Subject to the
provisions of such Section and the conditions contained herein, we will sell to
you on the fifth business day following the termination of the subscription
period, or such other date as we may advise (the "Closing Date"), such number of
Class B shares as to which you have placed orders with us not later than 5:00
P.M. on the second full business day preceding the Closing Date.
2. In all sales of these Class B 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.
1
<PAGE>
3. You shall not place orders for any of the Class B shares unless you
have already received purchase orders for such Class B shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. All orders are subject to acceptance 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 Prospectus, as amended from time to time.
You agree that you will not offer or sell any of the Class B 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
B 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 B 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.
4. Payment for Class B shares purchased by you is to be made by certified
or official bank check at the office of Merrill Lynch Funds Distributor, Inc.,
Box 9011, Princeton, New Jersey 08543-9011, on such date as we may advise, in
New York Clearing House funds payable to the order of Merrill Lynch Funds
Distributor, Inc. against delivery by us of non-negotiable share deposit
receipts ("Receipts") issued by Merrill Lynch Financial Data Service, Inc., as
shareholder servicing agent, acknowledging the deposit with it of the Class B
shares so purchased by you. You agree that as promptly as practicable after the
delivery of such Class B shares you will issue appropriate written transfer
instructions to the Fund or to the shareholder servicing agent as to the
purchasers to whom you sold the Class B shares.
5. No person is authorized to make any representations concerning Class B
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 B
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 and Statement of Additional Information, periodic reports and
proxy solicitation material are 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.
6. 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.
7. We reserve the right in our discretion, without notice, to suspend sales
or withdraw the offering of Class B shares entirely. Each party hereto has the
right to cancel this Agreement upon notice to the other party.
8. 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.
9. 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.
10. Upon application to us, we will inform you as to the states in which we
believe the Class B 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 B shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class B shares, if necessary.
11. 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.
3
<PAGE>
12. You agree that you will not sell any Class B shares of the Fund to any
account over which you exercise discretionary authority.
13. This Agreement shall terminate at the close of business on the Closing
Date, unless earlier terminated, provided, however, this Agreement shall
continue after termination for the purpose of settlement of accounts hereunder.
MERRILL LYNCH FUND DISTRUBUTOR, INC.
By: /S/ Gerald M.Richad
---------------------------------
(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 B
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
CLASS B 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
B shares of common stock, par value $0.10 per share (herein referred to as the
"Class B shares"), of the Fund, and as such has the right to distribute Class B
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 B
shares being offered to the public are registered under the Securities Act of
1933, as amended. You have received a copy of the Class B 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" 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. As principal, we offer to sell to you, as a member of the Selected
Dealers Group, Class B shares of the Fund upon the following terms and
conditions:
1. In all sales of these Class B 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.
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 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.
1
<PAGE>
3. You shall not place orders for any of the Class B shares unless you
have already received purchase orders for such Class B 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 B 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 B 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 B 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.
4. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for Class B 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 B 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.
5. 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.
6. No person is authorized to make any representations concerning Class B
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 B
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 are our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall 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
2
<PAGE>
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.
8. We reserve the right in our discretion, without notice, to suspend sales
or withdraw the offering of Class B shares entirely. 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 B 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 B shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class B 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 telegraphed 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 B shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH DISTRIBUTOR, INC.
By: /s/ Gerald M. Richard
----------------------------
(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 99.8
CUSTODY AGREEMENT
-----------------
Agreement made as of this 11th day of June, 1991, between MERRILL LYNCH
ADJUSTABLE RATE SECURITIES FUND, INC., a corporation organized and existing
under the laws of the State of Maryland having its principal office and place of
business at 800 Scudders Mill Road, Plainsboro, New Jersey 08536 (hereinafter
called the "Fund"), and THE BANK OF NEW YORK, a New York corporation authorized
to do a banking business, having its principal office and place of business at
48 Wall Street, New York, New York 10286 (hereinafter called the "Custodian").
W I T N E S S E T H :
that for and in consideration of the mutual promises hereinafter set forth, the
Fund and the Custodian agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
1. "Authorized Person" shall be deemed to include any person, whether or
not such person is an Officer or employee of the Fund, duly authorized by the
Board of Directors of the Fund to give Oral Instructions and Written
Instructions on behalf of the Fund and listed in the Certificate annexed hereto
as Appendix A or such other Certificate as may be received by the Custodian from
time to time.
2. "Book-Entry System" shall mean the Federal Reserve/Treasury book-entry
system for United States and federal agency securities, its successor or
successors and its nominee or nominees.
3. "Call Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer thereof the
specified underlying Securities.
4. "Certificate" shall mean any notice, instruction, or other instrument
in writing, authorized or required by this Agreement to be given to the
Custodian which is actually received by the Custodian and signed on behalf of
the Fund by any two Officers.
<PAGE>
5. "Clearing Member" shall mean a registered broker-dealer which is a
clearing member under the rules of O.C.C. and a member of a national securities
exchange qualified to act as a custodian for an investment company, or any
broker-dealer reasonably believed by the Custodian to be such a clearing
member.
6. "Collateral Account" shall mean a segregated account so denominated
which is specifically allocated to a Series and pledged to the Custodian as
security for, and in consideration of, the Custodian's issuance of (a) any Put
Option guarantee letter or similar document described in paragraph 8 of Article
V .herein, or (b) any receipt described in Article V or VIII herein.
7. "Covered Call Option" shall mean an exchange traded option entitling
the holder, upon timely exercise and payment of the exercise price, as
specified therein, to purchase from the writer thereof the specified underlying
Securities (excluding Futures Contracts) which are owned by the writer thereof
and subject to appropriate restrictions.
8. "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission, its
successor or successors and its nominee or nominees. The term "Depository"
shall further mean and include any other person authorized to act as a
depository under the Investment Company Act of 1940, its successor or
successors and its nominee or nominees, specifically identified in a certified
copy of a resolution of the Fund's Board of Directors specifically approving
deposits therein by the Custodian.
9. "Financial Futures Contract" shall mean the firm commitment to buy or
sell fixed income securities including, without limitation, U.S. Treasury
Bills, U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of
deposit, and Eurodollar certificates of deposit, during a specified month at an
agreed upon price.
10. "Futures Contract" shall mean a Financial Futures Contract and/or
Stock Index Futures Contracts.
11. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
12. "Margin Account" shall mean a segregated account in the name of a
broker, dealer, futures commission merchant, or a Clearing Member, or in the
name of the Fund for the benefit of a broker, dealer, futures commission
merchant, or Clearing Member, or otherwise, in accordance with an agreement
between the Fund, the Custodian and a broker, dealer, futures commission
merchant or a Clearing Member (a "Margin Account Agreement"), separate and
distinct from the custody account, in which certain Securities and/or money of
the Fund shall be deposited and withdrawn
- 2 -
<PAGE>
from time to time in connection with such transactions as the Fund may from
time to time determine. Securities held in the Book-Entry System or the
Depository shall be deemed to have been deposited in, or withdrawn from, a
Margin Account upon the Custodian's effecting an appropriate entry in its books
and records.
13. "Money Market Security" shall be deemed to include, without
limitation, certain Reverse Repurchase Agreements, debt obligations issued or
guaranteed as to interest and principal by the government of the United States
or agencies or instrumentalities thereof, any tax, bond or revenue anticipation
note issued by any state or municipal government or public authority, commercial
paper, certificates of deposit and bankers' acceptances, repurchase agreements
with respect to the same and bank time deposits, where the purchase and sale of
such securities normally requires settlement in federal funds on the same day as
such purchase or sale.
14. "O.C.C." shall mean the Options Clearing Corporation, a clearing
agency registered under Section 17A of the Securities Exchange Act of 1934, its
successor or successors,, and its nominee or nominees.
15. "Officers" shall be deemed to include the President, any Vice
President, the Secretary, the Treasurer, the Controller, any Assistant
Secretary, any Assistant Treasurer, and any other person or persons, whether or
not any such other person is an officer of the Fund, duly authorized by the
Board of Directors of the Fund to execute any Certificate, instruction, notice
or other instrument on behalf of the Fund and listed in the Certificate annexed
hereto as Appendix B or such other Certificate as may be received by the
Custodian from time to time.
16. "Option" shall mean a Call Option, Covered Call Option, Stock Index
Option and/or a Put Option.
17. "Oral Instructions" shall mean verbal instructions actually received
by the Custodian from an Authorized Person or from a person reasonably believed
by the Custodian to be an Authorized Person.
18. "Put Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and tender of the
specified underlying Securities, to sell such Securities to the writer thereof
for the exercise price.
19. "Reverse Repurchase Agreement" shall mean an agreement pursuant to
which the Fund sells Securities and agrees to repurchase such Securities at a
described or specified date and price.
- 3 -
<PAGE>
20. "Security" shall be deemed to include, without limitation, Money
Market Securities, Call Options, Put Options, Stock Index Options, Stock Index
Futures Contracts, Stock Index Futures Contract Options, Financial Futures
Contracts, Financial Futures Contract Options, Reverse Repurchase Agreements,
common stocks and other securities having characteristics similar to common
stocks, preferred stocks, debt obligations issued by state or municipal
governments and by public authorities, (including, without limitation, general
obligation bonds, revenue bonds, industrial bonds and industrial development
bonds), bonds, debentures, notes, mortgages or other obligations, and any
certificates, receipts, warrants or other instruments representing rights to
receive, purchase, sell or subscribe for the same, or evidencing or
representing any other rights or interest therein, or any property or assets.
21. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement as a
segregated account, by recordation or otherwise, within the custody account in
which certain Securities and/or other assets of the Fund specifically allocated
to such Series shall be deposited and withdrawn from time to time in accordance
with Certificates received by the Custodian in connection with such
transactions as the Fund may from time to time determine.
22. "Series" shall mean the various portfolios, if any, of the Fund as
described from time to time in the current and effective prospectus for the
Fund.
23. "Shares" shall mean the shares of capital stock of the Fund, each of
which is, in the case of a Fund having Series, allocated to a particular
Series.
24. "Stock Index Futures Contract" shall mean a bilateral agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the value
of a particular stock index at the close of the last business day of the
contract and the price at which the futures contract is originally struck.
25. "Stock Index Option" shall mean an exchange traded option entitling
the holder, upon timely exercise, to receive an amount of cash determined by
reference to the difference between the exercise price and the value of the
index on the date of exercise.
26. "Written Instructions" shall mean written communications actually
received by the Custodian from an Authorized Person or from a person reasonably
believed by the Custodian to be an Authorized Person by telex or any other such
system whereby the receiver of such communications is able to verify by codes
or otherwise with a reasonable degree of certainty the identity of the sender
of such communication.
- 4 -
<PAGE>
ARTICLE II
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as custodian
of the Securities and moneys at any time owned by the Fund during the period of
this Agreement.
2. The Custodian hereby accepts appointment as such custodian and agrees
to perform the duties thereof as hereinafter set forth.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, the Fund will deliver or cause to be delivered to the Custodian
all Securities and all moneys owned by it, at any time during the period of this
Agreement, and shall specify with respect to such Securities and money the
Series to which the same are specifically allocated. The Custodian shall
segregate, keep and maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and moneys not actually
received by it. The Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously made and moneys are
not finally collected. The Fund shall deliver to the Custodian a certified
resolution of the Board of Directors of the Fund, substantially in the form of
Exhibit A hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis to deposit in the Book-Entry System all Securities
eligible for deposit therein, regardless of the Series to which the same are
specifically allocated and to utilize the Book-Entry System to the extent
possible in connection with its performance hereunder, including, without
limitation, in connection with settlements of purchases and sales of Securities,
loans of Securities and deliveries and returns of Securities collateral. Prior
to a deposit of Securities specifically allocated to a Series in the Depository,
the Fund shall deliver to the Custodian a certified resolution of the Board of
Directors of the Fund, substantially in the form of Exhibit B hereto, approving,
authorizing and instructing the Custodian on a continuous and ongoing basis
until instructed to the contrary by a Certificate actually received by the
Custodian to deposit in the Depository all Securities specifically allocated to
such Series eligible for deposit therein, and to utilize the Depository to the
extent possible with respect to such securities in connection with its
performance hereunder, including, without limitation, in connection with
settlements of purchases and sales of Securities, loans of Securities, and
deliveries and returns of Securities collateral. Securities and
- 5 -
<PAGE>
moneys deposited in either the Book-Entry System or the Depository will be
represented in accounts which include only assets held by the Custodian for
customers, including, but not limited to, accounts in which the Custodian acts
in a fiduciary or representative capacity and will be specifically allocated on
the Custodian's books to the separate account for the applicable Series. Prior
to the Custodian's accepting, utilizing and acting with respect to Clearing
Member confirmations for Options and transactions in Options for a Series as
provided in this Agreement, the Custodian shall have received a certified
resolution of the Fund's Board of Directors, substantially in the form of
Exhibit C hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis, until instructed to the contrary by a Certificate
actually received by the Custodian, to accept, utilize and act in accordance
with such confirmations as provided in this Agreement with respect to such
Series.
