PROSPECTUS
FEBRUARY 18, 1994
MERRILL LYNCH AMERICAS INCOME FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Americas Income Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company seeking 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). The Fund
may at times utilize certain investment techniques, including options and
futures, to increase investment return or to hedge all or a portion of its
portfolio against interest rate, market and currency risks. In addition, the
Fund is authorized to borrow funds and to utilize leverage in amounts not to
exceed 33 1/3% of its total assets. There can be no assurance that the Fund's
investment objective will be achieved. Investment in securities of foreign
issuers involves certain special considerations and risk factors. See
"Investment Objective and Policies--Special Considerations and Risk
Factors--Foreign Investments".
The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus a sales charge
which, at the election of the purchaser, may be imposed (i) at the time of
purchase (the "Class A shares") or (ii) on a deferred basis (the "Class B
shares"). The deferred sales charges to which the Class B shares are subject
shall consist of a contingent deferred sales charge which may be imposed on
redemptions made within three years of purchase and an ongoing distribution fee.
The ability to purchase either Class A shares or Class B shares permits an
investor to choose the method of purchasing shares that is most beneficial given
the amount of the purchase, the length of time the investor expects to hold the
shares and other circumstances. Class A shares pay an ongoing account
maintenance fee at the annual rate of 0.25% of the Fund's average daily
(Continued on following page)
------------------------
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 February 18, 1994 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and is
available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
------------------------
INVESTMENT ADVISER:
MERRILL LYNCH ASSET MANAGEMENT
DISTRIBUTOR:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
<PAGE>
(Continued from Cover Page)
net assets attributable to Class A shares; Class B shares pay ongoing fees at
the annual rate of 0.75% of the Fund's average daily net assets attributable to
the Class B shares, comprised of a 0.25% fee for account maintenance services
and a 0.50% fee for distribution services. Investors should understand that the
purpose and function of the deferred sales charges with respect to the Class B
shares are the same as those of the initial sales charge with respect to the
Class A shares. Investors should also understand that over time the deferred
sales charges and account maintenance fee related to Class B shares may exceed
the initial sales charge and account maintenance fee with respect to Class A
shares. See "Alternative Sales Arrangements" on page 4.
Each Class A share and Class B share represents an identical interest in
the investment portfolio of the Fund and has the same rights, except that Class
B shares bear the expenses of the account maintenance and distribution fees and
certain other costs resulting from the deferred sales charge arrangement, which
will cause Class B shares to have a higher expense ratio and to pay lower
dividends than Class A shares, which also bear the expense of an account
maintenance fee. The two classes also have different exchange privileges.
The Fund has received an order from the Securities and Exchange Commission
permitting the issuance and sale of the Class A shares and Class B shares. The
Fund has applied for an additional order from the Securities and Exchange
Commission to issue additional classes of shares also representing interests in
the Fund. If such order is received, it is presently expected that the Fund
would issue additional class(es) of shares with different sales arrangements
than those for Class A shares and Class B shares. There can be no assurance that
the additional order will be granted.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), Box 9011, Princeton, New Jersey 08543-9011 ((609)
282-2800), or from securities dealers which have entered into selected dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $250, and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares".
2
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A shares and Class B shares follows:
<TABLE> <CAPTION>
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
CHARGE ALTERNATIVE CHARGE
ALTERNATIVE
-------------------- --------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...................... 3.00 (a) None
Sales Charge Imposed on Dividend Reinvestments.............. None None
Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower)........ None(a) 3.0% during the first
year, decreasing 1.0%
annually to 0% after the
third year(b)
Exchange Fee................................................ None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Investment Advisory Fees(c)................................. 0.60% 0.60%
Rule 12b-1 Fees(d).......................................... 0.25% 0.75%(f)
Other Expenses
Shareholder Servicing Costs(e)........................... 0.08% 0.08%
Custodian Fees........................................... 0.19% 0.19%
Other.................................................... 0.91% 0.91%
--------- ---------
Total Other Expenses................................... 1.18% 1.18%
Total Fund Operating Expenses............................... 2.03% 2.53%
Reimbursement of Expenses................................... (1.43%) (1.43%)
TOTAL FUND OPERATING EXPENSES (AFTER EXPENSE REIMBURSEMENT)... 0.60% 1.10%
----- -----
----- -----
</TABLE>
- --------------
<TABLE>
<S> <C>
(a) Reduced for purchases of $100,000 and over, decreasing to 0.50% for purchases of $5,000,000 and over. Certain
investors making purchases of $1,000,000 or more in a single transaction will, in lieu of a front-end sales
load, be subject to a contingent deferred sales charge if the shares are redeemed within one year after
purchase. See "Purchase of Shares--Initial Sales Charge Alternative--Class A Shares"--page 27.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares"--page 28.
(c) See "Management of the Fund--Advisory and Management Arrangements"--page 22.
(d) See "Purchase of Shares--Alternative Sales Arrangements--Distribution Plans"--page 25.
(e) See "Management of the Fund--Transfer Agency Services"--page 23.
(f) This amount represents the 0.25% account maintenance fee and the 0.50% distribution fee applicable to Class B
shares of the Fund.
</TABLE>
3
<PAGE>
EXAMPLE:
<TABLE> <CAPTION>
CUMULATIVE EXPENSES
PAID
FOR THE PERIOD OF:
--------------------
1 YEAR 3 YEARS
--------- ---------
<S> <C> <C>
An investor would pay the following expenses on a $1,000 investment including, for Class A
shares, the maximum $30 front-end sales charge and assuming (1) an operating expense ratio
of 0.60% for Class A shares and 1.10% for Class B shares, (2) a 5% annual return throughout
the periods and (3) redemption at the end of the period:
Class A................................................................................. $ 35.95 $ 48.64
Class B................................................................................. $ 41.21 $ 44.97
An investor would pay the following expenses on the same $1,000 investment assuming no
redemption at the end of the period:
Class A................................................................................. $ 35.95 $ 48.64
Class B................................................................................. $ 11.21 $ 34.97
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on estimated
amounts through the end of the Fund's first fiscal year on an annualized basis.
The Example set forth above assumes reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by Securities
and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL
EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR
PURPOSES OF THE EXAMPLE. Class B 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.
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. The Investment
Adviser is voluntarily reimbursing certain expenses of the Fund, and such
reimbursement may be discontinued at any time. See "Purchase of Shares" and
"Redemption of Shares".
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "initial
sales charge alternative") or (ii) on a deferred basis (the "deferred sales
charge alternative").
Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Class A shares incur a sales charge when they are
purchased and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to the Class A shares. Although Class A
shares incur a sales charge when they are purchased, they enjoy the benefit of
not being subject to the ongoing distribution fee to which Class B shares are
subject or any sales charge when they are redeemed. Certain purchases of Class A
shares qualify for reduced initial sales charges. See "Purchase of Shares".
4
<PAGE>
Class B Shares. An investor who elects the deferred sales charge
alternative acquires Class B shares. Class B shares do not incur a sales charge
when they are purchased, but they are subject to ongoing account maintenance and
distribution fees of 0.25% and 0.50%, respectively, of the Fund's average net
assets attributable to the Class B shares and a sales charge if they are
redeemed within three years of purchase. Class B shares enjoy the benefit of
permitting all of the investor's dollars to work from the time the investment is
made. The ongoing distribution fee paid by Class B shares will cause such shares
to have a higher expense ratio and to pay lower dividends than Class A shares.
Both Class A shares and Class B shares pay an ongoing account maintenance fee.
Payment of the distribution fee is subject to certain limits as set forth under
"Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares".
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Shares acquired under the initial sales charge alternative
would be subject to an ongoing account maintenance fee that is lower than the
sum of the ongoing account maintenance fee and distribution fee on Class B
shares. However, because initial sales charges are deducted at the time of
purchase, such investors would not have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees on Class B shares may exceed the
initial sales charge and ongoing account maintenance fee on Class A shares.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the deferred
alternative. However, there can be no assurance as to the return, if any, which
will be realized on such additional funds. Certain other investors might
determine it to be more advantageous to have all their funds invested initially,
although remaining subject to continued account maintenance and distribution
fees and, for a three-year period of time, a contingent deferred sales charge.
The distribution expenses incurred by the Distributor and dealers
(primarily Merrill Lynch) in connection with the sale of the shares will be
paid, in the case of the Class A shares, from the proceeds of the initial sales
charge and ongoing account maintenance fee, and in the case of the Class B
shares, such distribution expenses will be paid from the proceeds of the ongoing
account maintenance and distribution fees and the contingent deferred sales
charge incurred upon redemption within three years of purchase. Sales personnel
may receive different compensation for selling Class A or Class B shares.
Investors should understand that the purpose and function of the deferred sales
charges and account maintenance fee with respect to the Class B shares are the
same as those of the initial sales charge and account maintenance fee with
respect to the Class A shares.
Dividends paid by the Fund with respect to Class A and Class B shares, to
the extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance and distribution fees and any incremental transfer agency costs
relating to Class B shares will be borne exclusively by that class, and the
account maintenance fee relating to Class A shares will be borne exclusively by
that class. See "Additional Information--Determination of Net Asset Value".
Class A and Class B shareholders of the Fund each have an exchange privilege for
Class A and Class B shares, respectively, of certain other mutual funds
sponsored by Merrill Lynch. Class A and Class B shareholders of the Fund also
may exchange their
5
<PAGE>
shares for shares of certain money market funds sponsored by Merrill Lynch. See
"Shareholder Services--Exchange Privilege".
The Directors of the Fund have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis, the
Directors of the Fund, pursuant to their fiduciary duties under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and state laws,
will seek to assure that no such conflict arises.
The Fund has received an order from the Securities and Exchange Commission
permitting the issuance and sale of two classes of shares, namely Class A shares
and Class B shares. The Fund has applied for an additional order from the
Securities and Exchange Commission to issue additional classes of shares also
representing interests in the Fund. If such order is received, it is presently
expected that the Fund would issue additional class(es) of shares with different
sales arrangements than those for Class A shares and Class B shares. There can
be no assurance that the additional order will be granted.
THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE
METHOD OF PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF
THE PURCHASE, THE LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES
AND OTHER CIRCUMSTANCES. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR
PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES
CHARGE AND AN ACCOUNT MAINTENANCE FEE OR TO HAVE THE ENTIRE INITIAL
PURCHASE PRICE INVESTED IN THE FUND WITH THE INVESTMENT THEREAFTER BEING
SUBJECT TO ONGOING ACCOUNT MAINTENANCE AND DISTRIBUTION FEES. TO ASSIST
INVESTORS IN MAKING THIS DETERMINATION, THE FEE TABLE ON PAGE 3 SETS FORTH
THE CHARGES APPLICABLE TO EACH CLASS OF SHARES, AND A DISCUSSION OF
RELEVANT FACTORS IN MAKING SUCH DETERMINATION IS SET FORTH UNDER "PURCHASE
OF SHARES--ALTERNATIVE SALES ARRANGEMENTS" ON PAGE 25.
6
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audit of the financial statements of the Fund by
Deloitte & Touche, independent auditors. Financial statements and the
independent auditors' report thereon for the period August 27, 1993
(commencement of operations) to December 31, 1993, 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.
<TABLE> <CAPTION>
FOR THE PERIOD
AUGUST 27, 1993+ TO
DECEMBER 31, 1993
--------------------
CLASS A CLASS B
--------- ---------
<S> <C> <C>
INCREASE IN NET ASSET VALUE:
Per Share Operating Performance:
Net Asset Value, Beginning of Period................................................. $ 10.00 $ 10.00
--------- ---------
Investment income--net............................................................... .26 .24
Realized and unrealized gain on investments and foreign currency transactions--net... .88 .88
--------- ---------
Total from investment operations..................................................... 1.14 1.12
--------- ---------
Less dividends and distributions
Investment income--net............................................................. (.26) (.24)
Realized gain on investments--net.................................................. (.04) (.04)
--------- ---------
Total dividends and distributions.................................................... (.30) (.28)
--------- ---------
Net Asset Value, End of Period....................................................... $ 10.84 $ 10.84
--------- ---------
--------- ---------
Total Investment Return:**
Based on net asset value per share................................................... 11.49%++ 11.30%++
--------- ---------
--------- ---------
Ratios to Average Net Assets:
Expenses, net of reimbursement and excluding account maintenance
and distribution fees.............................................................. .35%* .35%*
--------- ---------
--------- ---------
Expenses, net of reimbursement....................................................... .60%* 1.10%*
--------- ---------
--------- ---------
Expenses............................................................................. 2.03%* 2.53%*
--------- ---------
--------- ---------
Investment income--net............................................................... 7.14%* 6.76%*
--------- ---------
--------- ---------
Supplemental Data:
Net assets, end of period (in thousands)............................................. $ 15,076 $ 98,848
--------- ---------
--------- ---------
Portfolio Turnover Rate.............................................................. 75.18% 75.18%
--------- ---------
--------- ---------
</TABLE>
+ Commencement of Operations.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
7
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a non-diversified, open-end management investment company. The
Fund's investment objective is to seek 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). The
foregoing is a fundamental policy of the Fund and may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act. There can be no assurance
that the Fund's investment objective will be achieved.
The Fund's investment adviser, Merrill Lynch Asset Management, L.P., doing
business as Merrill Lynch Asset Management (the "Investment Adviser"), will
actively manage the Fund's assets in response to market, political and general
economic conditions in the Western Hemisphere and elsewhere, and will seek to
adjust the Fund's investments based on its perception of which investments would
best enable the Fund to achieve its investment objective. In its analysis, the
Investment Adviser will consider various factors, including its views regarding
interest and currency exchange rate changes and credit risks. Such professional
investment management may be attractive to investors, particularly individuals,
who lack the time, information, capability or inclination to effect such an
investment strategy directly.
The securities in which the Fund may invest include debt obligations issued
or guaranteed by the governments of countries located in the Western Hemisphere,
political subdivisions thereof (including states, provinces and municipalities)
or their agencies and instrumentalities ("governmental entities"), or issued or
guaranteed by international organizations (such as the Inter-Americas
Development Bank) designated or supported by governmental entities to promote
economic reconstruction or development ("supranational entities"), or issued by
corporations or financial institutions. Securities issued by supranational
entities may be denominated in U.S. dollars, a foreign currency or a
multi-national currency unit. Securities of corporations and financial
institutions in which the Fund may invest include corporate and commercial
obligations, such as medium-term notes and commercial paper, which may be
indexed to foreign currency exchange rates.
Indexed notes and commercial paper typically provide that the principal
amount is adjusted upwards or downwards (but not below zero) at maturity to
reflect fluctuations in the exchange rate between two currencies during the
period the obligation is outstanding depending on the terms of the specific
security. In selecting the two currencies, the Investment Adviser will consider
the correlation and relative yields of various currencies. The Fund will
purchase an indexed obligation using the currency in which it is denominated
and, at maturity, will receive interest and principal payments thereon in that
currency. The amount of principal payable by the issuer at maturity, however,
will vary (i.e., increase or decrease) in response to the change (if any) in the
exchange rate between the two specified currencies during the period from the
date the instrument is issued to its maturity date. The potential for realizing
gains as a result of changes in foreign currency exchange rates may enable the
Fund to hedge the currency in which the obligation is denominated (or to effect
cross-hedges against other currencies) against a decline in the U.S. dollar
value of investments denominated in foreign currencies while providing an
attractive rate of return. The Fund will purchase such indexed obligations to
generate current income or for hedging purposes and will not speculate in such
obligations. Such obligations may be deemed liquid investments if they can be
disposed of promptly in the ordinary course
8
<PAGE>
of business at a value reasonably close to that used in the calculation of the
Fund's net asset value per share; otherwise, they will be deemed illiquid
investments subject to the restrictions discussed further below under
"Investment Restrictions".
The Fund may invest in securities denominated in or indexed to the currency
of one country in the Western Hemisphere although issued by a governmental
entity, corporation or financial institution of another such country. For
example, the Fund may invest in a Mexican peso denominated obligation issued by
a U.S. corporation. Such investments involve credit risks associated with the
issuer and currency risks associated with the currency in which the obligation
is denominated.
The Fund also may invest in securities whose potential return is based on
the change in particular measurements of value or rate (also an "index"). As an
illustration, the Fund may invest in a security that pays interest and returns
principal based on the change in an index of interest rates or of the value of a
precious or industrial metal. Interest and principal payable on a security may
also be based on relative changes among particular indices. In addition, the
Fund may invest in 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.
The Fund also may invest in participations in, or bonds and notes backed
by, pools of mortgage, credit card, automobile or other types of receivables.
These investments are described more fully below under "Investments in
Mortgage-Backed and Asset-Backed Securities". Because of liquidity and valuation
concerns relating to investments in certain derivative mortgage-backed
securities, investments in such securities will be restricted as discussed below
under "Investments in Mortgage-Backed and Asset-Backed Securities--Derivative
Mortgage-Backed Securities".
The Fund has established no rating criteria for the debt securities in
which it may invest and such securities may not be rated at all for
creditworthiness. Investments in debt securities rated in the medium to lower
rating categories of nationally recognized statistical rating organizations such
as Standard & Poor's Corporation ("S&P") and Moody's Investors Services
("Moody's") or in unrated securities of comparable quality involve special risks
which are described more fully below under "Special Considerations and Risk
Factors--High Yield Securities".
Except for time deposits, certificates of deposit, and pass-through and
other asset-backed securities, the Fund currently does not intend to invest more
than 10% of its assets in the securities of issuers that are domiciled in any
one country in the Western Hemisphere other than the United States, Canada,
Mexico, Argentina, Chile, Brazil and Venezuela. In addition, the Fund may not
maintain more than a
9
<PAGE>
10% net exposure to any currency other than the currency of any such country.
The Fund expects to maintain normally at least 25% of its assets in securities
denominated in the U.S. dollar.
Under normal circumstances, the Fund will invest at least 25% of its total
assets in debt instruments issued by Western Hemisphere companies engaged in the
financial services industry, including banks, thrift institutions, insurance
companies, securities firms and holding companies of any of the foregoing. Such
investments may include certificates of deposit, time deposits, bankers'
acceptances, and other obligations issued by such entities, as well as
repurchase agreements entered into with such entities. For temporary defensive
purposes, however, the Fund may reduce its investments in the financial services
industry to less than 25% of its total assets. The Fund's policy as to
concentrating its investments in the financial services industry is fundamental
and may not be changed without the approval of a majority of the Fund's voting
securities.
The Fund's policy of concentrating its investments in the financial
services industry will cause the Fund to have greater exposure to certain risks
associated with the financial services industry. In particular, economic or
regulatory developments in or related to the financial services industry will
affect the value of an investment in the Fund's shares. For example, sustained
increases in interest rates may adversely affect the availability and cost of
funds for a bank's lending activities; deterioration in general economic
conditions may increase a bank's exposure to credit losses. Banks are also
subject to the effects of the concentration of loan portfolios in particular
businesses that may be adversely affected by economic conditions, such as real
estate, energy, agriculture or high technology-related companies. Also, the
Fund's investments in commercial banks located in several foreign countries are
subject to additional risks due to the combination in such banks of commercial
banking and diversified securities activities. Insurance companies may be
adversely affected by losses sustained by insured clients due to catastrophic or
other events. Securities firms are subject to risks associated with underwriting
activities and to fluctuations in the values of their investments that may in
turn affect their ability to comply with regulations governing capital
requirements. Insurance companies and securities firms may also be affected by a
deterioration in general economic conditions. In addition, the financial
services industry is subject to national and local regulation and competition
among different types of financial institutions.
The Fund may at times utilize certain other investment techniques to
increase investment return or to hedge all or a portion of its portfolio,
including options and futures, although suitable hedging instruments may not be
available on a timely basis and on acceptable terms with respect to specific
securities and currencies in which the Fund may invest. See "Other Investment
Practices--Portfolio Strategies Involving Interest Rate Transactions, Options,
Futures and Currency Transactions". In addition, the Fund is authorized to
borrow funds and utilize leverage (including by effecting reverse repurchase
agreements and dollar rolls) in amounts not exceeding 33 1/3% of its total
assets (including the amount borrowed). See "Other Investment
Practices--Leverage and Borrowing".
SPECIAL CONSIDERATIONS AND RISK FACTORS
Foreign Investments. Investment in securities of foreign issuers generally
involves risks not typically involved in domestic investment, including
fluctuations in foreign exchange rates, future political and economic
developments and the possible imposition of exchange controls or other foreign
or U.S. Governmental laws or restrictions applicable to such investments. These
risks are often heightened for investments in smaller capital markets and Latin
American countries. The Fund is designed for
10
<PAGE>
long-term investors and should be considered as a means of diversifying an
investment portfolio and not in itself a balanced investment program.
Since the Fund is authorized to invest in securities denominated or quoted
in currencies other than the U.S. dollar, changes in foreign currency exchange
rates relative to the U.S. dollar will affect the value of securities in the
portfolio and the unrealized appreciation or depreciation of investments insofar
as U.S. investors are concerned. Changes in foreign currency exchange rates
relative to the U.S. dollar will also affect the Fund's yield on assets
denominated in currencies other than the U.S. dollar.
As noted above, the Fund intends to invest in debt securities denominated
in the currencies of certain Latin American countries (i.e., Mexico, Argentina,
Chile, Brazil and Venezuela). Certain of these Latin American countries are
among the largest debtors to commercial banks and foreign governments. Trading
in debt obligations ("sovereign debt") issued or guaranteed by Latin American
governmental entities involves a high degree of risk. The governmental entity
that controls the repayment of sovereign debt may not be willing or able to
repay the principal and/or interest when due in accordance with the terms of
such obligations. A governmental entity's willingness or ability to repay
principal and interest due in a timely manner may be affected by, among other
factors, its cash flow situation, the relative size of the debt service burden
to the economy as a whole, the governmental entity's dependence on expected
disbursements from third parties, the governmental entity's policy toward the
International Monetary Fund and the political constraints to which a
governmental entity may be subject. As a result, governmental entities may
default on their sovereign debt. Holders of sovereign debt (including the Fund)
may be requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. There is no bankruptcy proceeding by
which sovereign debt on which governmental entities have defaulted may be
collected in whole or in part. The sovereign debt instruments in which the Fund
may invest involve great risk and are deemed to be the equivalent in terms of
quality to high yield/high risk securities (as defined below) and are subject to
many of the same risks as such securities. Similarly, the Fund may have
difficulty disposing of certain sovereign debt obligations because there may be
a thin trading market for such securities. The Fund will not invest more than
15% of its total assets in sovereign debt which is in default.
With respect to certain foreign countries, there is the possibility of
economic, political or social instability or diplomatic developments which could
affect investment in those countries. For example, although the Mexican economy
has experienced gradual improvement in a number of areas since 1988, the Mexican
economy has experienced difficulties in the past decade, including high rates of
inflation, interest and underemployment as well as low or negative rates of
growth. These problems affected the ability of the Mexican Government to service
its sovereign debt. The economies of other Latin American countries have
experienced similar problems.
There may be less publicly available information about a foreign financial
instrument than about a U.S. instrument, and foreign issuers may not be subject
to accounting, auditing and financial reporting standards and requirements
comparable to those to which U.S. entities are subject. In addition, certain
foreign investments may be subject to foreign withholding taxes.
Foreign financial markets, while generally growing in volume, have, for the
most part, substantially less volume than U.S. markets, and securities of many
foreign companies are less liquid and their prices more volatile than securities
of comparable domestic companies. The foreign markets also have different
clearance and settlement procedures, and in certain markets there have been
times when
11
<PAGE>
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Costs associated with transactions in foreign
securities are generally higher than with transactions in U.S. securities. There
is generally less government supervision and regulation of exchanges, financial
institutions and issuers in foreign countries than there is in the United
States.
High Yield Securities. The Fund has established no rating criteria for the
debt securities in which it may invest, and such securities may not be rated at
all for creditworthiness. Securities rated in the medium to lower rating
categories of nationally recognized statistical rating organizations such as S&P
and Moody's and unrated securities of comparable quality (referred to herein as
"high yield/high risk securities") are predominantly speculative with respect to
the capacity to pay interest and repay principal in accordance with the terms of
such securities and generally involve a greater volatility of price than
securities in higher rating categories. These securities are commonly referred
to as "junk" bonds. In purchasing such securities, the Fund will rely on the
Investment Adviser's judgment, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Investment Adviser will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The Fund is not
authorized to purchase debt securities that are in default, except for sovereign
debt (discussed above) in which the Fund may invest no more than 15% of its
total assets while such sovereign debt securities are in default.
The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield/high risk securities may be more likely to
experience financial stress, especially if such issuers are highly leveraged.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments or
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high yield/high risk
securities because such securities may be unsecured and may be subordinated to
other creditors of the issuer.
High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield/high risk
securities because there may be a thin trading market for such securities. To
the extent that a secondary trading market for high
12
<PAGE>
yield/high risk securities does exist, it is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market liquidity
may have an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
high yield/high risk securities also may make it more difficult for the Fund to
obtain accurate market quotations for purposes of valuing the Fund's portfolio.
Market quotations are generally available on many high yield/high risk
securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to adversely affect the Fund's net asset value. In addition, the Fund may
incur additional expenses to the extent it is required to seek recovery upon a
default on a portfolio holding or to participate in the restructuring of the
obligation.
Leverage. The Fund is authorized to borrow money from banks in an amount up
to 33 1/3% of the Fund's total assets (including the amount borrowed), less all
liabilities and indebtedness other than the bank borrowing. The Fund is also
authorized to borrow an additional 5% of its total assets without regard to the
foregoing limitation for temporary purposes such as clearance of portfolio
transactions and share redemptions. The Fund may engage in reverse repurchase
agreements and dollar rolls as discussed below, and if certain conditions are
not met, such transactions will be considered borrowings subject to the
restrictions discussed in this paragraph. The utilization of leverage by the
Fund involves certain risks described below. For example, leveraging may
exaggerate changes in the net asset value of Fund shares and in the yield on the
Fund's portfolio. See "Other Investment Practices--Leverage and Borrowing"
below.
Interest Rate Fluctuations. The value of the Fund's investments (and hence
its net asset value) will be affected by changes in the general level of
interest rates. When interest rates decline, the value of a debt security can be
expected to rise. Conversely, when interest rates rise, the value of a debt
security can be expected to decline. However, not all of the Fund's investments
in debt securities may respond to interest rate fluctuations in this manner.
Non-Diversified Status. The Fund has registered as a "non-diversified"
investment company so that it will be able to invest more than 5% of the value
of its assets in the obligations of a single issuer subject to the
diversification requirements of subchapter M of the Internal Revenue Code of
1986, as amended, applicable to the Fund. To qualify, the Fund must comply with
certain requirements, including limiting its investments so that at the close of
each quarter of the taxable year (i) not more than 25% of the market value of
the Fund's total assets will be invested in the securities of a single issuer,
and (ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities of a single issuer, and the Fund will not own more than 10% of the
outstanding voting securities of a singer issuer. Foreign government securities
(unlike U.S. Government securities) are not exempt from the diversification
requirements of the Code. To the extent the Fund invests a relatively high
percentage of its assets in obligations of a limited number of issuers, the Fund
may be more susceptible than a more widely diversified fund to any single
economic, political or regulatory occurrence or to changes in an issuer's
financial condition or in the market's assessment of the issuers.
13
<PAGE>
INVESTMENTS IN MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Mortgage-Backed and Asset-Backed Securities. Subject to the investment
limitations described above, the Fund may invest in mortgage-backed and
asset-backed securities. Mortgage-backed securities are securities that directly
or indirectly represent an interest in, or are backed by and payable from,
mortgage loans secured by real property. Asset-backed securities generally
consist of structures similar to mortgage-backed securities, except that the
underlying asset pools are comprised of other types of financial assets such as
credit card, automobile or other types of receivables and commercial loans.
Mortgage-backed and asset-backed securities 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
mortgage-backed and asset-backed securities are discussed more fully below.
The mortgage-backed securities in which the Fund may invest will primarily
be guaranteed by GNMA or issued by FNMA or the Federal Home Loan Mortgage
Corporation ("FHLMC"). Certain of the asset-backed securities in which the Fund
will invest may be guaranteed by the Small Business Administration ("SBA") or
issued in programs originated by the Resolution Trust Corporation ("RTC"). GNMA,
FNMA, FHLMC and SBA are agencies or instrumentalities of the United States.
Certain of the mortgage-backed and asset-backed securities in which the
Fund may invest will be issued by private issuers. Private issuers include
originators of or investors in mortgage loans and receivables such as savings
and loan associations, mortgage bankers, commercial banks, investment banks,
finance companies and special purpose finance subsidiaries of any of the above.
Securities issued by private issuers may be subject to 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 Investment Adviser 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.
The Fund may invest in pass-through mortgage-backed securities that
represent ownership interests in a pool of mortgages on single-family or
multi-family residences. Such securities represent interests in pools of
residential mortgage loans originated by U.S. governmental or private lenders
and guaranteed, to the extent provided in such securities, by the U.S.
government, one of its agencies or instrumentalities or by private guarantors.
Such securities, which are ownership interests in the underlying mortgage loans,
differ from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semiannually) and principal payments at
maturity or on specified call dates. Mortgage pass-through securities provide
for monthly payments that "pass-through" the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such securities
and the servicer of the underlying mortgage loans. The Fund may also invest in
collateralized mortgage obligations ("CMOs") which are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
The yield characteristics of mortgage-backed and asset-backed securities
differ from traditional corporate debt securities. Among the major differences
are that interest and principal payments are
14
<PAGE>
made more frequently, usually monthly, and that principal may be prepaid at any
time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if the Fund purchases such a security at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Conversely, if the Fund
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to maturity.
The Fund may invest a portion of its assets in derivative mortgage-backed
securities, such as stripped mortgage-backed securities, which are highly
sensitive to changes in prepayment and interest rates. The Investment Adviser
will seek to manage these risks (and potential benefits) by investing in a
variety of such securities and through hedging techniques.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. Generally, however, prepayments on
fixed rate mortgage loans will increase during a period of falling interest
rates and decrease during a period of rising interest rates. Accordingly,
amounts available for reinvestment by the Fund are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. This
prepayment effect has been particularly pronounced during the past year as
borrowers have refinanced higher interest rate mortgages into lower interest
rate mortgages available in the marketplace. Although asset-backed securities
generally are less likely to experience substantial prepayments than are
mortgage-backed securities, certain of the factors that affect the rate of
prepayments on mortgage-backed securities also affect the rate of prepayments on
asset-backed securities. However, during any particular period, the predominant
factors affecting prepayment rates on mortgage-backed and asset-backed
securities may be different. Mortgage-backed and asset-backed securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed income securities from declining interest rates because of
the risk of prepayment.
The Fund's yield will also be affected by the yields on instruments in
which the Fund is able to reinvest the proceeds of payments and prepayments.
Accelerated prepayments on securities purchased by the Fund at a premium also
impose a risk of loss of principal because the premium may not have been fully
amortized at the time the principal is repaid in full.
Derivative Mortgage-Backed Securities. The Fund may also invest in various
derivative mortgage-backed securities, which are synthetic securities designed
to be highly sensitive to certain types of interest rate and principal
prepayment scenarios. Derivative instruments primarily consist of some form of
stripped mortgage-backed securities ("SMBS") that commonly involve different
classes of securities that receive disproportionate amounts of the interest and
principal distributions on a pool of mortgage assets.
SMBSs are typically issued by the same types of issuers as are
mortgage-backed securities. The structure of SMBSs, however, is different. A
common variety of SMBS involves a class (the principal-only or PO class) that
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 only interest, while the PO class receives only principal. The
yield to maturity on an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying assets, and a rapid
rate of principal payments in
15
<PAGE>
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 these types of IOs
to interest rate fluctuations may be increased because of the characteristics of
the principal portion to which they relate. The impact of IOs on the Fund's
portfolio may be offset to some degree by investments in mortgage-backed
securities and inverse floaters (floating rate securities the interest rate of
which is adjusted up or down inversely to changes in a specified index). 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. Under
certain interest rate scenarios, the Fund may decide to retain investments in
IOs or inverse floaters yielding less than prevailing interest rates in order to
avoid capital losses on the sale of such investments.
The Fund may also combine IOs and IO-related derivative mortgage products
with LIBOR-based inverse floaters (LIBOR being the London interbank offered
rate). A LIBOR-based inverse floater is a floating rate security the interest
rate of which is adjusted up or down inversely to changes in LIBOR; as LIBOR
decreases, the interest rate paid by the inverse floater would increase, and
vice versa. Depending on the amount of leverage built into the inverse floater,
the yield could vary in excess of the change in LIBOR because of the leverage
built into the inverse floater formula. The yield on an inverse floater varies
inversely with interest rates because as LIBOR decreases, the interest payable
on the inverse floater increases. The converse is true, of course, when LIBOR
increases. When an inverse floater is combined with an IO or IO-type derivative
product, the result is a synthetic security that tends to provide a somewhat
less volatile yield over a wide range of interest rate and prepayment rate
scenarios.
New types of mortgage-backed and asset-backed securities, derivative
securities and hedging instruments are developed and marketed from time to time.
Consistent with its investment objective, policies and restrictions, the Fund
may invest in such new types of securities and instruments that the Investment
Adviser believes may assist the Fund in achieving its investment objective.
The staff of the Securities and Exchange Commission (the "Commission") has
taken the following position with respect to investments in IOs and POs. Such
position has been adopted as an investment policy of the Fund, subject to
amendment as discussed further below. The staff of the Commission has taken the
position that the determination of whether a particular U.S. Government issued
IO or PO that is backed by fixed-rate mortgages is liquid may be made by the
Investment Adviser under guidelines and standards established by the Fund's
Board of Directors. Such a security may be deemed liquid if it can be disposed
of promptly in the ordinary course of business at a value reasonably close to
that used in the calculation of the Fund's net asset value per share. The
Commission's staff also has taken the position that all other IOs and POs are
illiquid securities which are subject to the restriction limiting the Fund's
investments in illiquid securities to 15% of its total assets. (Under the laws
of certain states, the Fund presently is limited with respect to such
investments to 10% of its total assets.) This policy as to IOs and POs is not a
fundamental policy of the Fund and may be amended by the Board of 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's staff of its position.
16
<PAGE>
OTHER INVESTMENT PRACTICES
Leverage and Borrowing. The Fund is authorized to borrow money from banks
(as defined in the Investment Company Act) in an amount up to 33 1/3% of the
Fund's total assets (including the amount borrowed), less all liabilities and
indebtedness other than the bank borrowing. The Fund is also authorized to
borrow an additional 5% of its total assets without regard to the foregoing
limitation for temporary purposes such as clearance of portfolio transactions
and share redemptions. The Fund may engage in reverse repurchase agreements and
dollar rolls as discussed below, and if certain conditions are not met, such
transactions will be considered borrowings subject to the restrictions discussed
in this paragraph. The Fund will only borrow when the Investment Adviser
believes that such borrowing will benefit the Fund after taking into account
considerations such as interest income and possible gains or losses upon
liquidation.
Borrowings by the Fund create an opportunity for greater total return but,
at the same time, increase exposure to capital risk. For example, leveraging may
exaggerate changes in the net asset value of Fund shares and in the yield on the
Fund's portfolio. Although the principal of such borrowings will be fixed, the
Fund's assets may change in value during the time the borrowings are
outstanding. Borrowing will create interest expenses for the Fund which can
exceed the income from the assets retained. To the extent the income derived
from securities purchased with borrowed funds exceeds the interest the Fund will
have to pay, the Fund's net income will be greater than if borrowing were not
used. Conversely, if the income from the assets retained with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund will
be less than if borrowing were not used, and therefore the amount available for
distribution to shareholders as dividends will be reduced. The Fund may also
borrow for emergency purposes, for the payment of dividends, for share
repurchases or for the clearance of transactions.
Because few or none of its assets will consist of margin securities, the
Fund does not expect to borrow on margin. The Fund may also leverage by entering
into reverse repurchase agreements with the same parties with whom it may enter
into repurchase agreements (as discussed below). Under a reverse repurchase
agreement, the Fund sells securities and agrees to repurchase them at a mutually
agreed date and price. The value of the securities subject to such agreements
will not exceed 125% of the proceeds of the reverse repurchase agreements. At
the time the Fund enters into a reverse repurchase agreement, it may establish
and maintain a segregated account with its custodian containing cash, cash
equivalents or liquid high grade debt securities having a value not less than
the repurchase price (including accrued interest). If the Fund establishes and
maintains such a segregated account, a reverse repurchase agreement will not be
considered a borrowing by the Fund; however, under circumstances in which the
Fund does not establish and maintain such a segregated account, the Fund will
enter into a reverse repurchase agreement only with banks (as defined in the
Investment Company Act), and such reverse repurchase agreement will be
considered a borrowing solely for the purpose of the Fund's limitation on
borrowing. Reverse repurchase agreements involve the risk that the market value
of the securities acquired, or retained in lieu of sale, by the Fund in
connection with the reverse repurchase agreement 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
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Fund would bear the risk of loss to the extent that the
proceeds of the reverse repurchase agreement are less than the value of the
securities subject to such agreement.