2. The Custodian shall establish and maintain separate accounts, in the
name of each Series, and shall credit to the separate account for each Series
all moneys received by it for the account of the Fund with respect to such
Series. Money credited to a separate account for a Series shall be disbursed by
the Custodian only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the name and address of
the person to whom the payment is to be made, the Series account from which
payment is to be made and the purpose for which payment is to be made; or
(c) In payment of the fees and in reimbursement of the expenses and
liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian shall
furnish the Fund with confirmations and a summary, on a per Series basis, of all
transfers to or from the account of the Fund for a Series, either hereunder or
with any co-custodian or sub-custodian appointed in accordance with this
Agreement during said day. Where Securities are transferred to the account of
the Fund for a Series, the Custodian shall also by book-entry or otherwise
identify as belonging to such Series a quantity of Securities in a fungible bulk
of Securities registered in the name of the Custodian (or its nominee) or shown
on the Custodian's account on the books of the Book-Entry System or the
Depository. At least monthly and from time to time, the Custodian shall furnish
the Fund with a detailed statement, on a per Series basis, of the Securities and
moneys held by the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, all Securities held by the Custodian hereunder, which are issued
or issuable only in bearer
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form, except such Securities as are held in the Book-Entry System, shall be held
by the Custodian in that form; all other Securities held hereunder may be
registered in the name of the Fund, in the name of any duly appointed registered
nominee of the Custodian as the Custodian may from time to time determine, or in
the name of the Book-Entry System or the Depository or their successor or
successors, or their nominee or nominees. The Fund agrees to furnish to the
Custodian appropriate instruments to enable the Custodian to hold or deliver in
proper form for transfer, or to register in the name of its registered nominee
or in the name of the Book-Entry System or the Depository any Securities which
it may hold hereunder and which may from time to time be registered in the name
of the Fund. The Custodian shall hold all such Securities specifically
allocated to a Series which are not held in the Book-Entry System or in the
Depository in a separate account in the name of such Series physically
segregated at all times from those of any other person or persons.
5. Except as otherwise provided in this Agreement and unless otherwise
instructed to the contrary by a Certificate, the Custodian by itself, or through
the use of the Book-Entry System or the Depository with respect to Securities
held hereunder and therein deposited, shall with respect to all Securities held
for the Fund hereunder in accordance with preceding paragraph 4:
(a) Collect all income due or payable;
(b) Present for payment and collect the amount payable upon such
Securities which are called, but only if either (i) the Custodian receives a
written notice of such call, or (ii) notice of such call appears in one or more
of the publications listed in Appendix C annexed hereto, which may be amended at
any time by the Custodian without the prior notification or consent of the Fund;
(c) Present for payment and collect the amount payable upon all
Securities which mature;
(d) Surrender Securities in temporary form for definitive Securities;
(e) Execute, as custodian, any necessary declarations or certificates
of ownership under the Federal Income Tax Laws or the laws or regulations of any
other taxing authority now or hereafter in effect; and
(f) Hold directly, or through the Book-Entry System or the Depository
with respect to Securities therein deposited, for the account of a Series, all
rights and similar securities issued with respect to any Securities held by the
Custodian for such Series hereunder.
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6. Upon receipt of a Certificate and not otherwise, the Custodian,
directly or through the use of the Book-Entry System or the Depository, shall:
(a) Execute and deliver to such persons as may be designated in such
Certificate proxies, consents, authorizations, and any other instruments
whereby the authority of the Fund as owner of any Securities held by the
Custodian hereunder for the Series specified in such Certificate may be
exercised;
(b) Deliver any Securities held by the Custodian hereunder for the
Series specified in such Certificate in exchange for other Securities or cash
issued or paid in connection with the liquidation, reorganization, refinancing,
merger, consolidation or recapitalization of any corporation, or the exercise
of any conversion privilege and receive and hold hereunder specifically
allocated to such Series any cash or other Securities received in exchange;
(c) Deliver any Securities held by the Custodian hereunder for the
Series specified in such Certificate to any protective committee,
reorganization committee or other person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization or sale of assets of any
corporation, and receive and hold hereunder specifically allocated to such
Series such certificates of deposit, interim receipts or other instruments or
documents as may be issued to it to evidence such delivery;
(d) Make such transfers or exchanges of the assets of the Series
specified in such Certificate, and take such other steps as shall be stated in
such Certificate to be for the purpose of effectuating any duly authorized plan
of liquidation, reorganization, merger, consolidation or recapitalization of
the Fund; and
(e) Present for payment and collect the amount payable upon
Securities not described in preceding paragraph 5(b) of this Article which may
be called as specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the
Custodian shall not be required to obtain possession of any instrument or
certificate representing any Futures Contract, any Option, or any Futures
Contract Option until after it shall have determined, or shall have received a
Certificate from the Fund stating, that any such instruments or certificates
are available. The Fund shall deliver to the Custodian such a Certificate no
later than the business day preceding the availability of any such instrument
or certificate. Prior to such availability, the Custodian shall comply with
Section 17(f) of the Investment Company Act of 1940, as amended, in connection
with the purchase, sale, settlement, closing out or writing of Futures
Contracts, Options, or Futures Contract Options by making payments or
deliveries specified in Certificates received by
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<PAGE>
the Custodian in connection with any such purchase, sale, writing, settlement or
closing out upon its receipt from a broker, dealer, or futures commission
merchant of a statement or confirmation reasonably believed by the Custodian to
be in the form customarily used by brokers, dealers, or future commission
merchants with respect to such Futures Contracts, Options, or Futures Contract
Options, as the case may be, confirming that such Security is held by such
broker, dealer or futures commission merchant, in book-entry form or otherwise,
in the name of the Custodian (or any nominee of the Custodian) as custodian for
the Fund, provided, however, that notwithstanding the foregoing, payments to or
deliveries from the Margin Account, and payments with respect to Securities to
which a Margin Account relates, shall be made in accordance with the terms and
conditions of the Margin Account Agreement. Whenever any such instruments or
certificates are available, the Custodian shall, notwithstanding any provision
in this Agreement to the contrary, make payment for any Futures Contract,
Option, or Futures Contract Option for which such instruments or such
certificates are available only against the delivery to the Custodian of such
instrument or such certificate, and deliver any Futures Contract, Option or
Futures Contract Option for which such instruments or such certificates are
available only against receipt by the Custodian of payment therefor. Any such
instrument or certificate delivered to the Custodian shall be held by the
Custodian hereunder in accordance with, and subject to, the provisions of this
Agreement.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other than a
purchase of an Option, a Futures Contract, or a Futures Contract Option, the
Fund shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Certificate, Oral
Instructions or Written Instructions, specifying with respect to each such
purchase: (a) the Series to which such Securities are to be specifically
allocated; (b) the name of the issuer and the title of the Securities; (c) the
number of shares or the principal amount purchased and accrued interest, if any;
(d) the date of purchase and settlement; (e) the purchase price per unit; (f)
the total amount payable upon such purchase; (g) the name of the person from
whom or the broker through whom the purchase was made, and the name of the
clearing broker, if any; and (h) the name of the broker to whom payment is to be
made. The Custodian shall, upon receipt of Securities purchased by or for the
Fund, pay to the broker specified in the Certificate out of the moneys held for
the account of such
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<PAGE>
Series the total amount payable upon such purchase, provided that the same
conforms to the total amount payable as set forth in such Certificate, Oral
Instructions or Written Instructions.
2. Promptly after each sale of Securities by the Fund, other than a sale
of any option, Futures Contract, Futures Contract Option, or any Reverse
Repurchase Agreement, the Fund shall deliver to the Custodian (i) with respect
to each sale of Securities which are not Money Market Securities, a Certificate,
and (ii) with respect to each sale of Money Market Securities, a Certificate,
Oral Instructions or Written Instructions, specifying with respect to each such
sale: (a) the Series to which such Securities were specifically allocated; (b)
the name of the issuer and the title of the Security; (c) the number of shares
or principal amount sold, and accrued interest, if any; (d) the date of sale;
(e) the sale price per unit; (f) the total amount payable to the Fund upon such
sale; (g) the name of the broker through whom or the person to whom the sale was
made, and the name of the clearing broker, if any; and (h) the name of the
broker to whom the Securities are to be delivered. The Custodian shall deliver
the Securities specifically allocated to such Series to the broker specified in
the Certificate against payment of the total amount payable to the Fund upon
such sale, provided that the same conforms to the total amount payable as set
forth in such Certificate, Oral Instructions or Written Instructions.
ARTICLE V
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund shall
deliver to the Custodian a Certificate specifying with respect to each Option
purchased: (a) the Series to which such Option is specifically allocated; (b)
the type of Option (put or call); (c) the name of the issuer and the title and
number of shares subject to such Option or, in the case of a Stock Index Option,
the stock index to which such Option relates and the number of Stock Index
Options purchased; (d) the expiration date; (e) the exercise price; (f) the
dates of purchase and settlement; (g) the total amount payable by the Fund in
connection with such purchase; (h) the name of the Clearing Member through whom
such Option was purchased; and (i) the name of the broker to whom payment is to
be made. The Custodian shall pay, upon receipt of a Clearing Member's statement
confirming the purchase of such Option held by such Clearing Member for the
account of the Custodian (or any duly appointed and registered nominee of the
Custodian) as custodian for the Fund, out of moneys held for the account of the
Series to which such Option is to be specifically allocated, the total amount
payable upon such purchase to the Clearing Member through whom the purchase was
made, provided that the same conforms to the total amount payable as set forth
in such Certificate.
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<PAGE>
2. Promptly after the sale of any Option purchased by the Fund pursuant
to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each such sale: (a) the Series to which such Option
was specifically allocated; (b) the type of Option (put or call); (c) the name
of the issuer and the title and number of shares subject to such Option or, in
the case of a Stock Index Option, the stock index to which such Option relates
and the number of Stock Index Options sold; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the Clearing Member through whom the sale was
made. The Custodian shall consent to the delivery of the Option sold by the
Clearing Member which previously supplied the confirmation described in
preceding paragraph 1 of this Article with respect to such Option against
payment to the Custodian of the total amount payable to the Fund, provided that
the same conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Call Option: (a) the
Series to which such Call Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Call Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share; (f) the total amount to be paid by the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Call Option was exercised.
The Custodian shall, upon receipt of the Securities underlying the Call Option
which was exercised, pay out of the moneys held for the account of the Series to
which such Call Option was specifically allocated the total amount payable to
the Clearing Member through whom the Call Option was exercised, provided that
the same conforms to the total amount payable as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian
a Certificate specifying with respect to such Put Option: (a) the Series to
which such Put Option was specifically allocated; (b) the name of the issuer and
the title and number of shares subject to the Put Option; (c) the expiration
date; (d) the date of exercise and settlement; (e) the exercise price per share;
(f) the total amount to be paid to the Fund upon such exercise; and (g) the name
of the Clearing Member through whom such Put Option was exercised. The
Custodian shall, upon receipt of the amount payable upon the exercise of the Put
Option, deliver or direct the Depository to deliver the Securities specifically
allocated to such Series, provided the same conforms to the amount payable to
the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index Option
purchased by the Fund pursuant to paragraph 1
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<PAGE>
hereof, the Fund shall deliver to the Custodian a Certificate specifying with
respect to such Stock Index Option: (a) the Series to which such Stock Index
Option was specifically allocated; (b) the type of Stock Index Option (put or
call); (c) the number of Options being exercised; (d) the stock index to which
such Option relates; (e) the expiration date; (f) the exercise price; (g) the
total amount to be received by the Fund in connection with such exercise; and
(h) the Clearing Member from whom such payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Covered Call Option: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares for which
the Covered Call Option was written and which underlie the same; (c) the
expiration date; (d) the exercise price; (e) the premium to be received by the
Fund; (f) the date such Covered Call Option was written; and (g) the name of the
Clearing Member through whom the premium is to be received. The Custodian shall
deliver or cause to be delivered, in exchange for receipt of the premium
specified in the Certificate with respect to such Covered Call Option, such
receipts as are required in accordance with the customs prevailing among
Clearing Members dealing in Covered Call Options and shall impose, or direct the
Depository to impose, upon the underlying Securities specified in the
Certificate specifically allocated to such Series such restrictions as may be
required by such receipts. Notwithstanding the foregoing, the Custodian has the
right, upon prior written notification to the Fund, at any time to refuse to
issue any receipts for Securities in the possession of the Custodian and not
deposited with the Depository underlying a Covered Call option.
7. Whenever a Covered Call Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate instructing the Custodian to deliver, or
to direct the Depository to deliver, the Securities subject to such Covered Call
Option and specifying: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares subject
to the Covered Call Option; (c) the Clearing Member to whom the underlying
Securities are to be delivered; and (d) the total amount payable to the Fund
upon such delivery. Upon the return and/or cancellation of any receipts
delivered pursuant to paragraph 6 of this Article, the Custodian shall deliver,
or direct the Depository to deliver, the underlying Securities as specified in
the Certificate against payment of the amount to be received as set forth in
such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly deliver
to the Custodian a Certificate specifying with respect to such Put Option: (a)
the Series for which such Put Option was written; (b) the name of the issuer and
the title
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<PAGE>
and number of shares for which the Put Option is written and which underlie the
same; (c) the expiration date; (d) the exercise price; (e) the premium to be
received by the Fund; (f) the date such Put Option is written; (g) the name of
the Clearing Member through whom the premium is to be received and to whom a Put
Option guarantee letter is to be delivered; (h) the amount of cash, and/or the
amount and kind of Securities, if any, specifically allocated to such Series to
be deposited in the Senior Security Account for such Series; and (i) the amount
of cash and/or the amount and kind of Securities specifically allocated to such
Series to be deposited into the Collateral Account for such Series. The
Custodian shall, after making the deposits into the Collateral Account specified
in the Certificate, issue a Put Option guarantee letter substantially in the
form utilized by the Custodian on the date hereof, and deliver the same to the
Clearing Member specified in the Certificate against receipt of the premium
specified in said Certificate. Notwithstanding the foregoing, the Custodian
shall be under no obligation to issue any Put Option guarantee letter or similar
document if it is unable to make any of the representations contained therein.
9. Whenever a Put Option written by the Fund and described in the
preceding paragraph is exercised, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Put Option was
written; (b) the name of the issuer and title and number of shares subject to
the Put Option; (c) the Clearing Member from whom the underlying Securities are
to be received; (d) the total amount payable by the Fund upon such delivery; (e)
the amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be withdrawn from the Collateral Account for such
Series and (f) the amount of cash and/or the amount and kind of Securities;
specifically allocated to such Series, if any, to be withdrawn from the Senior
Security Account. Upon the return and/or cancellation of any Put Option
guarantee letter or similar document issued by the Custodian in connection with
such Put Option, the Custodian shall pay out of the moneys held for the account
of the Series to which such Put Option was specifically allocated the total
amount payable to the Clearing Member specified in the Certificate as set forth
in such Certificate against delivery of such Securities, and shall make the
withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Stock Index Option: (a) the Series for which such Stock Index Option was
written; (b) whether such Stock Index Option is a put or a call; (c) the number
of options written; (d) the stock index to which such Option relates; (e) the
expiration date; (f) the exercise price; (g) the Clearing Member through whom
such Option was written; (h) the premium to be received by the Fund; (i) the
amount of cash and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in the
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Senior Security Account for such Series; (j) the amount of cash and/or the
amount and kind of Securities, if any, specifically allocated to such Series to
be deposited in the Collateral Account for such Series; and (k) the amount of
cash and/or the amount and kind of Securities, if any, specifically allocated to
such Series to be deposited in a Margin Account, and the name in which such
account is to be or has been established. The Custodian shall, upon receipt of
the premium specified in the Certificate, make the deposits, if any, into the
Senior Security Account specified in the Certificate, and either (1) deliver
such receipts, if any, which the Custodian has specifically agreed to issue,
which are in accordance with the customs prevailing among Clearing Members in
Stock Index Options and make the deposits into the Collateral Account specified
in the Certificate, or (2) make the deposits into the Margin Account specified
in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written; (b)
such information as may be necessary to identify the Stock Index Option being
exercised; (c) the Clearing Member through whom such Stock Index Option is being
exercised; (d) the total amount payable upon such exercise, and whether such
amount is to be paid by or to the Fund; (e) the amount of cash and/or amount and
kind of Securities, if any, to be withdrawn from the Margin Account; and (f) the
amount of cash and/or amount and kind of Securities, if any, to be withdrawn
from the Senior Security Account for such Series; and the amount of cash and/or
the amount and kind of Securities, if any, to be withdrawn from the Collateral
Account for such Series. Upon the return and/or cancellation of the receipt, if
any, delivered pursuant to the preceding paragraph of this Article, the
Custodian shall pay out of the moneys held for the account of the Series to
which such Stock Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any, as specified
therein.
12. Whenever the Fund purchases any Option identical to a previously
written Option described in paragraphs, 6, 8 or 10 of this Article in a
transaction expressly designated as a "Closing Purchase Transaction" in order to
liquidate its position as a writer of an Option, the Fund shall promptly deliver
to the Custodian a Certificate specifying with respect to the Option being
purchased: (a) that the transaction is a Closing Purchase Transaction; (b) the
Series for which the option was written; (c) the name of the issuer and the
title and number of shares subject to the Option, or, in the case of a Stock
Index option, the stock index to which such Option relates and the number of
Options held; (d) the exercise price; (e) the premium to be paid by the Fund;
(f) the expiration date; (g) the type of option (put or call); (h) the date of
such purchase; (i) the name of the Clearing Member to whom the premium is to be
paid;
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<PAGE>
and (j) the amount of cash and/or the amount and kind of Securities, if any, to
be withdrawn from the Collateral Account, a specified Margin Account, or the
Senior Security Account for such Series. Upon the Custodian's payment of the
premium and the return and/or cancellation of any receipt issued pursuant to
paragraphs 6, 8 or 10 of this Article with respect to the Option being
liquidated through the Closing Purchase Transaction, the Custodian shall
remove, or direct the Depository to remove, the previously imposed restrictions
on the Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing Purchase
Transaction with respect to any Option purchased or written by the Fund and
described in this Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3 Article III herein,
and upon the return and/or cancellation of any receipts issued by the
Custodian, shall make such withdrawals from the Collateral Account, and the
Margin Account and/or the Senior Security Account as may be specified in a
Certificate received in connection with such expiration, exercise, or
consummation.
ARTICLE VI
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund shall
deliver to the Custodian a Certificate specifying with respect to such Futures
Contract, (or with respect to any number of identical Futures Contract(s)): (a)
the Series for which the Futures Contract is being entered; (b) the category of
Futures Contract (the name of the underlying stock index or financial
instrument); (c) the number of identical Futures Contracts entered into; (d)
the delivery or settlement date of the Futures Contract(s); (e) the date the
Futures Contract(s) was (were) entered into and the maturity date; (f) whether
the Fund is buying (going long) or selling (going short) on such Futures
Contract(s); (g) the amount of cash and/or the amount and kind of Securities,
if any, to be deposited in the Senior Security Account for such Series; (h) the
name of the broker, dealer, or futures commission merchant through whom the
Futures Contract was entered into; and (i) the amount of fee or commission, if
any, to be paid and the name of the broker, dealer, or futures commission
merchant to whom such amount is to be paid. The Custodian shall make the
deposits, if any, to the Margin Account in accordance with the terms and
conditions of the Margin Account Agreement. The Custodian shall make payment
out of the moneys specifically allocated to such Series of the fee or
commission, if any, specified in the Certificate and deposit in the Senior
Security Account for such Series the amount of cash and/or the amount and kind
of Securities specified in said Certificate.
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<PAGE>
2. (a) Any variation margin payment or similar payment required to be
made by the Fund to a broker, dealer, or futures commission merchant with
respect to an outstanding Futures Contract, shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a broker,
dealer, or futures commission merchant to the Fund with respect to an
outstanding Futures Contract, shall be received and dealt with by the Custodian
in accordance with the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is
retained by the Fund until delivery or settlement is made on such Futures
Contract, the Fund shall deliver to the Custodian a Certificate specifying: (a)
the Futures Contract and the Series to which the same relates; (b) with respect
to a Stock Index Futures Contract, the total cash settlement amount to be paid
or received, and with respect to a Financial Futures Contract, the Securities
and/or amount of cash to be delivered or received; (c) the broker, dealer, or
futures commission merchant to or from whom payment or delivery is to be made
or received; and (d) the amount of cash and/or Securities to be withdrawn from
the Senior Security Account for such Series. The Custodian shall make the
payment or delivery specified in the Certificate, and delete such Futures
Contract from the statements delivered to the Fund pursuant to paragraph 3 of
Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a
Futures Contract held by the Custodian hereunder, the Fund shall deliver to the
Custodian a Certificate specifying: (a) the items of information required in a
Certificate described in paragraph 1 of this Article, and (b) the Futures
Contract being offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from the Senior Security Account for such
Series as may be specified in such Certificate. The withdrawals, if any, to be
made from the Margin Account shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
ARTICLE VII
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the
Fund, the Fund shall promptly deliver to the Custodian a Certificate specifying
with respect to such Futures Contract Option: (a) the Series to which such
Option is specifically allocated; (b) the type of Futures Contract Option
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(put or call); (c) the type of Futures Contract and such other information as
may be necessary to identify the Futures Contract underlying the Futures
Contract option purchased; (d) the expiration date; (e) the exercise price; (f)
the dates of purchase and settlement; (g) the amount of premium to be paid by
the Fund upon such purchase; (h) the name of the broker or futures commission
merchant through whom such option was purchased; and (i) the name of the
broker, or futures commission merchant, to whom payment is to be made. The
Custodian shall pay out of the moneys specifically allocated to such Series,
the total amount to be paid upon such purchase to the broker or futures
commissions merchant through whom the purchase was made, provided that the same
conforms to the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to each such sale: (a) Series
to which such Futures Contract Option was specifically allocated; (b) the type
of Future Contract Option (put or call); (c) the type of Futures Contract and
such other information as may be necessary to identify the Futures Contract
underlying the Futures Contract Option; (d) the date of-sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund
upon such sale; and (h) the name of the broker of futures commission merchant
through whom the sale was made. The Custodian shall consent to the
cancellation of the Futures Contract Option being closed against payment to the
Custodian of the total amount payable to the Fund, provided the same conforms
to the total amount payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant to
paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular Futures Contract
Option (put or call) being exercised; (c) the type of Futures Contract
underlying the Futures Contract Option; (d) the date of exercise; (e) the name
of the broker or futures commission merchant through whom the Futures Contract
Option is exercised; (f) the net total amount, if any, payable by the Fund; (g)
the amount, if any, to be received by the Fund; and (h) the amount of cash
and/or the amount and kind of Securities to be deposited in the Senior Security
Account for such Series. The Custodian shall make, out of the moneys and
Securities specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the
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Series for which such Futures Contract Option was written; (b) the type of
Futures Contract Option (put or call); (c) the type of Futures Contract and such
other information as may be necessary to identify the Futures Contract
underlying the Futures Contract Option; (d) the expiration date; (e) the
exercise price; (f) the premium to be received by the Fund; (g) the name of the
broker or futures commission merchant through whom the premium is to be
received; and (h) the amount of cash and/or the amount and kind of Securities,
if any, to be deposited in the Senior Security Account for such Series. The
Custodian shall, upon receipt of the premium specified in the Certificate, make
out of the moneys and Securities specifically allocated to such Series the
deposits into the Senior Security Account, if any, as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a
call is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Futures Contract Option
was specifically allocated; (b) the particular Futures Contract Option
exercised; (c) the type of Futures Contract underlying the Futures Contract
Option; (d) the name of the broker or futures commission merchant through whom
such Futures Contract Option was exercised; (e) the net total amount, if any,
payable to the Fund upon such exercise; (f) the net total amount, if any,
payable by the Fund upon such exercise; and (g) the amount of cash and/or the
amount and kind of Securities to be deposited in the Senior Security Account for
such Series. The Custodian shall, upon its receipt of the net total amount
payable to the Fund, if any, specified in such Certificate make the payments, if
any, and the deposits, if any, into the Senior Security Account as specified in
the Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund and
which is a put is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Option was specifically
allocated; (b) the particular Futures Contract Option exercised; (c) the type of
Futures Contract underlying such Futures Contract Option; (d) the name of the
broker or futures commission merchant through whom such Futures Contract Option
is exercised; (e) the net total amount, if any, payable to the Fund upon such
exercise; (f) the net total amount, if any, payable by the Fund upon such
exercise; and (g) the amount and kind of Securities and/or cash to be withdrawn
from or deposited in, the Senior Security Account for such Series, if any. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in the Certificate, make out of the moneys and Securities
specifically allocated to such Series, the payments, if any, and the deposits,
if any, into the Senior Security Account
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as specified in the Certificate. The deposits to and/or withdrawals from the
Margin Account, if any, shall be made by the Custodian in accordance with the
terms and conditions of the Margin Account Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical to
a previously written Futures Contract Option described in this Article in order
to liquidate its position as a writer of such Futures Contract Option, the
Fund shall promptly deliver to the Custodian a Certificate specifying with
respect to the Futures Contract Option being purchased: (a) the Series to
which such option is specifically allocated; (b) that the transaction is a
closing transaction; (c) the type of Future Contract and such other information
as may be necessary to identify the Futures Contract underlying the Futures
Option Contract; (d) the exercise price; (e) the premium to be paid by the
Fund; (f) the expiration date; (g) the name of the broker or futures commission
merchant to whom the premium is to be paid; and (h) the amount of cash and/or
the amount and kind of Securities, if any, to be withdrawn from the Senior
Security Account for such Series. The Custodian shall effect the withdrawals
from the Senior Security Account specified in the Certificate. The
withdrawals, if any, to be made from the Margin Account shall be made by the
Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
8. Upon the expiration, exercise, or consummation of a closing
transaction with respect to, any Futures Contract Option written or purchased
by the Fund and described in this Article, the Custodian shall (a) delete such
Futures Contract Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein and, (b) make such withdrawals from and/or in
the case of an exercise such deposits into the Senior Security Account as may
be specified in a Certificate. The deposits to and/or withdrawals from the
Margin Account, if any, shall be made by the Custodian in accordance with the
terms and conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a
Futures Contract Option described in this Article shall be subject to Article
VI hereof.