17
<PAGE>
The Fund also may enter into "dollar rolls". A dollar roll is a transaction
in which the Fund sells fixed income 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 foregoes principal and interest paid on such 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 cash, cash equivalents or liquid high grade debt
securities. Covered rolls will not be considered to be borrowings for purposes
of the Fund's limitation on borrowing to the extent that they are appropriately
collateralized by high grade liquid assets of the Fund. Dollar rolls which are
not so collateralized will be entered into by the Fund only with banks (as
defined in the Investment Company Act) and will be considered borrowings for the
purpose of the Fund's limitation on borrowing.
The Fund expects that some of its borrowings may be made on a secured
basis. In such situations, either the Fund's custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with
(i) the lender to act as a subcustodian if the lender is a bank or otherwise
qualified as a custodian of investment company assets or (ii) a suitable
subcustodian.
Certain of the Fund's borrowings may be subject to certain covenants set
forth in the governing credit agreements relating to asset coverage requirements
and portfolio composition. The Fund does not expect that observance of such
covenants would materially adversely affect the ability of the Fund to achieve
its investment objective. However, a breach of any such covenant not cured
within the specified cure period may result in acceleration of outstanding
indebtedness and require the Fund to dispose of portfolio investments at a time
when it may be disadvantageous to do so. The Fund also may be required to
maintain minimum average balances in connection with borrowings or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over a stated interest rate.
Portfolio Strategies Involving Interest Rate Transactions, Options, Futures
and Currency Transactions. 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 interest rate, market and currency
risks. 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. The Fund may also deal in forward foreign exchange
transactions and foreign currency options and futures, and related options on
such futures.
Although certain risks are involved in interest rate, options and futures
transactions, the Investment Adviser believes that, because the Fund will (i)
write only covered options on portfolio securities and (ii) engage in other
transactions primarily for hedging purposes, these portfolio strategies will not
subject the Fund to the risks frequently associated with the speculative use of
such transactions. 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 interest rate, market or currency movements occur.
Reference is made to the Appendix to this Prospectus and to the Statement of
Additional Information for further information concerning these strategies.
Portfolio Transactions. In executing portfolio transactions, the Investment
Adviser seeks to obtain the best net results for the Fund, taking into account
such factors as price (including the applicable
18
<PAGE>
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved and the firm's risk in
positioning a block of securities. While the Investment Adviser generally seeks
reasonably competitive commission rates, the Fund does not necessarily pay the
lowest commission or spread available. The Fund has no obligation to deal with
any broker or group of brokers in the execution of transactions in portfolio
securities. Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such affiliated persons, including Merrill
Lynch, are prohibited from dealing with the Fund as a principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Securities and Exchange Commission. Affiliated persons of the
Fund, and affiliated persons of such affiliated persons, may serve as the Fund's
broker in transactions conducted on an exchange and in over-the-counter
transactions conducted on an agency basis and may receive brokerage commissions
from the Fund. In addition, consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., the Fund may consider sales of
shares of the Fund as a factor in the selection of brokers or dealers to execute
portfolio transactions for the Fund. It is expected that the majority of the
shares of the Fund will be sold by Merrill Lynch. Brokerage commissions and
other transaction costs on foreign stock exchange transactions are generally
higher than in the United States, although the Fund will endeavor to achieve the
best net results in effecting its portfolio transactions.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. 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 such a loan,
the Fund receives the income on both the loaned securities and the collateral
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 the value of the collateral falls below the
market value of the borrowed securities.
Portfolio Turnover. The Investment Adviser will effect portfolio
transactions without regard to holding period, if, in its judgment, such
transactions are advisable in light of a change in circumstance in general
market, economic or financial conditions. As a result of its investment
policies, the Fund may engage in a substantial number of portfolio transactions.
Accordingly, while the Fund anticipates that its annual portfolio turnover rate
should not exceed 100% under normal conditions, it is impossible to predict
portfolio turnover rates. The portfolio turnover rate is calculated by dividing
the lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less and options, futures and currency
transactions) by the monthly average value of the securities in the portfolio
during the year.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or a primary dealer in U.S. Government securities. Purchase and
sale contracts may be entered into only with financial institutions which have
capital of at least $50 million or whose obligations are guaranteed by an entity
having capital of at least $50 million. Under such agreements, the other party
agrees, upon entering into the contract with the Fund, to repurchase the
security at a mutually agreed upon time and price in a specified currency,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period
although it may be affected by currency fluctuations. In the case of repurchase
agreements, the prices at which the trades are
19
<PAGE>
conducted do not reflect accrued interest on the underlying obligation; whereas,
in the case of purchase and sale contracts, the prices take into account accrued
interest. Such agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, as a purchaser, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement; the Fund does not have the right to seek additional collateral in the
case of purchase and sale contracts. In the event of default by the seller under
a repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with disposition of
the collateral. A purchase and sale contract differs from a repurchase agreement
in that the contract arrangements stipulate that the securities are owned by the
Fund. In the event of a default under such a repurchase agreement or under a
purchase and sale contract, instead of the contractual fixed rate, the rate of
return to the Fund would be dependent upon intervening fluctuations of the
market values of such securities and the accrued interest on the securities. 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. Repurchase agreements and purchase and sale
contracts maturing in more than seven days are deemed illiquid by the Commission
and are therefore subject to the Fund's investment restriction limiting
investments in securities that are not readily marketable to 15% of the Fund's
total assets. (However, under the law of certain states, the Fund presently is
limited with respect to such investments to 10% of its total assets.)
Short Sales. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. The Fund expects to make
short sales both as a form of hedging to offset potential declines in long
positions in similar securities and in order to maintain portfolio flexibility.
When the Fund makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. Government
securities or other high grade liquid securities similar to those borrowed. With
respect to uncovered short positions, the Fund will also be required to deposit
similar collateral with its custodian to the extent, if any, necessary so that
the value of both collateral deposits in the aggregate is at all times equal to
at least 100% of the current market value of the security sold short. Depending
on arrangements made with the broker-dealer from which it borrowed the security
regarding payment over of any payments received by the Fund on such security,
the Fund may not receive any payments (including interest) on its collateral
deposited with such broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
20
<PAGE>
The Fund will not make a short sale if, after giving effect to such sale,
the market value of all securities sold short exceeds 25% of the value of its
total assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund may
also make short sales "against the box" without respect to such limitations. In
this type of short sale, at the time of the sale, the Fund owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security. (Under the laws of a certain state, the Fund is presently limited so
that the value of securities of any one issuer in which the Fund is short may
not exceed the lesser of 2.0% of the value of the Fund's net assets or 2.0% of
the securities of any class of any issuer.)
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (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).
Among its fundamental policies, the Fund may not invest in securities which
cannot be readily resold because of legal or contractual restrictions or which
are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its total assets, taken at market value, would
be invested in such securities. While the Fund does not intend to purchase
illiquid securities in an amount exceeding 15% of its total assets, the Fund may
purchase, without regard to that limitation, securities that are not registered
under the Securities Act of 1933, as amended (the "Securities Act"), but that
can be offered and sold to "qualified institutional buyers" under Rule 144A
under the Securities Act, provided that the Fund's Board of Directors
continuously determines, based on the trading markets for the specific Rule 144A
security, that it is liquid. (Under the laws of certain states, the Fund is
presently limited with respect to investments in illiquid securities to 10% of
its total assets.) The Board of Directors has adopted guidelines regarding
certain foreign debt securities which may be held by the Fund and delegated to
the Investment Adviser the daily function of determining and monitoring
liquidity of such securities. The Board of Directors, however, has retained
oversight and is ultimately responsible for the determinations. Since it is not
possible to predict with assurance exactly how this market for restricted
securities sold and offered under Rule 144A will develop, the Board of Directors
will carefully monitor the Fund's investments in these securities, focusing on
such factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these securities.
Other fundamental policies include policies which (i) prohibit investment
of more than 25% of the Fund's total assets (taken at market value at the time
of each investment) in the securities of issuers in any particular industry
(other than debt securities issued or guaranteed by a Western Hemisphere
governmental entity), except that, under normal circumstances, the Fund will
invest more than 25% of its total assets in the securities of issuers in the
financial services industry or (ii) restrict the issuance of senior securities
and limit borrowings except that the Fund may borrow amounts up to 33 1/3% of
its total assets and up to an additional 5% of its assets for temporary
purposes.
Although the Fund has registered as a "non-diversified" investment company
under the Investment Company Act, to qualify as a regulated investment company
under the Internal Revenue Code of 1986, as amended, the Fund will be subject to
certain diversification requirements of the Code. See "Additional
Information--Taxes".
21
<PAGE>
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of five individuals, four of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL*--President and Chief Investment Officer of the
Investment Adviser; President and Director of Princeton Services, Inc.;
Executive Vice President of Merrill Lynch & Co., Inc.; Executive Vice
President of Merrill Lynch; Director of the Distributor.
DONALD CECIL--Special Limited Partner of Cumberland Partners (an
investment partnership).
EDWARD H. MEYER--Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
CHARLES C. REILLY--Self-employed financial consultant; former
President and Chief Investment Officer of Verus Capital, Inc.; former
Senior Vice President of Arnhold and S. Bleichroeder, Inc.; Adjunct
Professor, Columbia University Graduate School of Business.
RICHARD R. WEST--Professor of Finance, and Dean from 1984 to 1993, New
York University Leonard N. Stern School of Business Administration.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
ADVISORY AND MANAGEMENT ARRANGEMENTS
The Fund's investment adviser is Merrill Lynch Asset Management, L.P.,
which does business as Merrill Lynch Asset Management (the "Investment
Adviser"). The Investment Adviser is owned and controlled by Merrill Lynch &
Co., Inc., a financial services holding company and the parent of Merrill Lynch.
The Investment Adviser, or an affiliate of the Investment Adviser, Fund Asset
Management, L.P. ("FAM"), acts as the investment adviser to more than 90 other
registered investment companies and provides investment advisory services to
individual and institutional accounts. As of January 31, 1994, the Investment
Adviser and FAM had a total of approximately $167.1 billion in investment
company and other portfolio assets under management, including accounts of
certain affiliates of the Investment Adviser.
The investment advisory agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the direction of the
Board of Directors of the Fund, the Investment Adviser is responsible for the
actual management of the Fund's portfolio and constantly reviews the Fund's
holdings in light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Investment Adviser, subject to review by the
Board of Directors.
The Investment Adviser provides the portfolio manager for the Fund who
considers analyses from various sources (including brokerage firms with which
the Fund does business), makes the necessary decisions, and places transactions
accordingly. The Investment Adviser is also obligated to perform certain
administrative and management services for the Fund and is obligated to provide
all of the office space, facilities, equipment and personnel necessary to
perform its duties under the Investment Advisory Agreement.
22
<PAGE>
The Fund pays the Investment Adviser a monthly fee at the annual rate of
0.60% of the average daily net assets of the Fund plus the principal amount of
borrowings incurred by the Fund for leverage purposes. For the fiscal period
August 27, 1993 (commencement of operations) to December 31, 1993, the fee paid
by the Fund to the Investment Adviser was $197,936 (based upon average net
assets of approximately $95.5 million). At January 31, 1994, the net assets of
the Fund aggregated approximately $125.4 million. At this asset level, the
annual management fee would aggregate approximately $752,648. The Fund also pays
certain expenses incurred in its operations, including, among other things, the
investment advisory fees, 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. Also, accounting
services are provided to the Fund by the Investment Adviser, and the Fund
reimburses the Investment Adviser for its costs in connection with such services
on a semi-annual basis. For the fiscal period August 27, 1993 (commencement of
operations) to December 31, 1993, the Fund reimbursed the Investment Adviser
$21,800 for accounting services. For the fiscal period August 27, 1993
(commencement of operations) to December 31, 1993, for the Class A shares the
ratio of total expenses net of reimbursement and excluding account maintenance
fees to average net assets was 0.35% (annualized), and the ratio of total
expenses net of reimbursement and including account maintenance fees to average
net assets was 0.60% (annualized); for the Class B shares the ratio of total
expenses net of reimbursement and excluding account maintenance and distribution
fees to average net assets was 0.35% (annualized), and the ratio of total
expenses net of reimbursement and including account maintenance and distribution
fees to average net assets was 1.10% (annualized). The Investment Adviser is
voluntarily reimbursing certain expenses of the Fund, and such reimbursement may
be discontinued at any time. Absent such reimbursement, the ratio of total
expenses to average net assets would have been as follows for the same period:
Class A shares--2.03% (annualized); Class B shares-- 2.53% (annualized).
The name of the person associated with the Investment Adviser who is
primarily responsible for the day-to-day management of the Fund's portfolio, his
title, and business experience during the past five years is as follows:
PAOLO H. VALLE--Vice President--Vice President and Senior Portfolio
Manager of the Investment Adviser since 1992; Vice President and Manager,
Emerging Markets Trading, PNC Bank, prior thereto.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of $11 per Class A shareholder account and $12 per
Class B shareholder account, nominal miscellaneous fees (e.g., account closing
fees) and is entitled to reimbursement for out-of-pocket expenses incurred by it
under the Transfer Agency Agreement. For the fiscal period August 27, 1993
(commencement of operations) to December 31, 1993, the Fund paid the Transfer
Agent $26,936 pursuant to the Transfer Agency Agreement. At January 31, 1994,
the Fund had 614 Class A shareholder accounts and 5,784 Class B shareholder
accounts. At this level of accounts, the annual fee payable to the Transfer
Agent would aggregate approximately $76,162 plus miscellaneous and out-of-pocket
expenses.
23
<PAGE>
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), a subsidiary of
the Investment Adviser and an affiliate of Merrill Lynch, acts as the
distributor of Class A and Class B shares of the Fund. Shares of the Fund are
offered continuously for sale by the Distributor and other eligible securities
dealers (including Merrill Lynch). Shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase is $1,000, and the minimum subsequent
purchase is $50, except that for retirement plans, the minimum initial purchase
is $250, and the minimum subsequent purchase is $1.
The Fund is offering its shares at a public offering price equal to the
next determined net asset value per share plus sales charges which, at the
option of the purchaser, may be imposed either at the time of purchase (the
"initial sales charge alternative") or on a deferred basis (the "deferred sales
charge alternative"), as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to 4:15 p.m., New York time, which includes
orders received after the determination of the net asset value on the previous
day, the applicable offering price will be based on the net asset value
determined as of 4:15 p.m., New York time, on the day the orders are placed with
the Distributor, provided the orders are received by the Distributor prior to
4:30 p.m., New York time, on that day. If the purchase orders are not received
by the Distributor prior to 4:30 p.m., New York time, such orders shall be
deemed received on the next business day. Any order may be rejected by the
Distributor or the Fund. The Fund or the Distributor may suspend the continuous
offering of the Fund's shares 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 two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B shares bear the expenses of an account maintenance fee and the deferred sales
arrangements and any expenses (including incremental transfer agency costs)
resulting from such sales arrangements and that Class A shares bear the expenses
of an account maintenance fee, and each class has exclusive voting rights with
respect to the Rule 12b-1 distribution plan pursuant to which the account
maintenance and distribution fees, in the case of the Class B shares, and the
account maintenance fee, in the case of the Class A shares, is paid. The two
classes also have different exchange privileges. See "Shareholder
Services--Exchange Privilege". The net income attributable to Class B shares and
the dividends payable on Class B shares will be reduced by the amount by which
the account maintenance and distribution fees attributable to Class B shares and
incremental expenses associated with such account maintenance and distribution
fees exceed the account maintenance fee attributable to the Class A shares;
likewise the net asset value of the Class B shares will be reduced by such
amount to the extent the Fund has undistributed net income. Sales personnel may
receive different compensation for selling Class A or Class B shares. Investors
are advised that only Class A shares may be available for purchase through
securities dealers, other than Merrill Lynch, which are eligible to sell shares.
24
<PAGE>
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the Fund permit investors to choose
the method of purchasing shares that is most beneficial given the amount of
their purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge and an ongoing account maintenance fee, as discussed below, or to have
the entire initial purchase price invested in the Fund with the investment
thereafter being subject to ongoing account maintenance and distribution fees.
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to both an ongoing account
maintenance fee and a distribution fee, as described below, although the shares
are subject to an ongoing account maintenance fee, as discussed below. However,
because initial sales charges are deducted at the time of purchase, such
investors would not have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees related to Class B shares may exceed
the initial sales charge and ongoing account maintenance fee related to Class A
shares. Again, however, such investors must weigh this consideration against the
fact that not all their funds will be invested initially. Furthermore, the
ongoing account maintenance and distribution fees will be offset to the extent
any return is realized on the additional funds initially invested under the
deferred alternative. Another factor that may be applicable under certain
circumstances is that the payment of the Class B distribution fee and contingent
deferred sales charge is subject to certain limits as set forth below under
"Deferred Sales Charge Alternative--Class B Shares".
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continuing
account maintenance and distribution fees and, for a three-year period of time,
a contingent deferred sales charge as described below. For example, an investor
subject to the 3.00% initial sales charge will have to hold his investment for
more than 4 years for the ongoing 0.25% account maintenance fee and 0.50%
distribution fee of Class B shares to exceed the initial sales charge plus the
accumulated account maintenance fee of Class A shares. This example does not
take into account the time value of money which further reduces the impact of
the ongoing 0.25% account maintenance fee and 0.50% distribution fee of Class B
shares on the investment, fluctuations in net asset value, the effect of the
return on the investment over this period of time or the effect of any limits
that may be imposed upon the payment of the distribution fee and the contingent
deferred sales charge.