ARTICLE VIII
SHORT SALES.
1. Promptly after any short sales by any Series of the Fund, the Fund
shall promptly deliver to the Custodian a Certificate specifying: (a) the
Series for which such short sale was made; (b) the name of the issuer and the
title of the Security; (c) the number of shares or principal amount sold, and
accrued interest or dividends, if any; (d) the dates of the sale and
settlement; (e) the sale price per unit; (f) the total amount credited to the
Fund upon such sale, if any, (g) the
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amount of cash and/or the amount and kind of Securities, if any, which are to
be deposited in a Margin Account and the name in which such Margin Account has
been or is to be established; (h) the amount of cash and/or the amount and kind
of Securities, if any, to be deposited in a Senior Security Account, and (i)
the name of the broker through whom such short sale was made. The Custodian
shall upon its receipt of a statement from such broker confirming such sale and
that the total amount credited to the Fund upon such sale, if any, as specified
in the Certificate is held by such broker for the account of the Custodian (or
any nominee of the Custodian) as custodian of the Fund, issue a receipt or make
the deposits into the Margin Account and the Senior Security Account specified
in the Certificate.
2. In connection with the closing-out of any short sale, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to each
such closing out: (a) the Series for which such transaction is being made; (b)
the name of the issuer and the title of the Security; (c) the number of shares
or the principal amount, and accrued interest or dividends, if any, required to
effect such closing-out to be delivered to the broker; (d) the dates of closing-
out and settlement; (e) the purchase price per unit;(f) the net total amount
payable to the Fund upon such closing-out; (g) the net total amount payable to
the broker upon such closing-out; (h) the amount of cash and the amount and kind
of Securities to be withdrawn, if any, from the Margin Account; (i) the amount
of cash and/or the amount and kind of Securities, if any, to be withdrawn from
the Senior Security Account; and (j) the name of the broker through whom the
Fund is effecting such closing-out. The Custodian shall, upon receipt of the
net total amount payable to the Fund upon such closing-out, and the return and/
or cancellation of the receipts, if any, issued by the Custodian with respect to
the short sale being closed-out, pay out of the moneys held for the account of
the Fund to the broker the net total amount payable to the broker, and make the
withdrawals from the Margin Account and the Senior Security Account, as the same
are specified in the Certificate.
ARTICLE IX
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase Agreement with
respect to Securities and money held by the Custodian hereunder, the Fund shall
deliver to the Custodian a Certificate, or in the event such Reverse Repurchase
Agreement is a Money Market Security, a Certificate, Oral Instructions, or
Written Instructions specifying: (a) the Series for which the Reverse Repurchase
Agreement is entered; (b) the total amount payable to the Fund in connection
with such Reverse Repurchase Agreement and specifically allocated to such
Series; (c) the broker or dealer through or with whom the Reverse Repurchase
Agreement is entered; (d) the amount and kind of Securities to
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be delivered by the Fund to such broker or dealer; (e) the date of such Reverse
Repurchase Agreement; and (f) the amount of cash and/or the amount and kind of
Securities, if any, specifically allocated to such Series to be deposited in a
Senior Security Account for such Series in connection with such Reverse
Repurchase Agreement. The Custodian shall, upon receipt of the total amount
payable to the Fund specified in the Certificate, Oral Instructions, or Written
Instructions make the delivery to the broker or dealer, and the deposits, if
any, to the Senior Security Account, specified in such Certificate, Oral
Instructions, or Written Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in
preceding paragraph 1 of this Article, the Fund shall promptly deliver a
Certificate or, in the event such Reverse Repurchase Agreement is a Money Market
Security, a Certificate, Oral Instructions, or Written Instructions to the
Custodian specifying: (a) the Reverse Repurchase Agreement being terminated and
the Series for which same was entered; (b) the total amount payable by the Fund
in connection with such termination; (c) the amount and kind of Securities to be
received by the Fund and specifically allocated to such Series in connection
with such termination; (d) the date of termination; (e) the name of the broker
or dealer with or through whom the Reverse Repurchase Agreement is to be
terminated; and (f) the amount of cash and/or the amount and kind of Securities
to be withdrawn from the Senior Securities Account for such Series. The
Custodian shall, upon receipt of the amount and kind of Securities to be
received by the Fund specified in the Certificate, Oral Instructions, or
Written Instructions, make the payment to the broker or dealer, and the
withdrawals, if any, from the Senior Security Account, specified in such
Certificate, Oral Instructions, or Written Instructions.
ARTICLE X
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically
allocated to a Series held by the Custodian hereunder, the Fund shall deliver or
cause to be delivered to the Custodian a Certificate specifying with respect to
each such loan: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities, (c) the
number of shares or the principal amount loaned, (d) the date of loan and
delivery, (e) the total amount to be delivered to the Custodian against the loan
of the Securities, including the amount of cash collateral and the premium, if
any, separately identified, and (f) the name of the broker, dealer, or financial
institution to which the loan was made. The Custodian shall deliver the
Securities thus designated to the broker, dealer or financial institution to
which the loan was made upon receipt of the total amount designated as to be
delivered against the loan of Securities.
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The Custodian may accept payment in connection with a delivery otherwise than
through the Book-Entry System or Depository only in the form of a certified or
bank cashier's check payable to the order of the Fund or the Custodian drawn on
New York Clearing House funds and may deliver Securities in accordance with
the customs prevailing among dealers in securities.
2. Promptly after each termination of the loan of Securities by the Fund,
the Fund shall deliver or cause to be delivered to the Custodian a Certificate
specifying with respect to each such loan termination and return of Securities:
(a) the Series to which the loaned Securities are specifically allocated; (b)
the name of the issuer and the title of the Securities to be returned, (c) the
number of shares or the principal amount to be returned, (d) the date of
termination, (e) the total amount to be delivered by the Custodian (including
the cash collateral for such Securities minus any offsetting credits as
described in said Certificate), and (f) the name of the broker, dealer, or
financial institution from which the Securities will be returned. The Custodian
shall receive all Securities returned from the broker, dealer, or financial
institution to which such Securities were loaned and upon receipt thereof shall
pay, out of the moneys held for the account of the Fund, the total amount
payable upon such return of Securities as set forth in the Certificate.
ARTICLE XI
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or
withdrawals from, a Senior Security Account as specified in a Certificate
received by the Custodian. Such Certificate shall specify the Series for which
such deposit or withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such Series to be
deposited in, or withdrawn from, such Senior Security Account for such Series.
In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and the number of shares or the principal amount
of any particular Securities to be deposited by the Custodian into, or withdrawn
from, a Senior Securities Account, the Custodian shall be under no obligation to
make any such deposit or withdrawal and shall so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin Account
to the broker, dealer, futures commission merchant or Clearing Member in whose
name, or for whose benefit, the account was established as specified in the
Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions with
respect to Securities deposited in any Margin
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Account shall be dealt with in accordance with the terms and conditions of the
Margin Account Agreement.
4. The Custodian shall have a continuing lien and security interest in
and to any property at any time held by the Custodian in any Collateral Account
described herein. In accordance with applicable law the Custodian may enforce
its lien and realize on any such property whenever the Custodian has made
payment or delivery pursuant to any Put Option guarantee letter or similar
document or any receipt issued hereunder by the Custodian. In the event the
Custodian should realize on any such property net proceeds which are less than
the Custodian's obligations under any Put Option guarantee letter or similar
document or any receipt, such deficiency shall be a debt owed the Custodian by
the Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund with a
statement with respect to each Margin Account in which money or Securities are
held specifying as of the close of business on the previous business day: (a)
the name of the Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The Custodian shall make
available upon request to any broker, dealer, or futures commission merchant
specified in the name of a Margin Account a copy of the statement furnished the
Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in which
cash and/or Securities are maintained in a Collateral Account for any Series,
the Custodian shall furnish the Fund with a statement with respect to such
Collateral Account specifying the amount of cash and/or the amount and kind of
Securities held therein. No later than the close of business next succeeding
the delivery to the Fund of such statement, the Fund shall furnish to the
Custodian a Certificate or Written Instructions specifying the then market value
of the Securities described in such statement. In the event such then market
value is indicated to be less than the Custodian's obligation with respect to
any outstanding Put Option guarantee letter or similar document, the Fund shall
promptly specify in a Certificate the additional cash and/or Securities to be
deposited in such Collateral Account to eliminate such deficiency.
ARTICLE XII
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the resolution of
the Board of Directors of the Fund, certified by the Secretary or any Assistant
Secretary, either (i) setting forth with respect to the Series specified therein
the date of
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the declaration of a dividend or distribution, the date of payment thereof, the
record date as of which shareholders entitled to payment shall be determined,
the amount payable per Share of such Series to the shareholders of record as of
that date and the total amount payable to the Dividend Agent and any sub-
dividend agent or co-dividend agent of the Fund on the payment date, or (ii)
authorizing with respect to the Series specified therein the declaration of
dividends and distributions on a daily basis and authorizing the Custodian to
rely on Oral Instructions, Written Instructions or a Certificate setting forth
the date of the declaration of such dividend or distribution, the date of
payment thereof, the record date as of which shareholders entitled to payment
shall be determined, the amount payable per Share of such Series to the
shareholders of record as of that date and the total amount payable to the
Dividend Agent on the payment date.
2. Upon the payment date specified in such resolution, Oral
Instructions, Written Instructions or Certificate, as the case may be, the
Custodian shall pay out of the moneys held for the account of each Series the
total amount payable to the Dividend Agent and any sub-dividend agent or co-
dividend agent of the Fund with respect to such Series.
ARTICLE XIII
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to the
Custodian a Certificate duly specifying:
(a) The Series, the number of Shares sold, trade date, and price;
and
(b) The amount of money to be received by the Custodian for the
sale of such Shares and specifically allocated to the separate account in the
name of such Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian
shall credit such money to the separate account in the name of the Series for
which such money was received.
3. Upon issuance of any Shares of any Series described in the foregoing
provisions of this Article, the Custodian shall pay, out of the money held for
the account of such Series, all original issue or other taxes required to be
paid by the Fund in connection with such issuance upon the receipt of a
Certificate specifying the amount to be paid.
4. Except as provided hereinafter, whenever the Fund desires the
Custodian to make payment out of the money held by the Custodian hereunder in
connection with a redemption of any Shares, it shall furnish to the Custodian a
Certificate specifying:
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(a) The number and Series of Shares redeemed; and
(b) The amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth the
Series and number of Shares received by the Transfer Agent for redemption and
that such Shares are in good form for redemption, the Custodian shall make
payment to the Transfer Agent out of the moneys held in the separate account in
the name of the Series the total amount specified in the Certificate issued
pursuant to the foregoing paragraph 4 of this Article.
6. Notwithstanding the above provisions regarding the redemption of any
Shares, whenever any Shares are redeemed pursuant to any check redemption
privilege which may from time to time be offered by the Fund, the Custodian,
unless otherwise instructed by a Certificate, shall, upon receipt of an advice
from the Fund or its agent setting forth that the redemption is in good form for
redemption in accordance with the check redemption procedure, honor the check
presented as part of such check redemption privilege out of the moneys held in
the separate account of the Series of the Shares being redeemed.