Distribution Plans. Pursuant to separate distribution plans adopted by the
Fund pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan"), the Fund pays the Distributor (a) an account maintenance
fee relating to Class A shares, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to Class
A shares in order to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) in connection with account maintenance activities and (b) an
account maintenance fee and a distribution fee relating to Class B shares,
accrued daily and paid monthly, at the annual rates of 0.25% and 0.50%,
respectively, of the average daily net assets of the Fund attributable to Class
B shares in order to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing account maintenance and
25
<PAGE>
distribution services to the Fund, with the ongoing account maintenance fee
compensating the Distributor and Merrill Lynch for providing account maintenance
services to Class B shareholders and with the ongoing distribution fee
compensating the Distributor and Merrill Lynch for providing shareholder and
distribution services, and bearing certain distribution-related expenses of the
Fund, including payments to financial consultants for selling Class B shares of
the Fund. See "Additional Information-- Organization of the Fund". The
Distribution Plan related to Class B shares is designed to permit an investor to
purchase Class B shares through dealers without the assessment of a front-end
sales charge and at the same time permit the dealer to compensate its financial
consultants in connection with the sale of the Class B shares. In this regard,
the purpose and function of the ongoing account maintenance and distribution
fees and the contingent deferred sales charge are the same as those of the
initial sales charge and account maintenance fee with respect to the Class A
shares of the Fund in that the deferred sales charges and distribution fee
provide for the financing of the distribution of the Fund's Class B shares. For
the fiscal period August 27, 1993 (commencement of operations) to December 31,
1993, the Fund paid the Distributor $13,652 pursuant to the Class A Distribution
Plan (based on average net assets subject to the Class A Distribution Plan of
approximately $15.8 million), all of which was paid to Merrill Lynch for
providing account maintenance services in connection with the Class A shares.
For the same period, the Fund paid the Distributor $206,464 pursuant to the
Class B Distribution Plan (based on average net assets subject to the Class B
Distribution Plan of approximately $79.7 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. At January 31, 1994,
the net assets of the Fund subject to the Class A Distribution Plan and the
Class B Distribution Plan aggregated approximately $16.9 million for Class A
shares and approximately $108.5 million for Class B shares. At these asset
levels, the annual fees paid pursuant to such Plans would aggregate
approximately $42,280 for Class A shares and $813,970 for Class B shares.
The payments under the Class B Distribution Plan are based on a percentage
of average daily net assets attributable to Class B shares regardless of the
amount of expenses incurred, and accordingly, distribution-related revenues may
be more or less than distribution-related expenses. Information with respect to
the distribution-related revenues and expenses is presented to the Directors for
their consideration in connection with their deliberations as to the continuance
of the Distribution Plan. This information is presented annually as of December
31 of each year on a "fully allocated accrual" basis and quarterly on a "direct
expense and revenue/cash" basis. On the fully allocated accrual basis, revenues
consist of the account maintenance fees, distribution fees, the contingent
deferred sales charges and certain other related revenues, and expenses consist
of financial consultant compensation, branch office and regional operation
center selling and transaction processing expenses, advertising, sales promotion
and marketing expenses, corporate overhead and interest expense. On the direct
expense and revenue/cash basis, revenues consist of the account maintenance
fees, distribution fees and contingent deferred sales charges, and the expenses
consist of financial consultant compensation. As of December 31, 1993, direct
cash revenues for the period since commencement of the offering of Class B
shares exceeded direct cash expenses by $8,791 (0.009% of Class B net assets at
that date).
The Fund has no obligation with respect to distribution and account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B and Class A 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 account maintenance fee, the distribution fee and the
contingent deferred sales
26
<PAGE>
charges in the case of Class B shares will not be used to subsidize the sale of
Class A shares. Similarly, the initial sales charges and account maintenance fee
in the case of Class A shares will not be used to subsidize the sale of Class B
shares. Payment of the distribution fee on Class B shares is subject to certain
limits as set forth under "Deferred Sales Charge Alternative--Class B Shares."
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales loads) as set forth below.
<TABLE> <CAPTION>
SALES CHARGE AS SALES CHARGE AS DISCOUNT TO
PERCENTAGE OF PERCENTAGE* OF SELECTED DEALERS
THE OFFERING THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE
- ------------------------------------------------------------ ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $100,000.......................................... 3.00 % 3.09 % 2.75 %
$100,000 but less than $500,000............................. 2.50 2.56 2.25
$500,000 but less than $1,000,000........................... 2.00 2.04 1.75
$1,000,000 but less than $3,000,000......................... 1.50 1.52 1.25
$3,000,000 but less than $5,000,000......................... 1.00 1.01 0.75
$5,000,000 and over......................................... .50 .50 .40
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
Initial sales charges will be waived for shareholders purchasing $1 million
or more in a single transaction (other than an employer sponsored retirement or
savings plan, such as a tax qualified retirement plan under Section 401 of the
Internal Revenue Code of 1986, as amended (the "Code"), a deferred compensation
plan under Section 403(b) and Section 457 of the Code, other deferred
compensation arrangements, VEBA plans and non-qualified After Tax Savings and
Investment programs maintained on the Merrill Lynch Group Employee Services
system herein referred to as "Employer Sponsored Retirement or Savings Plans"),
or a purchase by a TMASM Managed Trust, of Class A shares of the Fund. In
addition, purchases of Class A shares of the Fund made in connection with a
single investment of $1 million or more under the Merrill Lynch Mutual Fund
Adviser Program will not be subject to an initial sales charge. Purchases
described in this paragraph will be subject to a contingent deferred sales
charge if the shares are redeemed within one year after purchase at the
following rates:
<TABLE> <CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
- --------------------------------------------------------- ---------------------------------
<S> <C>
$1 million up to $5 million.............................. 0.25%
Over $5 million.......................................... 0.20%
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A shares of
the Fund will receive a concession equal to most of the sales charge, they may
be deemed to be underwriters under the Securities Act of 1933, as amended.
During the fiscal period August 27, 1993 (commencement of operations) to
December 31, 1993, the Fund sold 1,903,377 Class A shares for aggregate net
proceeds to the Fund of $19,440,340. The gross sales charges for the sale of
Class A shares of the Fund for that period were $317,743, of which $5,926 and
$311,817 were received by the Distributor and Merrill Lynch, respectively.
27
<PAGE>
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Directors of the Fund, to directors of Merrill Lynch &
Co., Inc., to participants in certain benefit plans, to directors and trustees
of certain other Merrill Lynch sponsored investment companies, to an investor
who has a business relationship with a financial consultant who joined Merrill
Lynch from another investment firm within six months prior to the date of
purchase if certain conditions set forth in the Statement of Additional
Information are met, and to employees of Merrill Lynch & Co., Inc. and its
subsidiaries. Class A shares are offered at net asset value to (i) certain
retirement plans, including eligible 401(k) plans, provided such plans meet the
required minimum number of eligible employees or required amount of assets
advised by the Investment Adviser or its subsidiary, FAM and (ii) certain
Employer Sponsored Retirement or Savings Plans, provided such plans meet the
required minimum number of eligible employees or required amount of assets
advised by the Investment Adviser or any of its affiliates. Also, Class A shares
may be offered at net asset value in connection with the acquisition of assets
of other investment companies. No initial sales charges are imposed upon Class A
shares issued as a result of the automatic reinvestment of dividends or capital
gains distributions. Class A shares of the Fund are also offered at net asset
value, without sales charge, to an investor who has a business relationship with
a Merrill Lynch financial consultant and who has invested in a mutual fund
sponsored by a non-Merrill Lynch company for which Merrill Lynch has served as a
selected dealer and where Merrill Lynch has either received or given notice that
such arrangement will be terminated, if the following conditions are satisfied:
first, the investor must purchase Class A shares of the Fund with proceeds from
a redemption of shares of such other mutual fund and such fund imposed a sales
charge either at the time of purchase or on a deferred basis; second, such
purchase of Class A shares must be made within 90 days after such notice of
termination. Class A shares of the Fund are also offered at net asset value to
shareholders of certain closed-end funds advised by the Investment Adviser or
FAM who wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in shares of the Fund, provided certain conditions are
met. For example, Class A shares of the Fund and certain other mutual funds
advised by the Investment Adviser or FAM are offered at net asset value to
shareholders of Senior Floating Rate Fund (formerly known as Merrill Lynch Prime
Fund, Inc.) 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 such
funds. Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being sold without an initial sales
charge so that the Fund will receive the full amount of the investor's purchase
payment. Merrill Lynch compensates its financial consultants for selling Class B
shares at the time of purchase from its own funds. The proceeds of the
contingent deferred sales charge and the ongoing distribution fee discussed
below are used to defray Merrill Lynch's expenses, including compensating its
financial consultants. The proceeds from the ongoing account maintenance fee are
used to compensate Merrill Lynch for providing continuing account maintenance
activities.
Proceeds from the contingent deferred sales charge are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to financial consultants for
selling Class B shares. Payments by the Fund to the Distributor under the
Distribution Plan relating to Class B shares may be used in whole
28
<PAGE>
or in part by the Distributor for this purpose. The combination of the
contingent deferred sales charge and the ongoing distribution fee facilitates
the ability of the Fund to sell the Class B shares without a sales charge being
deducted at the time of purchase. Class B shareholders of the Fund exercising
the exchange privilege described under "Shareholder Services--Exchange
Privilege" will continue to be subject to the Fund's contingent deferred sales
charge schedule if such schedule is higher than the deferred sales charge
schedule relating to the Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charge. Class B shares which are redeemed within
three years of purchase may be subject to a contingent deferred sales charge at
the rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
current market value or the cost of the shares being redeemed. Accordingly, no
sales charge will be imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. For the fiscal period
August 27, 1993 (commencement of operations) to December 31, 1993, the
Distributor received contingent deferred sales charges of $51,471 with respect
to the redemption of Class B shares, all of which was paid to Merrill Lynch.
The following table sets forth the rates of the contingent deferred sales
charge:
<TABLE> <CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE
YEARS SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ------------------------------------------------------------------------ ---------------------
<S> <C>
0-1..................................................................... 3.0%
1-2..................................................................... 2.0%
2-3..................................................................... 1.0%
3 and thereafter........................................................ None
</TABLE>
In determining whether a contingent deferred sales charge is applicable to
a redemption, the calculation will be determined in the manner that results in
the lowest possible rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over 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 1.0% (the
applicable rate in the third year after purchase).
The contingent deferred sales charge is waived on redemptions of shares in
connection with certain post-retirement withdrawals from Individual Retirement
Accounts ("IRAs") or other retirement plans or following the death or disability
(as defined in the Code) of a shareholder.
The contingent deferred sales charge also is waived on redemptions of
shares by certain eligible 401(a) and eligible 401(k) plans. The contingent
deferred sales charge is also waived for any Class B
29
<PAGE>
shares which are purchased by an eligible 401(k) or eligible 401(a) plan and
which are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied IRA 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.
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 Fund's distribution fee and the contingent deferred
sales charge but not the account maintenance fees. 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 1/4% of
eligible gross sales of Class B shares (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges) plus (2) interest on the
unpaid balance at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fee
and the contingent deferred sales charge). The Distributor has voluntarily
agreed to waive interest charges on the unpaid balance in excess of 0.50% of
eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges at
any time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee, and any contingent
deferred sales charges will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance
fees. In certain circumstances the amount payable pursuant to the voluntary
maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
The following table sets forth comparative information as of December 31,
1993, with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule and
the Distributor's voluntary maximum for the period August 27, 1993 (commencement
of operations) to December 31, 1993:
DATA CALCULATED AS OF DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE> <CAPTION>
ALLOWABLE ALLOWABLE AMOUNTS
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE
GROSS SALES UNPAID AMOUNT PAID TO UNPAID
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE
--------- --------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted....................... $ 83,122 $ 5,195 $ 105 $ 5,300 $ 189 $ 5,111
Under Distributor's Voluntary Waiver............. $ 83,122 $ 5,195 $ 416 $ 5,611 $ 189 $ 5,422
<CAPTION>
ANNUAL
DISTRIBUTION
FEE AT
CURRENT NET
ASSET
LEVEL(4)
-----------
Under NASD Rule as Adopted....................... $ 494
Under Distributor's Voluntary Waiver............. $ 494
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B shares sold since August 27, 1993
(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 1.0% as permitted under the NASD
Rule.
(3) Consists of contingent deferred sales charge payments, distribution fee
payments and accruals.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any contingent deferred sales charge payments)
is amortizing the unpaid balance. No assurance can be given that payments of
the distribution fee will reach either the voluntary maximum or the NASD
maximum.
30
<PAGE>
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares of
the Fund on receipt of a written request in proper form. The redemption price is
the net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any contingent deferred sales charge
which may be applicable to Class B shares, there will be no charge for
redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Financial Data Services,
Inc., Transfer Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville,
Florida 32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., Transfer Agency Mutual Fund
Operations, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper
notice of redemption in the case of shares deposited with the Transfer Agent may
be accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. The notice in either event requires the signatures of
all persons in whose names the shares are registered, signed exactly as their
names appear on the Transfer Agent's register or on the certificate, as the case
may be. The signature(s) on the redemption request must be guaranteed by an
"eligible guarantor institution" (including, for example, Merrill Lynch branches
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, payment will be mailed within seven
days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a U.S. bank) has been collected for the purchase of
such shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the New
York Stock Exchange on the day received and that such request is received by the
Fund from such dealer not later than 4:30 p.m., New York time, on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 4:30 p.m., New York time, in order to obtain that day's
closing price.
31
<PAGE>
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
contingent deferred sales charge in the case of Class B shares). Securities
firms which do not have selected dealer agreements with the Distributor,
however, may impose a transaction charge on the shareholder for transmitting the
notice of repurchase to the Fund. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a repurchase of shares to such
customers. Redemptions directly through the Transfer Agent are not subject to
the processing fee. The Fund reserves the right to reject any order for
repurchase, which right of rejection might adversely affect shareholders seeking
redemption through the repurchase procedure. A shareholder whose order for
repurchase is rejected by the Fund may redeem shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A SHARES
Shareholders who have redeemed their Class A shares have a one-time
privilege to reinstate their accounts by purchasing Class A shares of the Fund
at net asset value without a sales charge up to the dollar amount redeemed. The
reinstatement privilege may be exercised by sending a notice of exercise along
with a check for the amount to be reinstated to the Transfer Agent within 30
days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset value
per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds. The reinstatement privilege
is a one-time privilege and may be exercised by the Class A shareholder only the
first time such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in its shares. Full details as to each of such
services, copies of the various plans described below and instructions as to how
to participate in the various 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. Certain of
these services are available only to U.S. investors.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements from the
Transfer Agent showing any reinvestment of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions. A shareholder may make additions to his Investment Account
at any time by mailing a check directly to the Transfer Agent. Shareholders may
also maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically, without charge, at
the Transfer Agent. Shareholders considering transferring their Class A shares
from Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A shares are to be transferred will
not take delivery of shares of the Fund, a shareholder either must redeem the
Class A shares so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an Investment Account
at the Transfer Agent for those Class A shares. Shareholders interested in
transferring their Class B shares from Merrill Lynch and who do not wish to have
an Investment Account maintained for such shares at the Transfer Agent may
request their new brokerage firm to maintain such shares in an account
32
<PAGE>
registered in the name of the brokerage firm for the benefit of the shareholder.
If the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he be issued certificates for his
shares and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an IRA from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder must either redeem the shares (paying any
applicable contingent deferred sales charge) so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must continue to
maintain a retirement account at Merrill Lynch for those shares.
Systematic Withdrawals and Automatic Investment Plans. A Class A
shareholder may elect to receive systematic withdrawal payments from his
Investment Account in the form of payments by check or through automatic payment
by direct deposit to his bank account on either a monthly or quarterly basis. A
Class A 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. Regular additions of Class A shares may be made to an
investor's Investment Account by pre-arranged charges of $50 or more to his
regular bank account. Investors who maintain CMA accounts may arrange to have
periodic investments made in the Fund in their CMA account or in certain related
accounts in amounts of $250 or more through the CMA Automatic Investment
Program. The Automatic Investment Program is not available to shareholders whose
shares are held in a brokerage account with Merrill Lynch (other than a CMA
account).
Automatic Reinvestment of Dividends and Distributions. All dividends and
capital gains distributions are automatically reinvested in full and fractional
shares of the Fund, without sales charge, at the net asset value per share next
determined after the close of the New York Stock Exchange on the monthly payment
date of such dividend or distribution. A shareholder may at any time, by written
notification to Merrill Lynch if the shareholder's account is maintained with
Merrill Lynch or by written notification or telephone call (1-800-MER-FUND) to
the Transfer Agent if the shareholder's account is maintained with the Transfer
Agent, elect to have subsequent dividends or capital gains distributions, or
both, paid in cash, rather than reinvested, in which event payment will be
mailed on or about the payment date. No deferred sales charge will be imposed on
redemptions of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. The Automatic Investment Program is
not available to shareholders whose shares are held in a brokerage account with
Merrill Lynch other than a CMA(R) account.
Exchange Privilege. U.S. Class A and Class B shareholders of the Fund each
have an exchange privilege with certain other mutual funds sponsored by Merrill
Lynch. There is currently no limitation on the number of times a shareholder may
exercise the exchange privilege. The exchange privilege may be modified or
terminated in accordance with the rules of the Securities and Exchange
Commission. Class A shareholders of the Fund may exchange their shares
("outstanding Class A shares") for Class A shares of another fund ("new Class A
shares") on the basis of relative net asset value per Class A share, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the outstanding Class A shares and the sales charge payable at the time of
the exchange on the new Class A shares. The Fund's exchange privilege is
modified with respect to purchases of Class A shares under the Merrill Lynch
Mutual Fund Adviser program. First, the initial allocation of assets is made
under the
33
<PAGE>
program. Then, any subsequent exchange under the program of Class A shares of a
fund for Class A shares of the Fund will be made solely on the basis of the
relative net asset values of the shares being exchanged. Therefore, there will
not be a charge for any difference between the sales charge previously paid on
the shares of the other fund and the sales charge payable on the shares of the
Fund being acquired in the exchange under this program.
Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share without the payment of any
contingent deferred sales charge that might otherwise be due upon redemption of
the outstanding Class B shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's contingent deferred
sales charge schedule if such schedule is higher than the deferred sales charge
schedule relating to the new Class B shares. In addition, Class B shares of the
Fund acquired through use of the exchange privilege will be subject to the
Fund's contingent deferred sales charge schedule if such schedule is higher than
the deferred sales charge schedule relating to the Class B shares of the fund
from which the exchange has been made. For purposes of computing the contingent
deferred sales charge that may be payable upon a disposition of the new Class B
shares, the holding period for the outstanding Class B shares is "tacked" to the
holding period of the new Class B shares. Class A and Class B shareholders of
the Fund may also exchange their shares for shares of certain money market
funds, but in the case of an exchange from Class B shares, the period of time
that shares are held in a money market fund will not count toward satisfaction
of the holding period requirement for purposes of reducing the contingent
deferred sales charge. Exercise of the exchange privilege is treated as a sale
for Federal income tax purposes. For further information, see "Shareholder
Services--Exchange Privilege" in the Statement of Additional Information.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A and Class B shares in accordance with a formula specified
by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge in the case of Class A shares and the
contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares. Dividends paid by the Fund with respect to Class A and Class B
shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that the account maintenance and distribution fees and any incremental transfer
agency costs relating to Class B shares will be borne exclusively by Class B
shares, and the account maintenance fee relating to Class A shares will be borne
exclusively by Class A shares. The Fund will include performance data for both
Class A and Class B shares of the Fund in any advertisement or information
including performance data of the Fund.
34
<PAGE>
The Fund may also quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return, and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return 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 longer periods of time.
In advertisements directed to investors whose purchases are subject to reduced
sales charges in the case of Class A shares or waiver of the contingent deferred
sales charge in the case of Class B shares (such as investors in certain
retirement plans), performance data may take into account the reduced, and not
the maximum, sales charge or may not take into account the contingent deferred
sales charge and therefore may reflect greater total return since, due to the
reduced sales charges or waiver of the contingent deferred sales charge, a lower
amount of expenses may be deducted. See "Purchase of Shares". The Fund's total
return may be expressed either as a percentage or as a dollar amount in order to
illustrate the effect of such total return on a hypothetical $1,000 investment
in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, or to
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other industry
publications. In addition, from time to time the Fund may include the Fund's
risk-adjusted performance ratings assigned by Morningstar Publications, Inc. in
advertising or supplemental sales literature. As with other performance data,
performance comparisons should not be considered representative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Fund is declared as dividends as of the
close of trading on the New York Stock Exchange (currently 4:15 p.m., New York
time) prior to the determination of the net asset value on that day. The net
investment income of the Fund for dividend purposes consists of interest earned
on portfolio securities, less expenses, in each case computed since the most
recent determination of the net asset value. Expenses of the Fund, including the
investment advisory fees, account maintenance and distribution fees with respect
to Class B shares, and account maintenance fees with respect to Class A shares,
are accrued daily. Dividends of net investment income are declared daily and
reinvested monthly in the form of additional full and fractional shares of the
Fund at net asset value unless the shareholder elects to receive such dividends
in cash. Shares will accrue dividends as long as they are
35
<PAGE>
issued and outstanding. Shares are issued and outstanding from the settlement
date of a purchase order to the day prior to settlement date of a redemption
order.
All net realized long-or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders annually. Capital gains distributions
will be reinvested automatically in shares unless the shareholder elects to
receive such distributions in cash.
The per share dividends and distributions on Class B shares will be lower
than the per share dividends and distributions on Class A shares as a result of
the effect of the account maintenance, distribution and higher transfer agency
fees applicable with respect to the Class B shares, as compared with the account
maintenance fee applicable to the Class A shares.
Certain gains or losses attributable to foreign currency gains or losses
from certain forward contracts may increase or decrease the amount of the Fund's
income available for distribution to shareholders. If such losses exceed other
income during a taxable year, (a) the Fund would not be able to make any
ordinary dividend distributions, and (b) distributions made before the losses
were realized would be recharacterized as a return of capital to shareholders,
rather than as an ordinary dividend, reducing each shareholder's tax basis in
his Fund shares for Federal income tax purposes. See "Additional
Information--Taxes".
TAXES
The Fund intends to elect and 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
and Class B 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.
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, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
that 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.
36
<PAGE>
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S. 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 U.S.
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 U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends and capital gain
dividends and on redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom a certified
taxpayer identification number is not on file with the Fund or who, to the
Fund's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each shareholder's Fund
shares.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class A
shares.
37
<PAGE>
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income dividends 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.
Shareholders are urged to consult their 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.
DETERMINATION OF NET ASSET VALUE
Net asset value per share is determined once daily at 4:15 p.m., New York
time, on each day during which the New York Stock Exchange is open for trading
and, under certain circumstances, on other days. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The net asset value is computed by dividing the
value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the fees payable to the Investment
Adviser and the Distributor, are accrued daily.
The per share net asset value of the Class B shares generally will be lower
than the per share net asset value of the Class A shares, reflecting the daily
expense accruals of the account maintenance, distribution and higher transfer
agency fees applicable with respect to the Class B shares, as compared with the
account maintenance fee applicable to the Class A shares. It is expected,
however, that the per share net asset value of the two classes will tend to
converge immediately after the payment of dividends or distributions which will
differ by approximately the amount of the expense accrual differential between
the classes.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on June 10, 1993. It has an
authorized capital of 200,000,000 shares of common stock, par value $0.10 per
share, divided into two classes, designated Class A and Class B common stock.
Class A common stock consists of 100,000,000 shares. Class B common stock
consists of 100,000,000 shares. Both Class A and Class B common stock represent
an interest in the same assets of the Fund and are identical in all respects
except that the expenses of the Class A account maintenance fee are borne solely
by the Class A shares, and the expenses of the Class B account maintenance and
distribution fees are borne solely by the Class B shares, and Class A and Class
B shares have exclusive voting rights with respect to matters relating to such
account maintenance and distribution expenditures. See "Purchase of Shares". The
Fund has received an order from the Commission permitting the issuance and sale
of two classes of common stock. The Fund has applied for an additional order
from the Commission to issue additional classes of shares also representing
interests in the Fund. If such order is received, it is presently expected that
the Fund would issue additional
38
<PAGE>
class(es) of shares with different sales arrangements than those for Class A
shares and Class B shares. There can be no assurance that the additional order
will be granted.
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 on which shareholders are entitled to vote. The Fund does not
intend to hold meetings of shareholders in any year in which the Investment
Company Act does not require shareholders to act upon any of the following
matters: (i) election of directors; (ii) approval of an investment advisory
agreement; (iii) approval of a distribution agreement; and (iv) ratification of
selection of independent accountants. Also, the by-laws of the Fund require that
a special meeting of stockholders be held upon the written request of
shareholders of the Fund as required by Maryland corporate law. Voting rights
for Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive or conversion rights. Each share of Class
A and Class B common stock is entitled to participate equally in dividends and
distributions declared by the Fund and in the net assets of the Fund upon
liquidation or dissolution after satisfaction of outstanding liabilities, except
that, as noted above, expenses related to the distribution of the shares of a
class will be borne solely by such class.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: Document Evaluation Unit
P.O. Box 45290
Jacksonville, FL 32232-5290
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch financial
consultant or Financial Data Services, Inc. at 1-800-637-3863.
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.
------------------------
39
<PAGE>
[This page is intentionally left blank.]
<PAGE>
APPENDIX
VARIOUS PORTFOLIO STRATEGIES
The Fund is authorized to engage in various portfolio hedging strategies.
These strategies are described in more detail below.
Interest Rate Transactions. In order to hedge the value of the Fund's
portfolio against interest rate fluctuations or to enhance the Fund's income,
the Fund may enter into various 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 primarily as a hedge and not as a speculative
investment. However, the Fund may also invest in interest rate swaps to enhance
income or to increase the Fund's yield during periods of steep interest rate
yield curves (i.e., wide differences between short-term and long-term interest
rates).
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 fixed
rate payments for floating rate payments. For example, if the Fund holds a
mortgage-backed security 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 mortgage-backed security due to
rising interest rates but would also limit its ability to benefit from falling
interest rates. Conversely, if the Fund holds a mortgage-backed security 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 and may permit the Fund to
enhance its income through the positive differential between one week and one
year interest rates, but would preclude it from taking full advantage of rising
interest rates.
Typically the parties with which the Fund will enter into interest rate
transactions will be broker-dealers and other financial institutions. 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 part thereto is
rated in one of the two highest 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 Investment Adviser 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 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. Caps and floors, however, are less
liquid than swaps. Certain Federal income tax requirements may limit the Fund's
ability to engage in certain interest rate
A-1
<PAGE>
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.
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 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. The Fund may also purchase and sell call options on indices.
Index options are similar to options on securities except that, rather than
taking or making delivery of securities underlying the option at a specified
price upon exercise, an index option gives the holder the right to receive cash
upon exercise of the option if the level of the index upon which the option is
based is greater than the exercise price of the option. The Fund will not
purchase options on securities if as a result of such purchase, the aggregate
cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.
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 stated
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 grade liquid
debt securities. 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 will receive a premium for writing a put
option, which increases the Fund's return. The Fund will not sell puts if, as a
result, more than 50% of the Fund's assets would be required to cover its
potential obligations under its hedging and other investment transactions. The
Fund may purchase and sell put options on indices. Index options are similar to
options on securities except that, rather than taking or making delivery of
securities underlying the option at a specified price upon exercise, an index
option gives the holder the right to receive cash upon exercise of the option if
the level of the index upon which the option is based is less than the exercise
price of the option.
A-2
<PAGE>
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. 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
"contract markets" by the Commodity Futures Trading Commission ("CFTC").
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 the 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 securities or 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' obligation 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.
Foreign Currency Hedging. The Fund has authority to deal in forward foreign
exchange among currencies of the different countries in which it will invest and
multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date (up to
A-3
<PAGE>
one year) and price set at the time of the contract. The Fund's dealings in
forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. In this situation, the Fund also may, for
example, enter into a forward contract to sell or purchase a different foreign
currency for a fixed U.S. dollar amount where it is believed that the U.S.
dollar value of the currency to be sold or bought pursuant to the forward
contract will fall or rise, as the case may be, whenever there is a decline or
increase, respectively, in the U.S. dollar value of the currency in which
portfolio securities of the Fund are denominated (this practice being referred
to as a "cross-hedge").
The Fund will not speculate in forward foreign exchange. Hedging against a
decline in the value of a currency does not eliminate fluctuations in the prices
of portfolio securities or prevent losses if the prices of such securities
decline. Such transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be possible for the
Fund to hedge against a devaluation that is so generally anticipated that the
Fund is not able to contract to sell the currency at a price above the
devaluation level it anticipates.
The Fund is also authorized to purchase or sell listed or OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to hedges on
non-U.S. denominated securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the rights to
buy or sell a currency at a fixed price on a future date. A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade of
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of securities which it has committed
or anticipates to purchase which are denominated in such currency, and in the
case of securities which have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated currency.
Restrictions on the Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund provide that the futures trading activities described
herein will not result in the Fund being deemed a "commodity pool" 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 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
A-4
<PAGE>
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
which exempts the Fund from certain provisions of the Investment Company Act 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.
Risk Factors in Interest Rate Transactions and Options, Futures and
Currency 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 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 Investment Adviser 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
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. Since interest rate transactions are
individually negotiated, the Investment Adviser expects to achieve an acceptable
degree of correlation between the Fund's rights to receive interest on
securities and its rights and obligations to receive and pay interest pursuant
to interest rate swaps. 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,
interest rates or currencies which are the subject of the hedge. If the price of
the options or futures moves more or less than the price of the 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 instrument that is the subject of the futures contract is different
from the instrument being hedged by the contract.
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 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.
A-5
<PAGE>
[This page is intentionally left blank.]
<PAGE>
MERRILL LYNCH AMERICAS INCOME FUND, INC.--AUTHORIZATION FORM
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase ............ Class A shares or
............ Class B shares (choose one) of Merrill Lynch Americas Income Fund,
Inc. and establish an Investment Account as described in the Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $ ......... payable to Financial Data Services,
Inc., as an initial investment (minimum $1,000) (subsequent investments $50
or more). I understand that this purchase will be executed at the applicable
offering price next to be determined after this Application is received by
you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information:
<TABLE>
<S> <C>
1............................................................. 4.............................................................
2............................................................. 5.............................................................
3............................................................. 6.............................................................
</TABLE>
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with respect to
dividends and distributions are elected:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Distribution Elect / / reinvest dividends Elect / / reinvest capital
Options gains
One / / pay dividends in One / / pay capital gains in
cash cash
</TABLE>
If no election is made, dividends and capital gains will be
reinvested automatically at net asset value without a sales charge.
------------------------
(PLEASE PRINT)
Name ...........................................................................
First Name Initial Last
Name
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any) ......................................................
First Name Initial Last Name
Address ........................................................................
...................................................................... , 19 ...
Date
.........................................................................
(Zip Code)
Occupation .......................... Name and Address of Employer ............
........................................
........................................
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security No. or Taxpayer Identification No. and (2) that I am not
subject to backup withholding (as discussed in the Prospectus under "Additional
Information--Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO 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) ...........................................................................
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- --------------------------------------------------------------------------------
2. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
............. , 19 ...
Date of Initial
Purchase
Gentlemen:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Americas Income 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:
/ / $100,000 / / $500,000 / / $1,000,000 / / $3,000,000 / / $5,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Americas Income
Fund, Inc. prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc. my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Americas Income Fund, Inc. held as security.
<TABLE>
<S> <C>
By:........................................................... ..............................................................
Signature of Co-Owner (If registered in joint names, both must
Signature of Owner sign)
</TABLE>
In making purchases under this letter, the following are the related accounts on
which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name...................................................... (2) Name......................................................
</TABLE>
B-1
<PAGE>
MERRILL LYNCH AMERICAS INCOME FUND, INC.--AUTHORIZATION FORM
- --------------------------------------------------------------------------------
3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of shares in Merrill Lynch Americas Income Fund, Inc. at cost or
current offering price. Begin systematic withdrawal on ......... , 19 .. .
Withdrawals to be made
either (check one) / /
Monthly / / Quarterly*
[Date] *Quarterly withdrawals
are made on the 24th
day of March, June,
September and December.
Specify withdrawal amount (check one): / / $ ...... or / / ...... % of the
current value of Class A shares in the account.
Specify withdrawal method: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
- --------------------------------------------------------------------------------
(A) I HEREBY AUTHORIZE PAYMENT BY
CHECK
Draw checks payable
(check one)
/ / 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..............................................................
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.
Specify type of account (check one): / / checking / / savings
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Name on your Account.........................................................
Bank..........
Bank # ................................. Account # .........................
Bank Address.................................................................
Signature of Depositor...........................................Date .......
Signature of Depositor (if joint account)...................................
NOTE: IF AUTOMATIC DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- --------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase .... Class A shares or .... Class B shares of Merrill
Lynch Americas Income Fund, Inc., subject to the terms set forth below.
- --------------------------------------------------------------------------------
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw a check or an ACH debit each month
on my bank account for investment in Merrill Lynch Americas Income
Fund, Inc. as indicated below:
Amount of each check or ACH debit $............................................
Account No.....................................................................
Please date and invest checks or draw ACH debits on the 20th of each month
beginning..................................................................
(Month)
or as soon thereafter as possible.
I agree that you are preparing these checks or drawing these debits
voluntarily at my request and that you shall not be liable for any loss arising
from any delay in preparing or failure to prepare any such check or debit.
If I change banks or desire to terminate or suspend this program, I agree to
notify you promptly in writing.
I further agree that if a check or debit is not honored upon presentation,
Financial Data Services, Inc. is authorized to discontinue immediately the
Automatic Investment Plan and to liquidate sufficient shares held in my
account to offset the purchase made with the returned check or dishonored
debit.
............... ..........................................
Date Signature of Depositor
..........................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR CHECKS
OR ACH DEBITS DRAWN BY
FINANCIAL DATA SERVICES, INC.
To......................................................................Bank
(Investor's Bank)
Bank Address...............................................................
City ................... State .......... Zip Code .........
As a convenience to me, I hereby request and authorize you to pay and
charge to my account checks or ACH debits drawn on my account by and
payable to Financial Data Services, Inc., Transfer Agency Mutual Fund
Operations, Jacksonville, Florida 32232-5289. I agree that your rights in
respect to each such check or debit shall be the same as if it were a check
drawn on you and signed personally by me. This authority is to remain in
effect until revoked personally by me in writing. Until you receive such
notice, you shall be fully protected in honoring any such check or debit.
I further agree that if any such check or debit be dishonored, whether with
or without cause and whether intentionally or inadvertently, you shall be
under no liability.
............... .........................................
Date Signature of Depositor
............... ..........................................
Bank Account Number 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.
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
This form when completed should be mailed to:
Merrill Lynch Americas Income Fund, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, FL 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our
agent in connection with transactions under this authorization form and
agree to notify the Distributor of any purchases made under a Letter of
Intention or Systematic Withdrawal Plan. We guarantee the shareholder's
signature.
................................................
Dealer Name and Address
By ..............................................
Authorized Signature of Dealer
..............
Branch-Code F/C No. F/C Last Name
Dealer's Customer A/C No.
B-2
<PAGE>
[This page is intentionally left blank.]
<PAGE>
[This page is intentionally left blank.]
<PAGE>
INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFER CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE INVESTMENT
ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
PAGE
-----------
Fee Table........................................ 3
Alternative Sales Arrangements................... 4
Financial Highlights............................. 7
Investment Objective and Policies................ 8
Special Considerations and Risk Factors........ 10
Investments in Mortgage-Backed and
Asset-Backed Securities...................... 14
Other Investment Practices..................... 17
Investment Restrictions........................ 21
Management of the Fund........................... 22
Board of Directors............................. 22
Advisory and Management Arrangements........... 22
Transfer Agency Services....................... 23
Purchase of Shares............................... 24
Alternative Sales Arrangements................. 25
Initial Sales Charge Alternative--
Class A Shares............................... 27
Deferred Sales Charge Alternative--
Class B Shares............................... 28
Redemption of Shares............................. 31
Redemption..................................... 31
Repurchase..................................... 31
Reinstatement Privilege--Class A Shares........ 32
Shareholder Services............................. 32
Performance Data................................. 34
Additional Information........................... 35
Dividends and Distributions.................... 35
Taxes.......................................... 36
Determination of Net Asset Value............... 38
Organization of the Fund....................... 38
Shareholder Reports............................ 39
Shareholder Inquiries.......................... 39
Appendix--Various Portfolio Strategies........... A-1
Authorization Form............................... B-1
Code #16802-0893
Prospectus
[ART]
-----------
MERRILL LYNCH
AMERICAS INCOME
FUND, INC.
February 18, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH AMERICAS INCOME FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Americas Income Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company seeking 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). The Fund
may at times utilize certain investment techniques, including options and
futures, to increase investment return or to hedge all or a portion of its
portfolio against interest rate, market and currency risks. In addition, the
Fund is authorized to borrow funds and to utilize leverage in amounts not to
exceed 33 1/3% of its total assets. There can be no assurance that the Fund's
investment objective will be achieved.
The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus, in both cases, a
sales charge which, at the election of the purchaser, may be imposed (i) at the
time of purchase (the "Class A shares") or (ii) on a deferred basis (the "Class
B shares"). These alternatives permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other circumstances.
Investors should understand that the purpose and function of the deferred sales
charges with respect to the Class B shares are the same as those of the initial
sales charge with respect to the Class A shares. Each Class A and Class B share
represents identical interests in the investment portfolio of the Fund and has
the same rights, except that Class B shares bear the expenses of the ongoing
account maintenance and distribution fees with respect to Class B shares and
certain other costs resulting from the deferred sales charge arrangement and
that Class A shares bear the expenses of the account maintenance fee with
respect to the Class A shares. The two classes also have different exchange
privileges.
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated
February 18, 1994 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission and can be obtained, without charge, by calling or
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
------------------------
INVESTMENT ADVISER:
MERRILL LYNCH ASSET MANAGEMENT
DISTRIBUTOR:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
------------------------
The date of this Statement of Additional Information is February 18, 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek 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). Reference
is made to "Investment Objective and Policies" in the Prospectus for a
discussion of the investment objective and policies of the Fund.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P., doing business as
Merrill Lynch Asset Management (the "Investment Adviser"), will effect portfolio
transactions without regard to holding period if, in its judgment, such
transactions are advisable in light of a change in circumstances of a particular
company or within a particular industry or in general market, economic or
financial conditions. As a result of the investment policies described in the
Prospectus, the Fund's portfolio turnover rate may be higher than that of other
investment companies. Accordingly, while the Fund anticipates that its annual
portfolio turnover rate should not exceed 100% under normal conditions, it is
impossible to predict portfolio turnover rates. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less and options, futures
and currency transactions) by the monthly average value of the securities in the
portfolio during the year. For the fiscal period August 27, 1993 (commencement
of operations) to December 31, 1993, the Fund's portfolio turnover rate was
75.18%. The Fund is subject to the Federal income tax requirement that less than
30% of the Fund's gross income must be derived from gains from the sale or other
disposition of securities held for less than three months.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such as
the Fund. If such restrictions should be reinstituted, it might become necessary
for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate. Any changes in
the investment objective or fundamental policies set forth under "Investment
Restrictions" below would require the approval of the holders of a majority of
the Fund's outstanding voting securities.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis on each day the Fund determines its net asset value in U.S. dollars, the
Fund intends to manage its portfolio so as to give reasonable assurance that it
will be able to obtain U.S. dollars to the extent necessary to meet anticipated
redemptions. Under present conditions, the Investment Adviser does not believe
that these considerations will have any significant effect on its portfolio
strategy, although there can be no assurance in this regard.
PORTFOLIO STRATEGIES INVOLVING INTEREST RATE TRANSACTIONS, OPTIONS AND FUTURES
Reference is made to the discussion concerning various portfolio strategies
of the Fund under the caption "Investment Objective and Policies--Other
Investment Practices--Portfolio Strategies Involving Interest Rate Transactions,
Options, Futures and Currency Transactions" in the Prospectus and to Appendix A
thereto.
2
<PAGE>
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 market, interest rate and currency movements. 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 options on its portfolio securities, and engage in
hedging transactions in financial futures and related options on such futures.
The Fund may also deal in forward foreign exchange transactions and foreign
currency options and futures and related options on such futures.
Although certain risks are involved in interest rate, options and futures
transactions (as discussed below), the Investment Adviser believes that, because
the Fund will (i) write only covered options on portfolio securities and (ii)
engage in other transactions primarily for hedging purposes, the interest rate,
options and futures portfolio strategies of the Fund will not subject the Fund
to the risks frequently associated with the speculative use of such
transactions.
The following additional information relates to the instruments the Fund
may utilize with respect to its portfolio strategies involving interest rate
transactions, options and futures.
Interest Rate Hedging Transactions. 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 Investment Adviser 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.
Writing Covered Options. 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.
Put Options on Portfolio Securities. 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.
Option Markets. The options in which the Fund invests may be options issued
by The Options Clearing Corporation (the "Clearing Corporation") which are
currently traded on the Chicago Board
3
<PAGE>
Options Exchange, American Stock Exchange, Philadelphia Stock Exchange, Pacific
Stock Exchange, New York Stock Exchange or Midwest Stock Exchange. An option
position may be closed out only on an exchange which provides a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing transactions in particular options, with the
result, in the case of a covered call option, that the Fund will not be able to
sell the underlying security until the option expires or it delivers the
underlying security upon exercise. Reasons for the absence of a liquid secondary
market on an exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be imposed by an
exchange on opening transactions or closing transactions or both, (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Clearing Corporation may not at all times
be adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that class
or series of options) would cease to exist, although outstanding options on that
exchange that had been issued by the Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
The Fund may also enter into OTC options, which are two-party contracts
with prices and terms negotiated between the buyer and seller. The staff of the
Securities and Exchange Commission (the "Commission") has taken the position
that OTC options and the assets used as cover for written OTC options are
illiquid securities. 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
position.
Financial Futures and Options Thereon. 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 the market". At any time prior to the
settlement date of the futures contract, the position may be closed out by
taking an opposite position which will operate to terminate the position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the broker and the
purchaser realizes a loss or gain. In addition, a nominal commission is paid on
each completed sale transaction.
4
<PAGE>
The Fund has received an order from the Commission exempting it from the
provisions of Section 17(f) of the Investment Company Act in connection with its
strategy of investing in futures contracts. Section 17(f) relates to the custody
of securities and other assets of an investment company and may be deemed to
prohibit certain arrangements between the Fund and commodities brokers with
respect to initial and variation margin.
Foreign Currency Hedging. Generally, the foreign exchange transactions of
the Fund will be conducted on a spot (i.e., cash basis), at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. The
Fund has authority to deal in forward foreign exchange among currencies of the
different countries. This is accomplished through contractual agreements to
purchase or sell a specified currency at a specified future date and price set
at the time of the contract. The Fund's dealings in forward foreign exchange
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities, the sale
and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Fund will not speculate in forward foreign exchange.
The Fund may not position hedge with respect to the currency of a particular
country to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or quoted
in that particular foreign currency. The Fund will enter into such transactions
only to the extent, if any, deemed appropriate by the Investment Adviser. The
Fund will not enter into a forward contract with a term of more than one year.
The Fund is also authorized to purchase or sell listed or over-the-counter
("OTC") foreign currency options, foreign currency futures and related options
on foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. dollars of an investment in a Canadian dollar denominated
security. In such circumstances, for example, the Fund may purchase a foreign
currency put option enabling it to sell a specified amount of Canadian dollars
for U.S. dollars at a specified price by a future date. To the extent the hedge
is successful, a loss in the value of the Canadian dollar relative to the U.S.
dollar will tend to be offset by an increase in the value of the put option. To
offset in whole or part the cost of acquiring such a put option, the Fund may
also sell a call option which, if exercised, requires it to sell a specified
amount of Canadian dollars for U.S. dollars at a specified price by a future
date (a technique called a "straddle"). By selling such call option in this
illustration, the Fund gives up the opportunity to profit without limit from
increases in the relative value of the Canadian dollar to the U.S. dollar. The
Investment Adviser believes that "straddles" of the type which may be utilized
by the Fund constitute hedging transactions and are consistent with the policies
described above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions
5
<PAGE>
in foreign currency exchange usually are conducted on a principal basis, no fees
or commissions are involved.
Risk Factors in Options and Futures Transactions. In the case of a futures
position or an option on a futures position written by the Fund, in the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. In such situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
In addition, the Fund may be required to take or make delivery of the securities
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.
The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security (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 Investment Adviser does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act of 1940, as amended (the "Investment Company Act"), means
the lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). The Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other than
customary broker's commission, is involved and only if immediately
thereafter not more than 10% of the Fund's total assets, taken at market
value, would be invested in such securities.
3. Purchase or sell real estate; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
4. Purchase or sell commodities or commodity contracts, except that
the Fund may engage in transactions involving commodities in order to hedge
against interest rate, market or currency risks or to increase investment
return provided that such transactions will not result in the Fund having
to register as a "commodity pool" under applicable regulations of the
Commodity Futures Trading Commission.
6
<PAGE>
5. Borrow money except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), and (ii) the Fund may borrow
up to an additional 5% of its total assets for temporary purposes. The Fund
may not pledge its assets other than to secure such borrowings or in
connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies. The Fund's
obligations under interest rate swaps are not treated as senior securities.
6. Make loans to other persons (except as provided in (7) below);
provided that for purposes of this restriction the acquisition of bonds,
debentures, or other corporate debt securities and investment in government
securities, short-term commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements shall not be deemed to be the making
of a loan.
7. Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value.
8. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which are not otherwise readily
marketable if, regarding all such securities, more than 15% of its total
assets, taken at market value, would be invested in such securities.
9. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended,
in selling portfolio securities.
10. Purchase or sell interests in oil, gas or other mineral
exploration or development programs.
11. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of issuers in a single industry
(other than debt securities issued or guaranteed by a Western Hemisphere
governmental entity), except that, under normal circumstances, the Fund
will invest more than 25% of its total assets in the securities of issuers
in the financial services industry.
The Board of Directors has established the policy that the Fund will not
purchase or retain the securities of any issuer if those individual officers and
Directors of the Fund, the officers and general partner of the Investment
Adviser, the directors of such general partner or the directors and officers of
the Distributor each owning beneficially more than one-half of 1% of the
securities of such issuer own in the aggregate more than 5% of the securities of
such issuer. Portfolio securities of the Fund may not be purchased from, sold or
loaned to the Investment Adviser or its affiliates or any of their directors,
general partners, officers or employees, acting as principal.
The Fund has adopted a policy pursuant to which it will not invest in
warrants if, at the time of acquisition, its investment in warrants, valued at
the lower of cost or market value, would exceed 5% of the Fund's net assets;
included within such limitation, but not to exceed 2% of the Fund's net assets,
are warrants which are not listed on the New York or American Stock Exchanges.
For purposes of this policy, warrants acquired by the Fund in units or attached
to securities may be deemed to be without value. The Fund also has adopted a
policy pursuant to which it will not invest in real estate limited partnerships
or in oil, gas or mineral leases. In order to comply with certain state
statutes, the Fund will not, as a matter of operating policy, mortgage, pledge
or hypothecate its portfolio securities to the extent that at any time the
percentage of the value of pledged securities plus the maximum sales charge will
exceed 10% of the value of the Fund's shares at the maximum offering price. The
Fund also has adopted
7
<PAGE>
policies pursuant to which it will not (i) purchase securities of any issuer if,
as to 75% of the assets of the Fund at the time of the purchase, more than 10%
of the voting securities of any issuer would be held by the Fund, (ii) invest
more than 15% of the Fund's total assets in the securities of issuers which
together with any predecessors have a record of less than three years continuous
operation, and (iii) borrow, pledge, mortgage or hypothecate in excess of 33
1/3% of the Fund's total assets. Under the laws of certain states, the Fund
presently is limited with respect to the investments described in investment
restriction (8) above to 10% of its total assets. The policies set forth in this
paragraph may be amended without the approval of the Fund's shareholders.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of any such
transaction, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on futures contracts
exceeds 15% of the total assets of the Fund, taken at market value, together
with all other assets of the Fund which are illiquid or are not otherwise
readily marketable. (Under the laws of certain states, the Fund presently is
limited with respect to such investments to 10% of its total assets.) 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 if 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 securities minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money". This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Board of Directors of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
Commission staff of its position.
The staff of the Commission has also taken the following position with
respect to investments in certain forms of stripped mortgage-backed securities,
namely the principal-only or PO class and the interest-only or IO class of such
derivative securities. Such position has been adopted as an investment policy of
the Fund, subject to amendment as discussed further below. The staff of the
Commission has taken the position that the determination of whether a particular
U.S. Government issued IO or PO that is backed by fixed-rate mortgages is liquid
may be made by the Investment Adviser under guidelines and standards established
by the Fund's Board of Directors. Such a security may be deemed liquid if it can
be disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of the Fund's net asset value per share.
The Commission's staff also has taken the position that all other IOs and POs
are illiquid securities which are subject to the restriction limiting the Fund's
investments in illiquid securities to 15% of its total assets. (Under the laws
of certain states, the Fund presently is limited with respect to such
investments to 10% of its total assets.) This policy as to IOs and POs is not a
fundamental policy of the Fund and may be amended by the Board of 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's staff of its position.
8
<PAGE>
Because of the affiliation of the Investment Adviser 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 Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage". Without such an exemptive order, the Fund would be
prohibited from engaging in portfolio transactions with the Investment Adviser
or its affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act of 1933, as amended,
in which such firms or any of their affiliates participate as an underwriter or
dealer.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is Box 9011,
Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL--President and Director(1)(2)--President of the Investment
Adviser since 1977 and Chief Investment Officer of the Investment Adviser since
1976; President of Fund Asset Management, L.P. ("FAM") since 1977 and Chief
Investment Officer since 1976; President and Director of Princeton Services,
Inc. ("Princeton Services") since 1993; Executive Vice President of Merrill
Lynch since 1990 and a Senior Vice President thereof from 1985 to 1990;
Executive Vice President of Merrill Lynch & Co., Inc. since 1990; Director of
the Distributor.
DONALD CECIL--Director(2)--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Partners (investment partnership)
since 1982; Member of Institute of Chartered Financial Analysts; Member and
Chairman of Westchester County (N.Y.) Board of Transportation.
EDWARD H. MEYER--Director(2)--777 Third Avenue, New York, New York 10017.
President of Grey Advertising Inc. since 1968, Chief Executive Officer since
1970 and Chairman of the Board of Directors since 1972; Director of The May
Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan Allen
Interiors Inc. and Harman International Industries, Inc.
CHARLES C. REILLY--Director(2)--9 Hampton Harbor Road, Hampton Bays, N.Y.
11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business since 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Director, Harvard
Business School Alumni Association.
RICHARD R. WEST--Director(2)--482 Tepi Drive, Southbury, Connecticut 06488.
Professor of Finance, and Dean from 1984 to 1993, New York University Leonard N.
Stern School of Business Administration; Director of Bowne & Co., Inc.
(financial printers), Vornado, Inc. (real estate holding company), Smith-Corona
Corporation (manufacturer of typewriters and word processors) and Alexander's
Inc.
9
<PAGE>
TERRY K. GLENN--Executive Vice President(1)(2)--Executive Vice President of
the Investment Adviser and FAM since 1983; Executive Vice President and Director
of Princeton Services since 1993; President and Director of the Distributor
since 1986.
JOSEPH T. MONAGLE, JR.--Senior Vice President(1)(2)--Senior Vice President
of the Investment Adviser and FAM since 1990; Vice President of the Investment
Advisor from 1978 to 1990; Senior Vice President of Princeton Services since
1993.
ALEX V. BOUZAKIS--Vice President(1)(2)--Vice President and Senior Portfolio
Manager of the Investment Adviser and associated therewith since 1982.
DONALD C. BURKE--Vice President(1)(2)--Vice President and Director of
Taxation of the Investment Adviser since 1990; employee of Deloitte & Touche
from 1982 to 1990.
PAOLO H. VALLE--Vice President(1)(2)--Vice President and Senior Portfolio
Manager of the Investment Adviser since 1992; Vice President and Manager,
Emerging Markets Trading, PNC Bank prior thereto.
GERALD M. RICHARD--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Investment Adviser and FAM since 1984; Senior Vice President and Treasurer
of Princeton Services since 1993; Vice President of the Distributor since 1981
and Treasurer since 1984.
MARK B. GOLDFUS--Secretary(1)(2)--Vice President of the Investment Adviser
and FAM since 1985.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or FAM acts
as investment adviser.
At January 31, 1994, the officers and Directors of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, and the other officers
of the Fund, owned less than 1% of the outstanding shares of common stock of
Merrill Lynch & Co., Inc.
The Fund pays each Director not affiliated with the Investment Adviser an
annual retainer of $3,500 per year plus $500 per Board meeting attended,
together with such Director's actual out-of-pocket expenses relating to
attendance at meetings. The Fund also compensates members of its audit
committee, which consists of all of the non-affiliated Directors, at a rate of
$500 per committee meeting attended. The Chairman of the audit committee
receives an additional fee of $250 per meeting attended. For the fiscal period
August 27, 1993 (commencement of operations) to December 31, 1993, fees and
expenses paid to unaffiliated Directors aggregated $11,450.
ADVISORY AND MANAGEMENT ARRANGEMENTS
Reference is made to "Management of the Fund--Advisory and Management
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
10
<PAGE>
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or more
clients when one or more clients are selling the same security. If purchases or
sales of securities by the Investment Adviser for the Fund or other funds for
which it acts as investment adviser or for its other advisory clients arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Investment Adviser or its affiliates during the same period
may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
The Fund has entered into an investment advisory agreement (the "Investment
Advisory Agreement") with the Investment Adviser. As described in the
Prospectus, the Investment Adviser receives for its services to the Fund monthly
compensation at the rate of 0.60% of the average daily net assets of the Fund
plus the principal amount of borrowings incurred by the Fund for leverage
purposes. For the fiscal period August 27, 1993 (commencement of operations) to
December 31, 1993, the investment advisory fees paid by the Fund to the
Investment Adviser aggregated $197,936.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Investment Adviser reimburse the Fund in an amount
necessary to prevent the ordinary operating expenses of the Fund (excluding
interest, taxes, distribution fees, brokerage fees and commissions and
extraordinary charges such as litigation costs) from exceeding 2.5% of the
Fund's first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of the remaining average daily net
assets. The Investment Adviser's obligation to reimburse the Fund is limited to
the amount of the investment advisory fee. No fee payment will be made to the
Investment Adviser during any fiscal year which will cause such expenses to
exceed the most restrictive expense limitation applicable at the time of such
payment.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well as
the fees of all Directors of the Fund who are affiliated persons of the
Investment Adviser. The Fund pays all other expenses incurred in the operation
of the Fund, including, among other things, taxes; expenses for legal and
auditing services; costs of printing proxies, stock certificates, shareholder
reports and prospectuses and statements of additional information (except to the
extent paid by the Distributor); charges of the custodian, any sub-custodian and
transfer agent; expenses of redemption of shares; Securities and Exchange
Commission fees; expenses of registering the shares under Federal, state or
foreign laws; fees and expenses of unaffiliated Directors; accounting and
pricing costs (including the daily calculation of net asset value); insurance;
interest; brokerage costs; litigation and other extraordinary or non-recurring
expenses; and other expenses properly payable by the Fund. Accounting services
are provided to the Fund by the Investment Adviser, and the Fund reimburses the
Investment Adviser for its costs in connection with such services on a
semi-annual basis. For the fiscal period August 27, 1993 (commencement of
operations) to December 31, 1993, the amount of such reimbursement was $21,800.