ARTICLE XIV
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion, advance funds on
behalf of any Series which results in an overdraft because the moneys held by
the Custodian in the separate account for such Series shall be insufficient to
pay the total amount payable upon a purchase of Securities specifically
allocated to such Series, as set forth in a Certificate, Oral Instructions, or
Written Instructions or which results in an overdraft in the separate account of
such Series for some other reason, or if the Fund is for any other reason
indebted to the Custodian with respect to a Series, including any indebtedness
to The Bank of New York under the Fund's Cash Management and Related Services
Agreement, (except a borrowing for investment or for temporary or emergency
purposes using Securities as collateral pursuant to a separate agreement and
subject to the provisions of paragraph 2 of this Article), such overdraft or
indebtedness shall be deemed to be a loan made by the Custodian to the Fund for
such Series payable on demand and shall bear interest from the date incurred at
a rate per annum (based on a 360-day year for the actual number of days
involved) equal to 1/2% over Custodian's prime commercial lending rate in effect
from time to time, such rate to be adjusted on the effective date of any change
in such prime commercial lending rate but in no event to be less than 6% per
annum. In addition, the Fund hereby agrees that the Custodian shall have a
continuing lien and security interest in and to any property specifically
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allocated to such Series at any time held by it for the benefit of such Series
or in which the Fund may have an interest which is then in the Custodian's
possession or control or in possession or control of any third party acting in
the custodian's behalf. The Fund authorizes the Custodian, in its sole
discretion, at any time to charge any such overdraft or indebtedness together
with interest due thereon against any balance of account standing to such
Series' credit on the Custodian's books. In addition, the Fund hereby covenants
that on each Business Day on which either it intends to enter a Reverse
Repurchase Agreement and/or otherwise borrow from a third party, or which next
succeeds a Business Day on which at the close of business the Fund had
outstanding a Reverse Repurchase Agreement or such a borrowing, it shall prior
to 9 a.m., New York City time, advise the Custodian, in writing, of each such
borrowing, shall specify the Series to which the same relates, and shall not
incur any indebtedness not so specified other than from the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, the
Custodian) from which it borrows money for investment or for temporary or
emergency purposes using Securities held by the Custodian hereunder as
collateral for such borrowings, a notice or undertaking in the form currently
employed by any such bank setting forth the amount which such bank will loan to
the Fund against delivery of a stated amount of collateral. The Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to each
such borrowing: (a) the Series to which such borrowing relates; (b) the name of
the bank, (c) the amount and terms of the borrowing, which may be set forth by
incorporating by reference an attached promissory note, duly endorsed by the
Fund, or other loan agreement, (d) the time and date, if known, on which the
loan is to be entered into, (e) the date on which the loan becomes due and
payable, (f) the total amount payable to the Fund on the borrowing date, (g)
the market value of Securities to be delivered as collateral for such loan,
including the name of the issuer, the title and the number of shares or the
principal amount of any particular Securities, and (h) a statement specifying
whether such loan is for investment purposes or for temporary or emergency
purposes and that such loan is in conformance with the Investment Company Act
of 1940 and the Fund's prospectus. The Custodian shall deliver on the
borrowing date specified in a Certificate the specified collateral and the
executed promissory note, if any, against delivery by the lending bank of the
total amount of the loan payable, provided that the same conforms to the total
amount payable as set forth in the Certificate. The Custodian may, at the
option of the lending bank, keep such collateral in its possession, but such
collateral shall be subject to all rights therein given the lending bank by
virtue of any promissory note or loan agreement. The Custodian shall deliver
such Securities as additional collateral as may be specified in a Certificate
to collateralize further any transaction described in this paragraph. The Fund
shall cause all Securities released from collateral status to be returned
directly to the Custodian,
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and the Custodian shall receive from time to time such return of collateral as
may be tendered to it. In the event that the Fund fails to specify in a
Certificate the Series, the name of the issuer, the title and number of shares
or the principal amount of any particular Securities to be delivered as
collateral by the Custodian, the Custodian shall not be under any obligation to
deliver any Securities.
ARTICLE XV
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, neither the Custodian nor its nominee
shall be liable for any loss or damage, including counsel fees, resulting from
its action or omission to act or otherwise, either hereunder or under any Margin
Account Agreement, except for any such loss or damage arising out of its own
negligence or willful misconduct. In no event shall the Custodian be liable to
the Fund or any third party for special, indirect or consequential damages or
lost profits or loss of business, arising under or in connection with this
Agreement, even if previously informed of the possibility of such damages and
regardless of the form of action. The Custodian may, with respect to questions
of law arising hereunder or under any Margin Account Agreement, apply for and
obtain the advice and opinion of counsel to the Fund or of its own counsel, at
the expense of the Fund, and shall be fully protected with respect to anything
done or omitted by it in good faith in conformity with such advice or opinion.
The Custodian shall be liable to the Fund for any loss or damage resulting from
the use of the Book-Entry System or any Depository arising by reason of any
negligence or willful misconduct on the part of the Custodian or any of its
employees or agents.
2. Without limiting the generality of the foregoing, the Custodian shall
be under no obligation to inquire into, and shall not be liable for:
(a) The validity of the issue of any Securities purchased, sold, or
written by or for the Fund, the legality of the purchase, sale or writing
thereof, or the propriety of the amount paid or received therefor;
(b) The legality of the sale or redemption of any Shares, or the
propriety of the amount to be received or paid therefor;
(c) The legality of the declaration or payment of any dividend by the
Fund;
(d) The legality of any borrowing by the Fund using Securities as
collateral;
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(e) The legality of any loan of portfolio Securities, nor shall the
Custodian be under any duty or obligation to see to it that any cash collateral
delivered to it by a broker, dealer, or financial institution or held by it at
any time as a result of such loan of portfolio Securities of the Fund is
adequate collateral for the Fund against any loss it might sustain as a result
of such loan. The Custodian specifically, but not by way of limitation, shall
not be under any duty or obligation periodically to check or notify the Fund
that the amount of such cash collateral held by it for the Fund is sufficient
collateral for the Fund, but such duty or obligation shall be the sole
responsibility of the Fund. In addition, the Custodian shall be under no duty
or obligation to see that any broker, dealer or financial institution to which
portfolio Securities of the Fund are lent pursuant to Article XIV of this
Agreement makes payment to it of any dividends or interest which are payable to
or for the account of the Fund during the period of such loan or at the
termination of such loan, provided, however, that the Custodian shall promptly
notify the Fund in the event that such dividends or interest are not paid and
received when due; or
(f) The sufficiency or value of any amounts of money and/or
Securities held in any Margin Account, Senior Security Account or Collateral
Account in connection with transactions by the Fund. In addition, the
Custodian shall be under no duty or obligation to see that any broker, dealer,
futures commission merchant or Clearing Member makes payment to the Fund of any
variation margin payment or similar payment which the Fund may be entitled to
receive from such broker, dealer, futures commission merchant or Clearing
Member, to see that any payment received by the Custodian from any broker,
dealer, futures commission merchant or Clearing Member is the amount the Fund
is entitled to receive, or to notify the Fund of the Custodian's receipt or
non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the
Custodian of, any money, whether or not represented by any check, draft, or
other instrument for the payment of money, received by it on behalf of the Fund
until the Custodian actually receives and collects such money directly or by
the final crediting of the account representing the Fund's interest at the
Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable
for ascertaining or acting upon any calls, conversions, exchange offers,
tenders, interest rate changes or similar matters relating to Securities held
in the Depository, unless the Custodian shall have actually received timely
notice from the Depository. In no event shall the Custodian have any
responsibility or liability for the failure of the Depository to collect, or
for the late collection or late crediting by the Depository of any amount
payable upon Securities deposited in the Depository which may mature or be
redeemed, retired, called or otherwise become payable. However, upon receipt
of a
- 28 -
<PAGE>
Certificate from the Fund of an overdue amount on Securities held in the
Depository the Custodian shall make a claim against the Depository on behalf of
the Fund, except that the Custodian shall not be under any obligation to appear
in, prosecute or defend any action suit or proceeding in respect to any
Securities held by the Depository which in its opinion may involve it in
expense or liability, unless indemnity satisfactory to it against all expense
and liability be furnished as often as may be required.
5. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount due to the Fund from the Transfer
Agent of the Fund nor to take any action to effect payment or distribution by
the Transfer Agent of the Fund of any amount paid by the Custodian to the
Transfer Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount, if the Securities upon which such
amount is payable are in default, or if payment is refused after due demand or
presentation, unless and until (i) it shall be directed to take such action by
a Certificate and (ii) it shall be assured to its satisfaction of reimbursement
of its costs and expenses in connection with any such action.
7. The Custodian may appoint one or more banking institutions as
Depository or Depositories, as Sub-Custodian or Sub-Custodians, or as Co-
Custodian or Co-Custodians including, but not limited to, banking institutions
located in foreign countries, of Securities and moneys at any time owned by the
Fund, upon such terms and conditions as may be approved in a Certificate or
contained in an agreement executed by the Custodian, the Fund and the appointed
institution.
8. The Custodian shall not be under any duty or obligation (a) to
ascertain whether any Securities at any time delivered to, or held by it, for
the account of the Fund and specifically allocated to a Series are such as
properly may be held by the Fund or such Series under the provisions of its then
current prospectus, or (b) to ascertain whether any transactions by the Fund,
whether or not involving the Custodian, are such transactions as may properly be
engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund agrees to pay
to the Custodian all out-of-pocket expenses and such compensation as may be
agreed upon from time to time between the Custodian and the Fund. The
Custodian may charge such compensation and any expenses with respect to a
Series incurred by the Custodian in the performance of its duties pursuant to
such agreement against any money specifically allocated to such Series. Unless
and until the Fund instructs the Custodian by a Certificate to apportion any
loss, damage, liability or expense among the Series in a specified manner, the
Custodian shall also be entitled to charge against any money
- 29 -
<PAGE>
held by it for the account of a Series such Series' pro rata share (based on
such Series net asset value at the time of the charge to the aggregate net
asset value of all Series at that time) of the amount of any loss, damage,
liability or expense, including counsel fees, for which it shall be entitled to
reimbursement under the provisions of this Agreement. The expenses for which
the Custodian shall be entitled to reimbursement hereunder shall include, but
are not limited to, the expenses of sub-custodians and foreign branches of the
Custodian incurred in settling outside of New York City transactions involving
the purchase and sale of Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate, notice
or other instrument in writing received by the Custodian and reasonably
believed by the Custodian to be a Certificate. The Custodian shall be entitled
to rely upon any Oral Instructions and any Written Instructions actually
received by the Custodian hereinabove provided for. The Fund agrees to forward
to the Custodian a Certificate or facsimile thereof confirming such Oral
Instructions or Written Instructions in such manner so that such Certificate or
facsimile thereof is received by the Custodian, whether by hand delivery,
telecopier or other similar device, or otherwise, by the close of business of
the same day that such Oral Instructions or Written Instructions are given to
the Custodian. The Fund agrees that the fact that such confirming instructions
are not received by the Custodian shall in no way affect the validity of the
transactions or enforceability of the transactions hereby authorized by the
Fund. The Fund agrees that the Custodian shall incur no liability to the Fund
in acting upon Oral Instructions or Written Instructions given to the Custodian
hereunder concerning such transactions provided such instructions reasonably
appear to have been received from an Authorized Person.
11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably believed by the
Custodian to be given in accordance with the terms and conditions of any Margin
Account Agreement. Without limiting the generality of the foregoing, the
Custodian shall be under no duty to inquire into, and shall not be liable for,
the accuracy of any statements or representations contained in any such
instrument or other notice including, without limitation, any specification of
any amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in the
possession of the Custodian shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the Investment Company
Act of 1940, as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives, shall have
access to such books and records during the Custodian's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's authorized
- 30 -
<PAGE>
representative, and the Fund shall reimburse the Custodian its expenses of
providing such copies. Upon reasonable request of the Fund, the Custodian
shall provide in hard copy or on microfilm, whichever the Custodian elects,
any records included in any such delivery which are maintained by the
Custodian on a computer disc, or are similarly maintained, and the Fund shall
reimburse the Custodian for its expenses of providing such hard copy or micro-
film.
13. The Custodian shall provide the Fund with any report obtained by the
Custodian on the system of internal accounting control of the Book-Entry System,
the Depository or O.C.C., and with such reports on its own systems of internal
accounting control as the Fund may reasonably request from time to time.
14. The Fund agrees to indemnify the Custodian against and save the
Custodian harmless from all liability, claims, losses and demands whatsoever,
including attorney's fees, howsoever arising or incurred because of or in
connection with this Agreement, including the Custodian's payment or non-payment
of checks pursuant to paragraph 6 of Article XIII as part of any check
redemption privilege program of the Fund, except for any such liability, claim,
loss and demand 'Arising out of the Custodian's own negligence or willful
misconduct.
15. Subject to the foregoing provisions of this Agreement, the Custodian
may deliver and receive Securities, and receipts with respect to such
Securities, and arrange for payments to be made and received by the Custodian in
accordance with the customs prevailing from time to time among brokers or
dealers in such Securities. When the Custodian is instructed to deliver
Securities against payment, delivery of such Securities and receipt of payment
therefor may not be completed simultaneously. The Fund assumes all
responsibility and liability for all credit risks involved in connection with
the Custodian's delivery of Securities pursuant to instructions of the Fund,
which responsibility and liability shall continue until final payment in full
has been received by the Custodian.
16. The Custodian shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE XVI
TERMINATION
1. Either of the parties hereto may terminate this Agreement by giving to
the other party a notice in writing specifying the date of such termination,
which shall be not less than ninety (90) days after the date of giving of such
notice. In the event such notice is given by the Fund, it shall be
- 31 -
<PAGE>
accompanied by a copy of a resolution of the Board of Directors of the Fund,
certified by the Secretary or any Assistant Secretary, electing to terminate
this Agreement and designating a successor custodian or custodians, each of
which shall be a bank or trust company having not less than $2,000,000
aggregate capital, surplus and undivided profits. In the event such notice is
given by the Custodian, the Fund shall, on or before the termination date,
deliver to the Custodian a copy of a resolution of the Board of Directors of
the Fund, certified by the Secretary or any Assistant Secretary, designating a
successor custodian or custodians. In the absence of such designation by the
Fund, the Custodian may designate a successor custodian which shall be a bank
or trust company having not less than $2,000,000 aggregate capital, surplus and
undivided profits. Upon the date set forth in such notice this Agreement shall
terminate, and the Custodian shall upon receipt of a notice of acceptance by
the successor custodian on that date deliver directly to the successor
custodian all Securities and moneys then owned by the Fund and held by it as
Custodian, after deducting all fees, expenses and other amounts for the payment
or reimbursement of which it shall then be entitled.
2. If a successor custodian is not designated by the Fund or the
Custodian in accordance with the preceding paragraph, the Fund shall upon the
date specified in the notice of termination of this Agreement and upon the
delivery by the Custodian of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund be deemed to be its own custodian and the Custodian shall thereby be
relieved of all duties and responsibilities pursuant to this Agreement, other
than the duty with respect to Securities held in the Book Entry System which
cannot be delivered to the Fund to hold such Securities hereunder in accordance
with this Agreement.
ARTICLE XVII
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the
present Officers of the Fund under its corporate seal, setting forth the names
and the signatures of the present Authorized Persons. The Fund agrees to
furnish to the Custodian a new Certificate in similar form in the event that any
such present Authorized Person ceases to be an Authorized Person or in the event
that other or additional Authorized Persons are elected or appointed. Until
such new Certificate shall be received, the Custodian shall be fully protected
in acting under the provisions of this Agreement upon Oral Instructions or
signatures of the present Authorized Persons as set forth in the last delivered
Certificate.
2. Annexed hereto as Appendix B is a Certificate signed by two of the
present Officers of the Fund under its corporate
- 32 -
<PAGE>
seal, setting forth the names and the signatures of the present Officers of the
Fund. The Fund agrees to furnish to the Custodian a new Certificate in similar
form in the event any such present Officer ceases to be an Officer of the Fund,
or in the event that other or additional Officers are elected or appointed.
Until such new Certificate shall be received, the Custodian shall be fully
protected in acting under the provisions of this Agreement upon the signatures
of the Officers as set forth in the last delivered Certificate.
3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10286, or at such other place as the
Custodian may from time to time designate in writing.
4. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given if addressed
to the Fund and mailed or delivered to it at its office at the address for the
Fund first above written, or at such other place as the Fund may from time to
time designate in writing.
5. This Agreement may not be amended or modified in any manner except by
a written agreement executed by both parties with the same formality as this
Agreement and approved by a resolution of the Board of Directors of the Fund.
6. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund without the written consent
of the Custodian, or by the Custodian without the written consent of the Fund,
authorized or approved by a resolution of the Fund's Board of Directors.
7. This Agreement shall be construed in accordance with the laws of the
State of New York without giving effect to conflict of laws principles thereof.
Each party hereby consents to the jurisdiction of a state or federal court
situated in New York City, New York in connection with any dispute arising
hereunder and hereby waives its right to trial by jury.
8. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
- 33 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective corporate Officers, thereunto duly authorized and
their respective corporate seals to be hereunto affixed, as of the day and year
first above written.
MERRILL LYNCH ADJUSTABLE
RATE SECURITIES FUND, INC.
[SEAL] BY: /s/
------------------------
Attest: /s/
- -----------------------
THE BANK OF NEW YORK
BY: /s/
[SEAL] ------------------------
Attest:
/s/
- -----------------------
- 34 -
<PAGE>
APPENDIX A
I, of MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC., a Maryland corporation do hereby certify that:
The following individuals have been duly authorized by the Board of
Directors of the Fund in conformity with the Fund's Articles of Incorporation
and By-Laws to give Oral Instructions and Written Instructions on behalf of the
Fund, and the signatures set forth opposite their respective names are their
true and correct signatures:
Name Signature
- ------------------------- -------------------------
<PAGE>
APPENDIX B
I, , and I, of MERRILL LYNCH
ADJUSTABLE RATE SECURITIES FUND, INC., a Maryland corporation (the "Fund"), do
hereby certify that:
The following individuals serve in the following positions with the Fund
and each has been duly elected or appointed by the Board of Directors of the
Fund to each such position and qualified therefor in conformity with the Fund's
Articles of Incorporation and By-Laws, and the signatures set forth opposite
their respective names are their true and correct signatures:
Name Position Signature
- -------------------- -------------------- --------------------
<PAGE>
APPENDIX C
I, , an Assistant Vice President with
THE BANK OF NEW YORK do hereby designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
<PAGE>
EXHIBIT A
CERTIFICATION
The undersigned, hereby certifies
that he is the duly elected and acting of MERRILL
LYNCH ADJUSTABLE RATE SECURITIES FUND, INC., a Maryland corporation (the
"Fund"), and further certifies that the following resolution was adopted by the
Board of Directors of the Fund at a meeting duly held on , 1991,
at which a quorum was at all times present and that such resolution has not
been modified or rescinded and is in full force and effect as of the date
hereof.
RESOLVED, that The Bank of New York,, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of ,
1991, (the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis to deposit in the Book-Entry System, as defined in the Custody
Agreement, all securities eligible for deposit therein, regardless of the Series
to which the same are specifically allocated, and to utilize the Book-Entry
System to the extent possible in connection with its performance thereunder,
including, without limitation, in connection with settlements of purchases and
sales of securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of MERRILL
LYNCH ADJUSTABLE RATE SECURITIES FUND, INC. as of the day of
, 1991.
------------------------------
[SEAL]
<PAGE>
EXHIBIT B
CERTIFICATION
The undersigned, , hereby certifies
that he is the duly elected and acting of MERRILL
LYNCH ADJUSTABLE RATE SECURITIES FUND, INC., a Maryland
corporation (the "Fund"), and further certifies that the following resolution
was adopted by the Board of Directors of the Fund at a meeting duly held on
, 1991, at which a quorum was at all times present and
that such resolution has not been modified or rescinded and is in full force
and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of , 1991,
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis until such time as it receives a Certificate, as defined in the
Custody Agreement, to the contrary to deposit in the Depository, as defined in
the Custody Agreement, all securities eligible for deposit therein, regardless
of the Series to which the same are specifically allocated, and to utilize the
Depository to the extent possible in connection with its performance thereunder,
including, without limitation, in connection with settlements of purchases and
sales of securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of MERRILL
LYNCH ADJUSTABLE RATE SECURITIES FUND, INC. as of the day of ,
1991.
______________________________
[SEAL]
<PAGE>
EXHIBIT B-1
CERTIFICATION
The undersigned, , hereby
certifies that he or she is the duly elected and acting
of MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC., a Maryland corporation
(the "Fund"), and further certifies that the following resolution was adopted by
the Board of Trustees of the Fund at a meeting duly held on ,
1991, at which a quorum was at all times present and that such resolution has
not been modified or rescinded and is in full force and effect as of the date
hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as of
, 1991, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as it
receives a Certificate, as defined in the Custody Agreement, to the
contrary to deposit in the Participants Trust Company as Depository, as
defined in the Custody Agreement, all securities eligible for deposit
therein, regardless of the Series to which the same are specifically
allocated, and to utilize the Participants Trust Company to the extent
possible in connection with its performance thereunder, including,
without limitation, in connection with settlements of purchases and sales
of securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC., as of the day
of , 1991.
______________________________
[SEAL]
<PAGE>
EXHIBIT C
CERTIFICATION
The undersigned, , hereby certifies that he is
the duly elected and acting of MERRILL LYNCH
ADJUSTABLE RATE SECURITIES FUND, INC., a Maryland corporation (the "Fund"), and
further certifies that the following resolution was adopted by the Board of
Directors of the Fund at a meeting duly held on , 1991,
at which a quorum was at all times present and that such resolution has not
been modified or rescinded and is in full force and effect as of the date
hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of
, 1991, (the "Custody Agreement") is authorized and instructed on a
continuous and ongoing basis until such time as it receives a Certificate, as
defined in the Custody Agreement, to the contrary, to accept, utilize and act
with respect to Clearing Member confirmations for Options and transaction in
Options, regardless of the Series to which the same are specifically allocated,
as such terms are defined in the Custody Agreement, as provided in the Custody
Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of MERRILL
LYNCH ADJUSTABLE RATE SECURITIES FUND, INC. as of the day of
, 1991.
______________________________
[SEAL)
<PAGE>
DOMESTIC CUSTODIAN FEE SCHEDULE
FOR
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
Safekeeping/Income Collection/Reporting Via First DTC/ID Affirmations
- ---------------------------------------------------------------------
1 basis point per annum on the market value of portfolio securities up to
$500MM.
1/2 basis point on the value exceeding $500MM.
Security Transaction Charges
- ----------------------------
$ 8 - Book-Entry settlements and paydowns - DTC/FRB/PTC
$30 - Physicals, options, and futures
Other Transaction Charges
- -------------------------
$8.50 Money transfers in/out - not related to Securities
transactions, Futures maintenance margins.
Out-of-Pocket Expenses
- ----------------------
These expenses are in addition to quoted fees and are billed as they are
incurred. These expenses traditionally include, but are not limited to, postage
and handling on physical transfer items, telephone charges, and Fed Wire charges
relating to security settlements, etc.
Billing Cycle
- -------------
Monthly
Merrill Lynch Adjustable Rate The Bank OF New York
Securities Fund, Inc.
Approved BY: /s/ Gerald M. Richard Submitted BY: /s/
----------------------- ------------------------
Date: July 31, 1991 Date: June 4, 1991
----------------------- ------------------------
<PAGE>
EXHIBIT 99.9
TRANSFER AGENCY, DIVIDEND DISBURSING AGENCY
AND SHAREHOLDER SERVICING AGENCY AGREEMENT
THIS AGREEMENT made as of the llth day of June, 1991 by and between
Merrill Lynch Adjustable Rate Securities Fund, Inc., a Maryland corporation (the
"Fund") and Merrill Lynch Financial Data Services, Inc. ("FDS"), a New Jersey
corporation.
WITNESSETH:
WHEREAS, the Fund wishes to appoint FDS to be the Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent upon, and subject to,
the terms and provisions of this Agreement, and FDS is desirous of accepting
such appointment upon, and subject to, such terms and provisions:
NOW THEREFORE, in consideration of mutual covenants contained in this
Agreement, the Fund and FDS agree as follows:
1. Appointment of FDS as Transfer Agent, Dividend Disbursing Agent and
-------------------------------------------------------------------
Shareholder Servicing Agent.
- ---------------------------
(a) The Fund hereby appoints FDS to act as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent for the
Fund upon, and subject to, the terms and provisions of this
Agreement.
(b) FDS hereby accepts the appointment as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund, and agrees to act
as such upon, and subject to, the terms and provisions of this Agreement.
2. Definitions.
-----------
(a) In this Agreement:
(i) The term "Act" means the Investment Company Act of 1940 as amended
from time to time and any rule or regulation thereunder;
(ii) The term "Account" means any account of a Shareholder, or, if the
shares are held in an account in the name of MLPF&S for benefit of an identified
customer, such account, including a Plan Account, any account under a plan (by
whatever name referred to in the Prospectus) pursuant to the Self-Employed
Individuals Retirement Act of 1962 ("Keogh Act Plan") and any plan (by whatever
name referred to in the Prospectus) in conjunction with Section 401 of the
Internal Revenue Code ("Corporation Master Plan");
<PAGE>
(iii) The term "application" means an application made by a
Shareholder or prospective Shareholder respecting the opening of an Account;
(iv) The term "MLFD" means Merrill Lynch Funds Distributor, Inc., a
Delaware corporation;
(v) The term "MLPF&S" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a Delaware corporation;
(vi) The term "Officer's Instruction" means an instruction in writing
given on behalf of the Fund to FDS, and signed on behalf of the Fund by the
President, any Vice President, the Secretary or the Treasurer of the Fund;
(vii) The term "Prospectus" means the Prospectus and the Statement of
Additional Information of the Fund as from time to time in effect;
(viii) The term "Shares" means shares of stock or beneficial
interest, as the case may be, of the Fund, irrespective of class or series;
(ix) The term "Shareholder" means the holder of record of Shares;
(x) The term "Plan Account" means an account opened by a Shareholder
or prospective Shareholder in respect to an open account, monthly payment or
withdrawal plan (in each case by whatever name referred to in the Prospectus),
and may also include an account relating to any other plan if and when provision
is made for such plan in the Prospectus.
3. Duties of FDS as Transfer Agent, Dividend Disbursing Agent and
--------------------------------------------------------------
Shareholder Servicing Agent.
- ---------------------------
(a) Subject to the succeeding provisions of the Agreement, FDS hereby
agrees to perform the following functions as Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing Agent for the Fund;
(i) Issuing, transferring and redeeming Shares;
(ii) Opening, maintaining, servicing and closing Accounts;
(iii) Acting as agent for the Fund Shareholders and/or
customers of MLPF&S in connection with Plan Accounts, upon the
terms and subject to the conditions contained in the Prospectus
and application relating to the specific Plan Account;
2
<PAGE>
(iv) Acting as agent of the Fund and/or MLPF&S, maintaining such
records as may permit the imposition of such contingent deferred sales charges
as may be described in the Prospectus, including such reports as may be
reasonably requested by the Fund with respect to such Shares as may be subject
to a contingent deferred sales charge;
(v) Upon the redemption of Shares subject to such a contingent
deferred sales charge, calculating and deducting from the redemption proceeds
thereof the amount of such charge in the manner set forth in the Prospectus.
FDS shall pay, on behalf of MLFD, to MLPF&S such deducted contingent deferred
sales charges imposed upon all Shares maintained in the name of MLPF&S, or
maintained in the name of an account identified as a customer account of MLPF&S.
Sales charges imposed upon any other Shares shall be paid by FDS to MLFD.
(vi) Exchanging the investment of an investor into, or from the shares
of other open-end investment companies or other series portfolios of the Fund,
if any, if and to the extent permitted by the Prospectus at the direction of
such investor.