The Distributor will pay certain promotional expenses of the Fund incurred in
connection with the offering of its shares. Certain expenses will be financed by
the Fund pursuant to distribution plans in compliance with Rule 12b-1 under the
Investment Company Act. See "Purchase of Shares--Alternative Sales
Arrangements--Distribution Plans".
11
<PAGE>
Merrill Lynch & Co., Inc., Merrill Lynch Investment Management, Inc. and
Princeton Services, Inc. are "controlling persons" of the Investment Adviser as
defined under the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies.
Duration and Termination. Unless earlier terminated as described below, the
Investment Advisory Agreement will continue in effect for a period of two years
from the date of its execution and will remain in effect from year to year
thereafter if approved annually (a) by the Board of Directors of the Fund or by
a majority of the outstanding shares of the Fund and (b) by a majority of the
Directors who are not parties to such contract or interested persons (as defined
in the Investment Company Act) of any such party. Such contract is 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 a majority of the
shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that (i)
Class B shares bear the expenses of the deferred sales arrangements, any
expenses (including incremental transfer agency costs) resulting from such sales
arrangements and the expenses of the account maintenance fee and (ii) that Class
A shares bear the expenses of the account maintenance fee relating to Class A
shares, and (iii) each class has exclusive voting rights with respect to the
Rule 12b-1 distribution plan pursuant to which the account maintenance and
distribution fees, in the case of the Class B shares, and the account
maintenance fee, in the case of the Class A shares, is paid. The two classes
also have different exchange privileges. See "Shareholder Services--Exchange
Privilege".
The Fund has entered into separate distribution agreements with Merrill
Lynch Funds Distributor, Inc. (the "Distributor") in connection with the
continuous offering of Class A and Class B shares of the Fund (the "Distribution
Agreements"). The Distribution Agreements obligate the Distributor to pay
certain expenses in connection with the offering of the Class A and Class B
shares of the Fund. After the prospectuses, statements of additional information
and periodic reports have been prepared, set in type and mailed to shareholders,
the Distributor pays for the printing and distribution of copies thereof used in
connection with the offering to dealers and investors. The Distributor also pays
for other supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Investment Advisory Agreement described under "Management of
the Fund--Advisory and Management Arrangements".
Distribution Plans. Reference is made to "Purchase of Shares--Alternative
Sales Arrangements--Distribution Plans" in the Prospectus for certain
information with respect to the distribution plans of the Fund (each a
"Distribution Plan").
12
<PAGE>
The payment of the account maintenance and distribution fees with respect
to Class B shares and the account maintenance fee with respect to Class A shares
is subject to the provisions of Rule 12b-1 under the Investment Company Act. See
"General Information--Description of Shares". Among other things, each
Distribution Plan provides that the Distributor shall provide and the Directors
shall review quarterly reports of the disbursement of the account maintenance
and distribution fees paid to the Distributor. In their consideration of the
Distribution Plans, the Directors must consider all factors they deem relevant,
including information as to the benefits of the Distribution Plans to the Fund
and its shareholders. Each Distribution Plan further provides that, so long as
such Distribution Plan remains in effect, the selection and nomination of
Directors who are not "interested persons" of the Fund, as defined in the
Investment Company Act (the "Independent Directors"), shall be committed to the
discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is a reasonable likelihood that such Distribution Plan will
benefit the Fund and its respective 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 Class A or Class B voting securities of the Fund voting separately
by class. Neither Distribution Plan can be amended to increase materially the
amount to be spent by the Fund without approval by the related class of
shareholders, and all material amendments are required to be approved by the
vote of Directors, including a majority of the Independent Directors who have no
direct or indirect financial interest in such Distribution Plan, cast in person
at a meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of the Distribution Plans and any reports made pursuant to such
plans for a period of not less than six years from the date of the Distribution
Plans or such reports, the first two years in an easily accessible place.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
For the fiscal period August 27, 1993 (commencement of operations) to
December 31, 1993, the Fund sold its shares through the Distributor and Merrill
Lynch, as a dealer. During the fiscal period August 27, 1993 (commencement of
operations) to December 31, 1993, the Fund sold 1,903,377 Class A shares for
aggregate net proceeds to the Fund of $19,440,340. The gross sales charges for
the sale of Class A shares of the Fund for that year were $317,743, of which
$5,926 and $311,817 were received by the Distributor and Merrill Lynch,
respectively.
The term "purchase" as used in the Prospectus and this Statement of
Additional Information 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 single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company", as that
term is defined in the Investment Company Act, but does not include purchases by
any such company which has not been in existence for at least six months or
which has no purpose other than the purchase of shares of the Fund or shares of
other registered investment companies at a discount; provided, however, that it
shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders of
a company, policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
13
<PAGE>
REDUCED INITIAL SALES CHARGES--CLASS A SHARES
Right of Accumulation. The reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
Class A shares of the Fund at the offering price applicable to the total of (a)
the dollar amount then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the purchaser's
combined holdings of the Class A and Class B shares of the Fund and of any other
investment company with a sales charge for which the Distributor acts as the
distributor. For any such right of accumulation to be made available, the
Distributor must be provided at the time of purchase, by the purchaser or the
purchaser's securities dealer, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation. The right of accumulation may be amended or terminated at
any time.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $100,000 or more of Class A shares of the Fund or any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor made within a thirteen-month
period starting with the first purchase pursuant to a Letter of Intention in the
form provided in the Prospectus. The Letter of Intention is available only to
investors whose accounts are maintained at the Fund's transfer agent. The Letter
of Intention is not available to employee benefit plans for which Merrill Lynch
provides plan-participant record-keeping services. The Letter of Intention is
not a binding obligation to purchase any amount of Class A shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A shares of
the Fund and of other investment companies with an initial sales charge or a
deferred sales charge for which the Distributor acts as the distributor
presently held, at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of Intention, may be included as a
credit toward 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 $100,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A shares purchased at the reduced rate and the sales
charge applicable to the shares actually purchased through the Letter. Class A
shares equal to five percent of the intended amount will be held in escrow
during the thirteen-month period (while registered in the name of the purchaser)
for this purpose. The first purchase under the Letter of Intention must be at
least five percent of the dollar amount of such Letter. If a purchase during the
term of such Letter would otherwise be subject to a further reduced sales charge
based on the right of accumulation, the purchaser will be entitled on that
purchase and subsequent purchases to the reduced percentage sales charge which
would be applicable to a single purchase equal to the total dollar value of the
Class A shares then being purchased under such Letter, but there will be no
retroactive reduction of the sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves Money Fund or Merrill Lynch U.S.A. Government Reserves into
14
<PAGE>
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 shares are offered
at net asset value to employer sponsored retirement or savings plans, such as
tax qualified retirement plans within the meaning of Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), deferred compensation
plans within the meaning of Sections 403(b) and 457 of the Code, other deferred
compensation arrangements, VEBA plans, and non-qualified After Tax Savings and
Investment programs, maintained on the Merrill Lynch Group Employee Services
system, herein referred to as "Employer Sponsored Retirement or Savings Plans",
provided the plan has $5 million or more in existing plan assets initially
invested in portfolios, mutual funds or trusts advised by the Investment Adviser
either directly or through an affiliate. Class A shares may also be offered at
net asset value to Employer Sponsored Retirement or Savings Plans, provided the
plan has accumulated $5 million or more in existing plan assets invested in
mutual funds advised by the Investment Adviser charging a front-end sales charge
or contingent deferred sales charge. Assets of Employer Sponsored Retirement or
Savings Plans sponsored by the same sponsor or an affiliated sponsor may be
aggregated. The Class A share reduced load breakpoints also apply to these
aggregated assets. Class A shares may be offered at net asset value to multiple
plans sponsored by the same sponsor or an affiliated sponsor provided that the
addition of one or more of the multiple plans results in aggregate assets of $5
million or more invested in portfolios, mutual funds or trusts advised by the
Investment Adviser either directly or through an affiliate. Employer Sponsored
Retirement or Savings Plans are also offered Class A shares at net asset value,
provided such plan initially has 1,000 or more employees eligible to participate
in the plan. Employees eligible to participate in Employer Sponsored Retirement
or Savings Plans of the same sponsoring employer or its affiliates may be
aggregated. Tax qualified retirement plans within the meaning of Section 401(a)
of the Code meeting any of the foregoing requirements and which are provided
specialized services (e.g., plans whose participants may direct on a daily basis
their plan allocations among a wide range of investments including individual
corporate equities and other securities in addition to mutual fund shares) by
the Merrill Lynch BlueprintSM Program, are offered Class A shares at a price
equal to net asset value per share plus a reduced sales charge of 0.50%. Any
Employer Sponsored Retirement or Savings Plan which does not meet the above
described qualifications to purchase Class A shares at net asset value has the
option of purchasing Class A shares at the sales charge schedule disclosed in
the Prospectus, or if the Employer Sponsored Retirement or Savings Plan is a
qualified retirement plan and meets the specified requirements, then it may
purchase Class B shares with a waiver of the contingent deferred sales charge
upon redemption. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Employer Sponsored Retirement
or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, directors and
trustees of certain other Merrill Lynch sponsored investment companies,
directors of Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc.
and its subsidiaries and any trust, pension, profit-sharing or other benefit
plan for such persons may purchase Class A shares of the Fund at net asset
value.
Class A shares of the Fund are offered at net asset value to shareholders
of Senior Floating Rate Fund (formerly known as Merrill Lynch Prime Fund, Inc.)
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 Senior Floating Rate Fund in
connection with a tender offer conducted by
15
<PAGE>
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.
Class A shares of the Fund are offered at net asset value to shareholders
of certain closed-end funds advised by the Investment Advisor or FAM who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in shares of the Fund. In order to exercise this investment option,
closed-end fund shareholders must (i) sell their closed-end fund shares through
Merrill Lynch and reinvest the proceeds immediately in the Fund, (ii) have
acquired the shares in the closed-end fund's initial public offering or through
reinvestment of dividends earned on shares purchased in such offering, (iii)
have maintained their closed-end fund shares continuously in a Merrill Lynch
account, and (iv) purchase a minimum of $250 worth of Fund shares.
Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A share in
connection with the acquisition of the assets of or merger or consolidation with
a 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.
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.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange is restricted as determined by the
Securities and Exchange 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.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternative-- Class B Shares", while Class B shares redeemed within three
years of purchase are subject to a contingent deferred sales charge under most
circumstances, the charge is waived on redemptions of
16
<PAGE>
Class B shares in connection with certain post-retirement withdrawals from an
Individual Retirement Account ("IRA") or other retirement plan or following the
death or disability of a Class B shareholder. Redemptions for which the waiver
applies are: (a) any partial or complete redemption in connection with a
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 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 period August 27, 1993 (commencement of operations)
to December 31, 1993, the Distributor received contingent deferred sales charges
of $51,471, 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 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 contingent deferred sales
charge upon redemption. The contingent deferred sales charge is waived for any
Eligible 401(k) Plan redeeming Class B shares. The contingent deferred sales
charge is also waived for redemptions from a 401(a) plan qualified under the
Code, provided, however, that such plan has the same or an affiliated sponsoring
employer as an Eligible 401(k) Plan purchasing Investment Adviser or FAM advised
mutual fund Class B shares ("Eligible 401(a) Plan"). The contingent deferred
sales charge is waived for any Class B shares which are purchased by an Eligible
401(k) Plan or Eligible 401(a) Plan and are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the time
of redemption. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions and the allocation of brokerage. In executing such
transactions, the Investment Adviser seeks to obtain the best net results for
the Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved and the firm's risk in
positioning a block of securities. While the Investment Adviser generally seeks
reasonably competitive commission rates, the Fund does not necessarily pay the
lowest commission or spread available. The Fund has no obligation to deal with
any broker or group of brokers in execution of transactions in portfolio
securities. Subject to obtaining the best price and execution, brokers who
provide supplemental investment research to the Investment Adviser may receive
orders for transactions by the Fund. Information so received will be in addition
to and not in lieu of the services required to be performed by the Investment
Adviser under the Investment Advisory Agreement, and the expenses of the
Investment Adviser will not necessarily be reduced as a result of the receipt of
such supplemental information. It is possible that certain of the supplementary
investment research so received will primarily benefit one or more other
investment companies or other accounts for which investment discretion is
exercised. Conversely, the Fund may be the primary beneficiary of the research
or services received as a result of portfolio transactions effected for such
other accounts or investment companies. In addition, consistent with the Rules
of Fair Practice of the National Association of Securities Dealers,
17
<PAGE>
Inc. and policies established by the Board of Directors of the Fund, the
Investment Adviser may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
The Board of Directors has considered the possibilities of seeking to
recapture for the benefit of the Fund brokerage commissions and other expenses
of possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund. After
considering all factors deemed relevant, the Board of Directors made a
determination not to seek such recapture. The Board will reconsider this matter
from time to time.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
Monday through Friday at 4:15 p.m., New York time, on each day during which the
New York Stock Exchange is open for trading. The New York Stock Exchange is not
open on New Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Fund also
will determine its net asset value on any day in which there is sufficient
trading in its portfolio securities that the net asset value might be affected
materially, but only if on any such day the Fund is required to sell or redeem
shares. Net asset value is computed by dividing the value of the securities held
by the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued expenses)
by the total number of shares outstanding at such time. Expenses, including the
fee payable to the Investment Adviser and the distribution and account
maintenance fee payable to the Distributor, are accrued daily. The per share net
asset value of the Class B shares generally will be lower than the per share net
asset value of the Class A shares, reflecting the daily expense accruals of the
account maintenance and distribution fees and the higher transfer agency fees
applicable with respect to the Class B shares as compared with the account
maintenance fee applicable to the Class A shares. It is expected, however, that
the per share net asset value of the two classes will tend to converge
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differential between the
classes.
Securities traded in the over-the-counter market are valued at the last
available bid price in the over-the-counter market prior to the time of
valuation. When the Fund writes a call option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last asked price in
the case of exchange-traded options or, in the case of options traded in the
over-the-counter market, the average of the last asked price as obtained from
one or more dealers. Options purchased by the Fund are valued at their last bid
price in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the average of the last bid price as obtained
from two or more dealers unless there is only one dealer, in which case that
dealer's price is used. Portfolio securities which are traded on stock exchanges
are valued at the last sale price (regular way) on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. In cases
where securities are traded on more than one exchange, the securities are valued
on the exchange designated by or under the authority of the Board of Directors
as the primary market. Other investments, including futures contracts and
related options, are stated at market value or otherwise at the fair value at
which it is expected they may be resold, as determined in good faith by or under
the direction of the Board of
18
<PAGE>
Directors. Any assets or liabilities expressed in terms of foreign currencies
are translated into U.S. dollars at the prevailing market rates as obtained from
one or more dealers.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund. Such valuations and procedures will be
reviewed periodically by the Board of Directors.
Generally, trading in foreign securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of the New York Stock Exchange. The values of
such securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of the New York Stock Exchange. Occasionally,
events affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of the New York
Stock Exchange 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. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements from the transfer agent after
each dividend payment showing any activity in the account since the preceding
statement. Shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the transfer agent.
Shareholders considering transferring their Class A shares from Merrill
Lynch to another brokerage firm or financial institution should be aware that,
if the firm to which the Class A shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A
shares so that the cash proceeds can be transferred to the account at the new
firm or such shareholder must continue to maintain an Investment Account at the
transfer agent for those Class A shares. Shareholders interested in transferring
their Class B shares from Merrill Lynch and who do not wish to have an
Investment Account maintained for such shares at the transfer agent may request
their new brokerage firm to maintain such shares in an account registered in the
name of the brokerage firm for the benefit of the shareholder. If the new
brokerage firm is willing to accommodate the shareholder in this manner, the
shareholder must request that he be issued certificates for his shares and then
must turn the certificates over to the new firm for re-registration as described
in the preceding sentence.
19
<PAGE>
AUTOMATIC INVESTMENT PLAN
A U.S. shareholder may make additions to an Investment Account at any time
by purchasing shares at the applicable public offering price either through the
shareholder's securities dealer or by mail directly to the transfer agent,
acting as agent for such securities dealer. Voluntary accumulation also can be
made through a service known as the Fund's 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. An investor whose shares of the Fund are held within a CMA(R)
account may arrange to have periodic investments made in the Fund in amounts of
$250 or more through the CMA Automatic Investment Program. The Automatic
Investment Program is not available to shareholders whose shares are held in a
brokerage account with Merrill Lynch other than a CMA(R) account.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary 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 the shares of the Fund,
without sales charge, as of the close of business on the monthly payment 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 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 dividends
and/or distributions reinvested in shares of the Fund or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A SHARES
A Class A shareholder may elect to make 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
shares of the Fund having a value, based upon cost or the current offering
price, of $5,000 or more, and monthly withdrawals for shareholders with Class A
shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A shares are
redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A shares.
Redemptions will be made at net asset value as determined at the close of
business of the New York Stock Exchange on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the
Exchange is not open for business on such date, the Class A shares will be
redeemed at the close of business on the following business day. The check for
the withdrawal payment will be mailed or the direct deposit of 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 shares in the Investment Account are automatically reinvested in Fund
Class A
20
<PAGE>
shares. A shareholder's Systematic Withdrawal Plan may be terminated at any
time, without charge or penalty, by the shareholder, the Fund, the transfer
agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional Class A shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for Class A shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
A Class A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption Program.
The minimum fixed dollar amount redeemable is $25. The proceeds of systematic
redemptions will be posted to the shareholder's account five business days after
the date the shares are redeemed. Monthly systematic redemptions will be made at
net asset value on the first Monday of each month; bimonthly systematic
redemptions will be made at net asset value on the first Monday of every other
month; and quarterly, semiannual or annual redemptions are made at net asset
value on the first Monday of months selected at the shareholder's option. If the
first Monday of the month is a holiday, the redemption will be processed at net
asset value on the next business day. The Systematic Redemption Program is not
available if Fund shares are being purchased within the account pursuant to the
Automatic Investment Program. For more information on the Systematic Redemption
Program, eligible shareholders should contact their Financial Consultant.