(vii) Processing redemptions;
(viii) Examining and approving legal transfers;
(ix) Replacing lost, stolen or destroyed certificates representing
Shares, in accordance with, and subject to, procedures and conditions adopted by
the Fund;
(x) Furnishing such confirmations of transactions relating to their
Shares as required by applicable law;
(xi) Acting as agent for the Fund and/or MLPF&S, furnishing such
appropriate periodic statements relating to Accounts, together with additional
enclosures, including appropriate income tax information and income tax forms
duly completed, as required by applicable law;
(xii) Acting as agent for the Fund and/or MLPF&S, mailing annual,
semi-annual and quarterly reports prepared by or on behalf of the Fund, and
mailing new Prospectuses upon their issue to Shareholders as required by
applicable law;
(xiii) Furnishing such periodic statements of transactions effected
by FDS, reconciliations, balances and summaries as the Fund may reasonably
request;
(xiv) Maintaining such books and records relating to transactions
effected by FDS as are required by the Act, or by any other applicable provision
of law, rule or regulation, to be maintained by the Fund or its transfer agent
with respect to such
3
<PAGE>
transactions, and preserving, or causing to be preserved any such books and
records for such periods as may be required by any such law, rule or regulation
and as may be agreed upon from time to time between FDS and the Fund. In
addition, FDS agrees to maintain and preserve master files and historical
computer tapes on a daily basis in multiple separate locations a sufficient
distance apart to insure preservation of at least one copy of such information;
(xv) Withholding taxes on non-resident alien Accounts, preparing and
filing U.S. Treasury Department Form 1099 and other appropriate forms as
required by applicable law with respect to dividends and distributions; and
(xvi) Reinvesting dividends for full and fractional shares and
disbursing cash dividends, as applicable.
(b) FDS agrees to act as proxy agent in connection with the holding of
annual, if any, and special meetings of Shareholders, mailing such notices,
proxies and proxy statements in connection with the holding of such meetings as
may be required by applicable law, receiving and tabulating votes-cast by proxy
and communicating to the Fund the results of such tabulation accompanied by
appropriate certifications, and preparing and furnishing to the Fund certified
lists of Shareholders as of such date, in such form and containing such
information as may be required by the Fund.
(c) FDS agrees to deal with, and answer in a timely manner, all
correspondence and inquiries relating to the functions of FDS under this
Agreement with respect to Accounts.
(d) FDS agrees to furnish to the Fund such information and at such
intervals as is necessary for the Fund to comply with the registration and/or
the reporting requirements (including applicable escheat laws) of the
Securities and Exchange Commission, Blue Sky authorities or other governmental
authorities.
(e) FDS agrees to provide to the Fund such information as may reasonably
be required to enable the Fund to reconcile the number of outstanding Shares
between FDS's records and the account books of the Fund.
(f) Notwithstanding anything in the foregoing provisions of this
paragraph, FDS agrees to perform its functions thereunder subject to such
modification (whether in respect of particular cases or in any particular class
of cases) as may from time to time be contained in an Officer's Instruction.
4
<PAGE>
4. Compensation.
------------
The charges for services described in this Agreement, including "out-
of-pocket" expenses, will be set forth in the Schedule of Fees attached hereto.
5. Right of Inspection.
-------------------
FDS agrees that it will in a timely manner make available to, and
permit, any officer, accountant, attorney or authorized agent of the Fund to
examine and make transcripts and copies (including photocopies and computer or
other electronical information storage media and print-outs) of any and all of
its books and records which relate to any transaction or function performed by
FDS under or pursuant to this Agreement.
6. Confidential Relationship.
-------------------------
FDS agrees that it will, on behalf of itself and its officers and
employees, treat all transactions contemplated by this Agreement, and all
information germane thereto, as confidential and not to be disclosed to any
person (other than the Shareholder concerned, or the Fund, or as may be
disclosed in the examination of any books or records by any person lawfully
entitled to examine the same) except as may be authorized by the Fund by way of
an officer's Instruction.
7. Indemnification.
---------------
The Fund shall indemnify and hold FDS harmless from any loss, costs,
damage and reasonable expenses, including reasonable attorney's fees (provided
that such attorney is appointed with the Fund's consent, which consent shall not
be unreasonably withheld), incurred by it resulting from any claim, demand,
action, or suit in connection with the performance of its duties hereunder,
provided that this indemnification shall not apply to actions or omissions of
FDS in cases of willful misconduct, failure to act in good faith or negligence
by FDS, its officers, employees or agents, and further provided, that prior to
confessing any claim against it which may be subject to this indemnification,
FDS shall give the Fund reasonable opportunity to defend against said claim in
its own name or in the name of FDS. An action taken by FDS upon any Officer's
Instruction reasonably believed by it to have been properly executed shall not
constitute willful misconduct, failure to act in good faith or negligence under
this Agreement.
5
<PAGE>
8. Regarding FDS.
-------------
(a) FDS hereby agrees to hire, purchase, develop and maintain such
dedicated personnel, facilities, equipment, software, resources and capabilities
as may be reasonably determined by the Fund to be necessary for the satisfactory
performance of the duties and responsibilities of FDS. FDS warrants and
represents that its officers and supervisory personnel charged with carrying out
its functions as Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent for the Fund possess the special skill and technical knowledge
appropriate for that purpose. FDS shall at all times exercise due care and
diligence in the performance of its functions as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund. FDS agrees that,
in determining whether it has exercised due care and diligence, its conduct
shall be measured by the standard applicable to persons possessing such special
skill and technical knowledge.
(b) FDS warrants and represents that is duly authorized and permitted to
act as Transfer Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
under all applicable laws and that it will immediately notify the Fund of any
revocation of such authority or permission or of the commencement of any
proceeding or other action which may lead to such revocation.
9. Termination.
-----------
(a) This Agreement shall become effective as of the date first above
written and shall thereafter continue from year to year. This Agreement may be
terminated by the Fund or FDS (without penalty to the Fund or FDS) provided that
the terminating party gives the other party written notice of such termination
at least sixty (60) days in advance, except that the Fund may terminate this
Agreement immediately upon written notice to FDS if the authority or permission
of FDS to act as Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent has been revoked or if any proceeding or other action which the
Fund reasonably believes will lead to such revocation has been commenced.
(b) Upon termination of this Agreement, FDS shall deliver all unissued and
cancelled stock certificates representing Shares remaining in its possession,
and all Shareholder records, books, stock ledgers, instruments and other
documents (including computerized or other electronically stored information)
made or accumulated in the performance of its duties as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund along with a
certified locator document clearly indicating the complete contents therein, to
such successor as may be specified in a notice of termination or Officer's
Instruction;
6
<PAGE>
and the Fund assumes all responsibility for failure thereafter to produce any
paper, record or documents so delivered and identified in the locator document,
if and when required to be produced.
10. Amendment.
---------
Except to the extent that the performance by FDS or its functions under
this Agreement may from time to time be modified by an Officer's Instruction,
this Agreement may be amended or modified only by further written Agreement
between the parties.
11. Governing Law.
-------------
This Agreement shall be governed by the laws of the State of New Jersey.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their respective duly authorized officers and their respective
corporate seals hereunto duly affixed and attested, as of the day and year above
written.
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC.
By: /S/ ARTHUR ZEIKEL
--------------------------
Title: President
-----------------------
FINANCIAL DATA SERVICES, INC.
By: /s/
--------------------------
Title: Vice President
------------------------
7
<PAGE>
Schedule of Fees
----------------
The Fund will pay to FDS an annual fee of $11.00 per class A and Class D
Shareholder Account and $14.00 per Class B and Class C Shareholder Account in
addition to reimbursement for the out-of-pocket expenses incurred by FDS
pursuant to this Agreement.
8
<PAGE>
EXHIBIT 99.13
CERTIFICATE OF SOLE SHAREHOLDER
Merrill Lynch Asset Management, Inc., the holder of 5,000 Class A shares of
beneficial interest, par value $0.10 per share, and 5,000 Class B shares of
beneficial interest, par value $0.10 per share, of Merrill Lynch Adjustable Rate
Securities Fund, Inc., a Maryland corporation (the "Fund"), does hereby confirm
to the Fund its representation that it purchased such shares for investment
purposes, with no present intention of redeeming or reselling any portion
thereof, and does further agree that if it redeems any portion of such shares
prior to the amortization of the Fund's organizational expenses, the proceeds
thereof will be reduced by the proportionate amount of the unamortized
organizational expenses which the number of shares being redeemed bears to the
number of shares initially purchased and outstanding at the time of redemption.
MLAM further agrees that in the event such shares are sold or otherwise
transferred to any other party, that prior to such sale or transfer MLAM will
obtain on behalf of the Fund an agreement from such other party to comply with
the foregoing as to the reduction of redemption proceeds and to obtain a similar
agreement from any transferee of such party.
MERRILL LYNCH ASSET MANAGEMENT, INC.
By: /s/ ARTHUR ZEIKEL
---------------------------------
President
Dated: June 13, 1991
<PAGE>
EXHIBIT 99.15(a)
AMENDED AND RESTATED
CLASS B DISTRIBUTION PLAN
OF
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 11th day of June, l991, and amended
and restated as of October 14, l992, by and between Merrill Lynch Adjustable
Rate Securities Fund, Inc. (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 has entered into a Class B Shares Distribution
Agreement with MLFD, pursuant to which MLFD acts as the exclusive distributor
and representative of the Fund in the offer and sale of Class B shares of common
stock, par value $0.10 per share (the "Class B shares"), of the Fund to the
public; and
WHEREAS, the Fund has entered into a Class B Distribution Plan (the
"Prior Plan") pursuant to Rule l2b-1 under the Investment Company Act; and
WHEREAS, the Fund desires to adopt this Amended and Restated Class B
Distribution Plan (the "Plan") pursuant to Rule 12b-l 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 B 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
Class B shareholders;
<PAGE>
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 O.25% of average daily net assets of the
Fund relating to Class B shares to compensate MLFD and securities firms with
which MLFD enters into related agreements pursuant to Paragraph 3 hereof ("Sub-
Agreements") for account maintenance activities with respect to Class B
shareholders of the Fund.
2. The Fund shall pay MLFD a distribution fee under the Plan at the end of
each month at the annual rate of 0.50% of average daily net assets of the Fund
relating to Class B 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 B shares of the Fund. Such expenditures may
consist of sales commissions to financial consultants for selling Class B 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 al1 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.
2
<PAGE>
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.
5. The Prior Plan has been approved by a vote of at least a majority, as
defined in the Investment Company Act, of the outstanding Class B voting
securities of the Fund. The Plan has not been submitted to the Class B
shareholders because the amendments do not materially increase the rate of
payments by the Fund provided for in the Prior Plan.
6. The Plan shall not take effect until it has been approved, together with
any related agreements, by (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
Trustees"), 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 Trustees, or by vote of a majority of the outstanding Class B voting
securities of the Fund.
9. The Plan may not be amended to increase materially the rate of payments by
the Fund provided for herein unless such amendment is approved by at least a
majority, as defined in the Investment Company Act, of the outstanding Class B
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
3
<PAGE>
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 Plan as of the
date first above written.
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND
By /s/ Arthur Zeikel
--------------------------------------------
MERRILL LYNCH DISTRIBUTOR, INC.
By /s/ Gerald M. Richard
--------------------------------------------
4
<PAGE>
AMENDED AND RESTATED
CLASS B SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 11th day of June, l991, and amended and
restated as of October 14, 1992, by and between Merrill Lynch Funds Distributor,
Inc. ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the
"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, a Maryland corporation (the "Fund"), pursuant
to which it acts as the exclusive distributor for the sale of Class B shares of
common stock, par value $0.10 per share (the "Class B shares"), of the Fund; and
WHEREAS, MLFD and the Fund have entered into an Amended and Restated
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 (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 B shares for account maintenance activities
related to Class B shares of the Fund and a distribution fee from the Fund at
the annual rate of 0.50% of average daily net assets of the Fund relating to
Class B shares for providing sales and promotional activities and services
related to the distribution of Class B shares of the Fund; 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 B 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 with
respect to the Class B shares of the Fund 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 B shares of the Fund, and
incur distribution expenditures, of the types referred to in Paragraph 2 of the
Plan.
3. As compensation for its activities and services performed under this
Sub-Agreement, MLFD shall pay the Securities
1
<PAGE>
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 Sub-Agreezent 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 Trustees"), 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 /s/ Gerald M. Richard
--------------------------------------------
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By /s/ Arthur Zeikel
--------------------------------------------
2
<PAGE>
EXHIBIT 99.16(a)
ADJUSTABLE RATE SECURITIES-CLASS D (8/2/91 TO 11/30/91)
AVERAGE ANNUAL AND TOTAL RETURNS
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVG ANNUAL TOTAL
RETURN RETURN*
---------- ----------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Max. Offer. Price 10.31
----------
Divided by Net Asset Value 10.00
----------
Equals Shares Purchased 96.99 100.00
Plus Shares Acquired through
Dividend Reinvestment 2.08 2.14
---------- ----------
Equals Shares Held
at 11/30/91 99.07 102.14
Multiplied by Net Asset
Value at 11/30/91 10.04 10.04
---------- ----------
Equals Ending Redeemable
Value at $1,000
Investment (ERV) at 11/30/91 $994.70 $1,025.50
Divided by $1,000 (P) 0.9947 1.0255
Subtract 1 -0.0053 0.0255
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) -0.53%
==========
Expressed as a percentage
equals the Aggregate Total
Return for the Period 2.55%
==========
ERV divided by P 0.9947
Raise to the power of 3.0440
Equals 0.9840
Subtract 1 -0.0160
Expressed as a percentage
equals the Average
Annualized Total Return -1.60%
==========
</TABLE>
*Does not include sales charge for the period.
<PAGE>
EXHIBIT 99.16(b)
ADJUSTABLE RATE SECURITIES-CLASS B (8/2/91 TO 11/30/91)
AVERAGE ANNUAL AND TOTAL RETURNS
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVG ANNUAL TOTAL
RETURN RETURN*
---------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 10.00 10.00
--------- ---------
Equals Shares Purchased 100.00 100.00
Plus Shares Acquired through
Dividend Reinvestment 1.98 1.98
Equals Shares Held --------- ---------
at 11/30/91 101.98 101.98
Multiplied by Net Asset
Value at 11/30/91 10.04 10.04
Equals Ending Value before --------- ---------
deduction for contingent
deferred sales charge 1,023.90 1,023.90
Less deferred sales charge 30.00 0.00
--------- ---------
Equals Ending Redeemable
Value of a $1,000
Investment (ERV) $993.90 $1,023.90
--------- ---------
Divided by $1,000 (P) 0.9939 1.0239
Subtract 1 -0.0061 0.0239
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) -0.61%
=========
Expressed as a percentage
equals the Aggregate Total
Return for the Period 2.39%
=========
ERV divided by P 0.9939
Raise to the power of 3.0440
Equals 0.9815
Subtract 1 -0.0185
Expressed as a percentage
equals the Average
Annualized Total Return -1.85%
=========
</TABLE>
*Does not include sales charge for the period.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND - CLASS A
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 221,689,268
<INVESTMENTS-AT-VALUE> 219,381,966
<RECEIVABLES> 4,163,395
<ASSETS-OTHER> 109,572
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 223,654,933
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,574,391
<TOTAL-LIABILITIES> 2,574,391
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 256,438,007
<SHARES-COMMON-STOCK> 36,067
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 80,308
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (33,130,471)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,307,302)
<NET-ASSETS> 344,607
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 18,944,393
<OTHER-INCOME> 0
<EXPENSES-NET> 4,561,386
<NET-INVESTMENT-INCOME> 14,383,007
<REALIZED-GAINS-CURRENT> (9,607,152)
<APPREC-INCREASE-CURRENT> 8,689,257
<NET-CHANGE-FROM-OPS> 13,465,112
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 14,494
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 68,974
<NUMBER-OF-SHARES-REDEEMED> 32,967
<SHARES-REINVESTED> 60
<NET-CHANGE-IN-ASSETS> (176,338,753)
<ACCUMULATED-NII-PRIOR> 362,953
<ACCUMULATED-GAINS-PRIOR> (23,863,016)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,463,526
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,561,386
<AVERAGE-NET-ASSETS> 379,083
<PER-SHARE-NAV-BEGIN> 9.46
<PER-SHARE-NII> .36
<PER-SHARE-GAIN-APPREC> .09
<PER-SHARE-DIVIDEND> .36
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.55
<EXPENSE-RATIO> .87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 221,689,268
<INVESTMENTS-AT-VALUE> 219,381,966
<RECEIVABLES> 4,163,395
<ASSETS-OTHER> 109,572
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 223,654,933
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,574,391
<TOTAL-LIABILITIES> 2,574,391
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 256,438,007
<SHARES-COMMON-STOCK> 21,173,475
<SHARES-COMMON-PRIOR> 39,268,886
<ACCUMULATED-NII-CURRENT> 80,308
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (33,130,471)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,307,302)
<NET-ASSETS> 202,333,797
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 18,944,393
<OTHER-INCOME> 0
<EXPENSES-NET> 4,561,386
<NET-INVESTMENT-INCOME> 14,383,007
<REALIZED-GAINS-CURRENT> (9,607,152)
<APPREC-INCREASE-CURRENT> 8,689,257
<NET-CHANGE-FROM-OPS> 13,465,112
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 13,293,732
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,506,784
<NUMBER-OF-SHARES-REDEEMED> 22,412,085
<SHARES-REINVESTED> 809,890
<NET-CHANGE-IN-ASSETS> (176,338,753)
<ACCUMULATED-NII-PRIOR> 362,953
<ACCUMULATED-GAINS-PRIOR> (23,863,016)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,463,526
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,561,386
<AVERAGE-NET-ASSETS> 273,532,075
<PER-SHARE-NAV-BEGIN> 9.53
<PER-SHARE-NII> .46
<PER-SHARE-GAIN-APPREC> .04
<PER-SHARE-DIVIDEND> .47
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.56
<EXPENSE-RATIO> 1.59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND - CLASS C
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 221,589,268
<INVESTMENTS-AT-VALUE> 219,381,966
<RECEIVABLES> 4,163,395
<ASSETS-OTHER> 109,572
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 223,654,933
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,574,391
<TOTAL-LIABILITIES> 2,574,391
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 256,438,007
<SHARES-COMMON-STOCK> 147,451
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 80,308
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (33,130,471)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,307,302)
<NET-ASSETS> 1,409,236
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 18,944,393
<OTHER-INCOME> 0
<EXPENSES-NET> 4,561,386
<NET-INVESTMENT-INCOME> 14,383,007
<REALIZED-GAINS-CURRENT> (9,607,152)
<APPREC-INCREASE-CURRENT> 8,689,257
<NET-CHANGE-FROM-OPS> 13,465,112
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 11,227
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 231,275
<NUMBER-OF-SHARES-REDEEMED> 84,618
<SHARES-REINVESTED> 794
<NET-CHANGE-IN-ASSETS> (176,338,753)
<ACCUMULATED-NII-PRIOR> 362,953
<ACCUMULATED-GAINS-PRIOR> (23,863,016)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,463,526
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,561,386
<AVERAGE-NET-ASSETS> 329,930
<PER-SHARE-NAV-BEGIN> 9.46
<PER-SHARE-NII> .31
<PER-SHARE-GAIN-APPREC> .10
<PER-SHARE-DIVIDEND> .31
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.56
<EXPENSE-RATIO> 1.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND - CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 221,689,268
<INVESTMENTS-AT-VALUE> 219,381,966
<RECEIVABLES> 4,163,395
<ASSETS-OTHER> 109,572
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 223,654,933
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,574,391
<TOTAL-LIABILITIES> 2,574,391
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 256,438,007
<SHARES-COMMON-STOCK> 1,779,040
<SHARES-COMMON-PRIOR> 2,418,159
<ACCUMULATED-NII-CURRENT> 80,308
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (33,130,471)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,307,302)
<NET-ASSETS> 16,992,902
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 18,944,393
<OTHER-INCOME> 0
<EXPENSES-NET> 4,561,386
<NET-INVESTMENT-INCOME> 14,383,007
<REALIZED-GAINS-CURRENT> (9,607,152)
<APPREC-INCREASE-CURRENT> 8,689,257
<NET-CHANGE-FROM-OPS> 13,465,112
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,017,584
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 404,099
<NUMBER-OF-SHARES-REDEEMED> 1,108,309
<SHARES-REINVESTED> 65,091
<NET-CHANGE-IN-ASSETS> (176,338,753)
<ACCUMULATED-NII-PRIOR> 362,953
<ACCUMULATED-GAINS-PRIOR> (23,863,016)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,463,526
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,561,386
<AVERAGE-NET-ASSETS> 18,745,013
<PER-SHARE-NAV-BEGIN> 9.53
<PER-SHARE-NII> .51
<PER-SHARE-GAIN-APPREC> .03
<PER-SHARE-DIVIDEND> .52
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.55
<EXPENSE-RATIO> 1.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
BROWN & WOOD
ONE WORLD TRADE CENTER
NEW YORK, N.Y. 10048-0557
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
September 27, 1995
Merrill Lynch Adjustable Rate
Securities Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Dear Sirs:
This opinion is furnished in connection with the registration by Merrill
Lynch Adjustable Rate Securities Fund, Inc., a Maryland corporation (the
"Company"), of 23,668,109 shares of common stock, par value $0.10 per share (the
"Shares"), under the Securities Act of 1933 pursuant to a registration statement
on Form N-1A (File No. 33-40332), as amended (the "Registration Statement").
As counsel for the Company, we are familiar with the proceedings taken by
it in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Company, as amended, the By-Laws of the Company and such other documents
as we have deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par
<PAGE>
value thereof, will be legally issued, fully paid and non-assessable shares of
common stock of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood
2
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Adjustable Rate
Securities Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 5 to Registration
Statement No. 33-40332 of our report dated June 30, 1995 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.
/s/ DELOITTE & TOUCHE LLP
Princeton, New Jersey
September 26, 1995
<PAGE>
Adjustable Rate Securities - Class A
10/21/94 - 5/31/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
------------ ----------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price 9.85
----------
Divided by Net Asset Value 9.45
----------
Equals Shares Purchased 101.480 105.708
Plus Shares Acquired through
Dividend Reinvestment 3.703 3.857
---------- ----------
Equals Shares Held at 5/31/95 105.183 109.566
Multiplied by Net Asset Value at 5/31/95 9.57 9.57
---------- ----------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 5/31/95 1,006.60 1,048.54
Divided by $1,000 (P) 1.0066 1.0485
Substract 1 0.0066 0.0485
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) 0.66%
==========
Expressed as a percentage equals the
Aggregate Total Return for the Period 4.85%
==========
ERV divided by P 1.0066
Raise to the power of 1.6441
Equals 1.0109
Substract 1 0.0109
Expressed as a percentage equals the
Average Annualized Total Return 1.09%
==========
</TABLE>
* Does not include sales charge for the period.
<PAGE>
30 DAYS STANDARDIZED YIELD
FOR THE PERIOD ENDING 5-31-95
ADJUSTABLE RATE SECURITIES - CLASS A
<TABLE>
<S> <C>
Long term income generally based on yield to
maturity times market value of each security $600
Plus short term income accrued for the past
thirty days 1,875
-----------
Equals Total Income 2,475
Less expenses for the past thirty days -286
-----------
Equals net monthly income for yield calculation 2,189
-----------
Average shares outstanding for 30 days 44,343
Times the Maximum Offering Price 9.95
-----------
Equals total dollars $441,212
===========
Net monthly income divided by total dollars equals 0.004961493
Add 1 1.004961493
Raise to the power of 6 1.030140656
Substract 1 0.030140656
Times 2 0.060281311
Expressed as a percentage equals the
standardized yield for 30 day period 6.03%
=======
Tax Rate 28.00%
X = 1 minus Tax Rate 72.00%
Standardized Yield divided by X equals
Tax Equivalent Yield for 30 day period 8.38%
=======
</TABLE>
<PAGE>
Adjustable Rate Securities - Class C
10/21/94 - 5/31/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
------------ ----------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 9.46 9.46
---------- ----------
Equals Shares Purchased 105.708 105.708
Plus Shares Acquired through
Dividend Reinvestment 3.347 3.347
---------- ----------
Equals Shares Held at 5/31/95 109.055 109.055
Multiplied by Net Asset Vallue at 5/31/95 9.58 9.58
---------- ----------
Equals Ending Value before deduction for
contingent deferred sales charge 1,044.75 1,044.75
Less deferred sales charge (10.00) 0.00
---------- ----------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 5/31/95 1,034.75 1,044.75
---------- ----------
Divided by $1,000 (P) 1.0347 1.0447
Subtract 1 0.0347 0.0447
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) 3.47%
==========
Expressed as a percentage equals the
Aggregate Total Return for the Period 4.47%
==========
ERV divided by P 1.0347
Raise to the power of 1.6441
Equals 1.0578
Subtract 1 0.0578
Expressed as a percentage equals the
Average Annualized Total Return 5.78%
==========
</TABLE>
* Does not include sales charge for the period.
<PAGE>
30 DAYS STANDARDIZED YIELD
FOR THE PERIOD ENDING 5-31-95
ADJUSTABLE RATE SECURITIES - CLASS C
<TABLE>
<S> <C>
Long term income generally based on yield to
maturity times market value of each security $785
Plus short term income accrued for the past
thirty days 2,451
-----------------
Equals Total Income 3,236
Less expenses for the past thirty days -743
-----------------
Equals net monthly income for yield calculation 2,493
-----------------
Average shares outstanding for 30 days 57,919
Times the Net Asset Value 9.56
-----------------
Equals total dollars $553,706
=================
Net monthly income divdided by total dollars equals 0.004502537
Add 1 1.004502537
Raise to the power of 6 1.027321145
Subtract 1 0.027321145
Times 2 0.054642290
Expressed as a percentage equals the
standardized yield for the 30 day period 5.46%
========
Tax Rate 28.00%
X = 1 minus Tax Rate 72.00%
Standardized Yield divided by X equals
Tax Equivalent Yield for 30 day period 7.58%
========
</TABLE>