EXCHANGE PRIVILEGE
Class A and Class B shareholders of the Fund may exchange their Class A or
Class B shares of the Fund for shares of the same class of Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Arizona Limited Maturity
Municipal Bond Fund, Merrill Lynch Arizona Municipal Bond Fund, Merrill Lynch
Balanced Fund for Investment and Retirement, Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch California Insured Municipal Bond Fund, Merrill Lynch
California Limited Maturity Municipal Bond Fund, Merrill Lynch California
Municipal Bond Fund, Merrill Lynch Capital Fund, Inc., Merrill Lynch Corporate
Bond Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc. (shares of
which are deemed Class A shares for purposes of the exchange privilege), Merrill
Lynch Colorado Municipal Bond Fund, Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Federal Securities Trust, Merrill Lynch Florida
Limited Maturity Municipal Bond Fund, Merrill Lynch Florida Municipal Bond Fund,
Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Fundamental Growth Fund,
Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund
for Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc.,
Merrill Lynch Global Holdings (residents of Arizona must meet investor
suitability standards), Merrill Lynch Global Resources Trust, Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Growth Fund for Investment and
Retirement, Merrill Lynch Healthcare Fund, Inc. (residents of Wisconsin must
meet investor suitability standards), Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Maryland Municipal Bond
Fund, Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund, Merrill
Lynch Massachusetts Municipal Bond Fund, Merrill Lynch
21
<PAGE>
Michigan Limited Maturity Municipal Bond Fund, Merrill Lynch Michigan Municipal
Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund, Merrill Lynch Municipal
Bond Fund, Inc., Merrill Lynch Municipal Intermediate Term Fund, Merrill Lynch
New Jersey Limited Maturity Municipal Bond Fund, Merrill Lynch New Jersey
Municipal Bond Fund, Merrill Lynch New York Limited Maturity Municipal Bond
Fund, Merrill Lynch New York Municipal Bond Fund, Merrill Lynch North Carolina
Municipal Bond Fund, Merrill Lynch Ohio Municipal Bond Fund, Merrill Lynch
Oregon Municipal Bond Fund, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Pennsylvania Limited Maturity Municipal Bond Fund, Merrill Lynch Pennsylvania
Municipal Bond Fund, Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Short-Term
Global Income Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
Texas Municipal Bond Fund, Merrill Lynch Utility Income Fund, Inc. and Merrill
Lynch World Income Fund, Inc. on the basis described below. In addition, Class A
shareholders of the Fund may exchange their Class A shares for shares of Merrill
Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money Fund and
Merrill Lynch Ready Assets Trust (or Merrill Lynch Retirement Reserves Money
Fund if the exchange occurs within certain retirement plans) (together, the
"Class A money market funds"), and Class B shareholders of the Fund may exchange
their Class B shares for shares of Merrill Lynch Government Fund, Merrill Lynch
Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund and Merrill
Lynch Treasury Fund (together, the "Class B money market funds") on the basis
described below. Shares with a net asset value of at least $250 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. Certain funds into which
exchanges may be made may impose a redemption fee (not in excess of 2.00% of the
amount redeemed) on shares purchased through the exchange privilege when such
shares are subsequently redeemed, including redemption through subsequent
exchanges. Such redemption fee would be in addition to any contingent deferred
sales charge otherwise applicable to a redemption of Class B shares. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor.
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on the
basis of relative net asset value per Class A share, plus an amount equal to the
difference, if any, between the sales charge previously paid on the outstanding
Class A shares and the sales charge payable at the time of the exchange on the
new Class A shares. With respect to outstanding Class A shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A
shares in the initial purchase and any subsequent exchange. Class A shares
issued pursuant to dividend reinvestment are sold on a no-load basis in each of
the funds offering Class A shares. For purposes of the exchange privilege, Class
A 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 shares on which the dividend was paid. Based on this formula, Class A shares
of the Fund generally may be exchanged into the Class A shares of the other
funds or into shares of the Class A money market funds with a reduced or without
a sales charge.
In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the outstanding shares. Class B shareholders
22
<PAGE>
of the Fund exercising the exchange privilege will continue to be subject to the
Fund's contingent deferred sales charge schedule if such schedule is higher than
the deferred sales charge schedule relating to the new Class B shares acquired
through use of the exchange privilege. In addition, Class B shares of the Fund
acquired through use of the exchange privilege will be subject to the Fund's
contingent deferred sales charge schedule if such schedule is higher than the
deferred sales charge schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the sales charge
that may be payable on a disposition of the new Class B shares, the holding
period for the outstanding Class B shares is "tacked" to the holding period of
the new Class B shares. For example, an investor may exchange Class B shares of
the Fund for those of Merrill Lynch Global Resources Trust after having held the
Fund Class B shares for two and a half years. The 1.0% sales charge that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Merrill
Lynch Global Resources Trust and receive cash. There will be no contingent
deferred sales charge 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 Merrill Lynch Global Resources Trust Class B shares, the investor will
be deemed to have held the new Class B shares for more than five years.
Shareholders also may exchange Class A shares and Class B shares from any
of the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that Class B shares are held
in a Class B money market fund will not count towards satisfaction of the
holding period requirement for purposes of reducing the contingent deferred
sales charge. However, shares of a Class B money market fund which were acquired
as a result of an exchange for Class B shares of a fund may, in turn, be
exchanged back into Class B shares of any fund offering such shares, in which
event the holding period for Class B shares of the fund will be aggregated with
previous holding periods for purposes of reducing the contingent deferred sales
charge. Thus, for example, an investor may exchange Class B shares of the Fund
for shares of Merrill Lynch Institutional Fund after having held the Fund Class
B shares for two and a half years and three years later decide to redeem the
shares of Merrill Lynch Institutional Fund for cash. At the time of this
redemption, the 1.0% contingent deferred sales charge that would have been due
had the Class B shares of the Fund been redeemed for cash rather than exchanged
for shares of Merrill Lynch Institutional Fund will be payable. If instead of
such redemption the shareholder exchanged such shares for Class B shares of a
fund which the shareholder continues to hold for an additional two and a half
years, any subsequent redemption will not incur a contingent deferred sales
charge.
Below is a description of the investment objectives of the other funds into
which exchanges can be made:
<TABLE>
<S> <C>
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC................................ High current income consistent with a policy of limiting
the degree of fluctuation in net asset value by
investing primarily in a portfolio of adjustable rate
securities, consisting principally of mortgage-backed
and asset-backed securities.
</TABLE>
23
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH ARIZONA 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 Arizona income taxes as is consistent with
prudent investment management through investment in a
portfolio primarily 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
investors with as high a level of income exempt from
Federal and Arizona income taxes as is consistent with
prudent investment management.
MERRILL LYNCH BALANCED FUND FOR
INVESTMENT AND RETIREMENT........................... As high a level of total investment return as is
consistent with reasonable risk by investing in common
stocks and other types of securities, including fixed
income securities and convertible securities.
MERRILL LYNCH BASIC VALUE FUND, INC................... Capital appreciation and, secondarily, income through
investment in securities, primarily equities, that are
undervalued and therefore represent basic 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
shareholders with as high a level of income exempt from
Federal and California income taxes as is consistent
with prudent investment management through investment
in a portfolio consisting primarily of insured
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
investors with as high a level of income exempt from
Federal and California income taxes as is consistent
with prudent investment management.
</TABLE>
24
<PAGE>
<TABLE> <CAPTION>
<S> <C>
MERRILL LYNCH CALIFORNIA 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 shareholders with as high a level of
income exempt from Federal and California income taxes
as is consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade California Municipal
Bonds.
MERRILL LYNCH CAPITAL FUND, INC....................... The highest total investment return consistent with
prudent risk through a fully managed investment policy
utilizing equity, debt and convertible securities.
MERRILL LYNCH COLORADO
MUNICIPAL BOND FUND................................. A portfolio of Merrill Lynch Multi-State Municipal Series
Trust, a series fund, whose objective is as high a
level of income exempt from Federal and Colorado income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH CORPORATE BOND FUND, INC................ Current income from three separate diversified portfolios
of fixed income securities.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC................................... Long-term appreciation through investment in securities,
principally equities, of issuers in countries having
smaller capital markets.
MERRILL LYNCH DRAGON FUND, INC........................ Capital appreciation primarily through investment 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.
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH FLORIDA LIMITED
MATURITY MUNICIPAL
BOND FUND........................................... A portfolio of Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, a series fund, whose objective
is 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
intangible personal property taxes through investment
in a portfolio primarily of intermediate-term invest-
ment grade Florida Municipal Bonds.
MERRILL LYNCH FLORIDA MUNICIPAL BOND FUND............. A portfolio of Merrill Lynch Multi-State Municipal Series
Trust, a series fund, whose objective is as high a
level of income exempt from Federal income taxes as is
consistent with prudent investment management while
seeking to offer share holders the opportunity to own
securities exempt from Florida intangible personal
property taxes.
MERRILL LYNCH FUND FOR
TOMORROW, INC....................................... Long-term growth through investment in a portfolio of
good quality securities, primarily common stock,
potentially positioned to benefit from demographic and
cultural changes as they affect consumer markets.
MERRILL LYNCH FUNDAMENTAL GROWTH
FUND, INC........................................... Long-term growth through investment in a diversified
portfolio of equity securities placing particular
emphasis on companies that have exhibited above-average
growth rate in earnings.
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC............. High total return consistent with prudent risk, through a
fully managed investment policy utilizing U.S. and
foreign equity, debt and money market securities, the
combination 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 investment in a global
portfolio of debt investments denominated in various
currencies and multinational currency units.
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC............ High total return from investment primarily in an
internationally diversified portfolio of convertible
debt securities, convertible preferred stock and
"synthetic" convertible securities consisting of a
combination of debt securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS
(residents of Arizona must meet investor suitability
standards)............................................ The highest total investment return consistent with
prudent risk through worldwide investment in an
internationally diversified portfolio of securities.
MERRILL LYNCH GLOBAL RESOURCES
TRUST............................................... Long-term growth and protection of capital from
investment in securities of domestic and foreign
companies that possess substantial natural resource
assets.
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
foreign companies which are primarily engaged in the
ownership or operation of facilities used to generate,
transmit or distribute electricity, tele-
communications, gas or water.
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 obligations.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT........................... Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing principal emphasis on those
securities which management of the fund believes to be
undervalued.
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents of Wisconsin must meet
investor suitability standards)..................... Capital appreciation through worldwide investment in
equity securities of companies that derive or
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
are expected to derive a substantial portion of their
sales from products and services in health-care.
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 liquidity and
the maintenance of a high quality portfolio of money
market securities.
MERRILL LYNCH INSTITUTIONAL TAX-EXEMPT
FUND................................................ Current income exempt from Federal income taxes,
preservation of capital and liquidity available from
investing in a diversified portfolio of short-term,
high quality municipal bonds.
MERRILL LYNCH INTERNATIONAL EQUITY FUND............... Capital appreciation and, secondarily, income by
investing in a diversified portfolio of equity secur-
ities of issuers located in countries other than the
United States.
MERRILL LYNCH LATIN AMERICA
FUND, INC........................................... Capital appreciation by investing primarily in Latin
American equity and debt securities.
MERRILL LYNCH MARYLAND
MUNICIPAL BOND FUND................................. A portfolio of Merrill Lynch Multi-State Municipal Series
Trust, a series fund, whose objective is 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 Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal and
Massachusetts income taxes as is consistent with
prudent investment management through investment in a
portfolio primarily of intermediate-term investment
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 as high a
level of income exempt from Federal and
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
Massachusetts income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MICHIGAN
LIMITED MATURITY MUNICIPAL
BOND FUND........................................... A portfolio of Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal and
Michigan income taxes as is consistent with prudent
investment management through investment in a portfolio
primarily of intermediate-term investment grade
Michigan Municipal Bonds.
MERRILL LYNCH MICHIGAN MUNICIPAL BOND
FUND................................................ A portfolio of Merrill Lynch Multi-State Municipal Series
Trust, a series fund, whose objective is as high a
level of income exempt from Federal and Michigan income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH MINNESOTA MUNICIPAL BOND FUND........... A portfolio of Merrill Lynch Multi-State Municipal Series
Trust, a series fund, whose objective is as high a
level of income exempt from Federal and Minnesota
income taxes as is consistent with prudent investment
management.
MERRILL LYNCH MUNICIPAL BOND
FUND, INC........................................... Tax-exempt income from three separate 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 as possible of income exempt
from Federal income taxes by investing in investment
grade obligations with a dollar weighted average
maturity of five to twelve years.
MERRILL LYNCH NEW JERSEY
LIMITED MATURITY MUNICIPAL
BOND FUND........................................... A portfolio of Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal and
New Jersey income taxes as is consistent with prudent
investment management through a portfolio primarily of
</TABLE>
29
<PAGE>
<TABLE>
<S> <C>
intermediate-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 as high a
level of income exempt from Federal and New Jersey
income taxes as is consistent with prudent investment
management.
MERRILL LYNCH NEW YORK
LIMITED MATURITY MUNICIPAL
BOND FUND........................................... A portfolio of Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal, New
York State and New York City income taxes as is
consistent with prudent investment management through
investment in a portfolio primarily of intermediate-
term investment grade New York Municipal Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL BOND
FUND................................................ A portfolio of Merrill Lynch Multi-State Municipal Series
Trust, a series fund, whose objective is as high a
level of income exempt from Federal, New York State and
New York City income taxes as is consistent with
prudent investment management.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND................................. A portfolio of Merrill Lynch Multi-State Municipal Series
Trust, a series fund, whose objective is 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 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 as high a
level of income exempt from Federal and Oregon income
taxes as is consistent with prudent investment
management.
</TABLE>
30
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH PACIFIC FUND, INC....................... Capital appreciation by investing in equity securities of
corporations domiciled in Far Eastern and Western
Pacific countries, including Japan, Australia, Hong
Kong, Singapore and the Philippines.
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 as high a
level of income exempt from Federal and Pennsylvania
income taxes as is consistent with prudent investment
management.
MERRILL LYNCH PHOENIX FUND, INC....................... Long-term growth of capital by investing in equity and
fixed income securities, 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 READY ASSETS TRUST...................... Preservation of capital, liquidity and the highest
possible current income consistent with the foregoing
objectives from the short-term money market securities
in which the Trust invests.
MERRILL LYNCH RETIREMENT RESERVES
MONEY FUND (available only if the exchange occurs
within certain retirement plans).................... Currently the only portfolio of Merrill Lynch Retirement
Series Trust, a series fund, whose objectives are
current income, preservation of capital and liquidity
available from investing in a diversified portfolio of
short-term money market securities.
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
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
denominated in various currencies and multinational
currency units and having remaining maturities not
exceeding three years.
MERRILL LYNCH SPECIAL VALUE FUND, INC................. Long-term growth of capital from investments in
securities, primarily common stocks, of relatively
small companies believed to have special investment
value and emerging growth companies regardless of size.
MERRILL LYNCH STRATEGIC DIVIDEND FUND................. Long-term total return from investment in dividend paying
common stocks which yield more than Standard & Poor's
500 Composite Stock Price Index.
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 services in technology.
MERRILL LYNCH TEXAS MUNICIPAL BOND FUND............... A portfolio of Merrill Lynch Multi-State Municipal Series
Trust, a series fund, whose objective is 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 political subdivisions, agencies and
instrumentalities.
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 secured by such obligations.
MERRILL LYNCH U.S.A. GOVERNMENT RESERVES.............. Preservation of capital, current income and liquidity
available from investing in direct obligations of the
U.S. Government and repurchase agreements relating to
such securities.
MERRILL LYNCH U.S. TREASURY MONEY FUND................ Preservation of capital, liquidity and current income
through investment exclusively in a diversified
portfolio of short-term marketable securities which are
direct obligations of the U.S. Treasury.
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH UTILITY INCOME
FUND, INC........................................... High current income through investment in equity and debt
securities issued by companies which are primarily
engaged 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 securities denominated in various
currencies, including multinational currencies.
</TABLE>
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes and, depending on the circumstances, a short-or long-term capital
gain or loss may be realized. In addition, a shareholder exchanging shares of
any of the funds may be subject to a backup withholding tax unless such
shareholder certifies under penalty of perjury that the taxpayer identification
number on file with any such fund is correct and that such shareholder is not
otherwise subject to backup withholding. See "Taxes" below.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the exchange, or
if the exchange does not involve a money market fund, the shareholder may write
to the transfer agent requesting that the exchange be effected. Such letter must
be signed exactly as the account is registered with signatures guaranteed by an
"eligible guarantor institution" (including, for example, Merrill Lynch branches
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. Shareholders of the Fund, and shareholders of the other
funds described above with shares for which certificates have not been issued,
may exercise the exchange privilege by wire through their securities dealers.
The Fund reserves the right to require a properly completed exchange
application. This exchange privilege may be modified or terminated in accordance
with the rules of the Securities and Exchange Commission. The Fund reserves the
right to limit the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of their shares to
the general public at any time and may thereafter resume such offering from time
to time. The exchange privilege is available only to U.S. shareholders in states
where the exchange legally may be made.
33
<PAGE>
TAXES
The Fund intends to elect and 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
and Class B 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.
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). 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 long-term capital gains distributions received
by the shareholder.
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, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
that 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% U.S. 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 U.S.
withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends and capital gain dividends and
on redemption payments ("backup withholding"). Generally, shareholders subject
to backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
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 U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more
34
<PAGE>
than 50% in value of the Fund's total assets at the close of its taxable year
consists of securities of foreign corporations, the Fund will be eligible, and
intends, to file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate shares
of such withholding taxes in their U.S. income tax returns as gross income,
treat such proportionate shares as taxes paid by them and deduct such
proportionate shares in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their U.S. income taxes. No deductions for
foreign taxes, however, may be claimed by noncorporate shareholders who do not
itemize deductions. A shareholder that is a nonresident alien individual or a
foreign corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such U.S. tax for the foreign taxes
treated as having been paid by such shareholder. The Fund will report annually
to its shareholders the amount per share of such withholding taxes. For this
purpose, the Fund will allocate foreign taxes and foreign source income between
the Class A and Class B shareholders according to a method (which it believes is
consistent with the Securities and Exchange Commission exemptive order
permitting the issuance and sale of two classes of stock) that is based on the
gross income allocable to Class A and Class B shareholders during the taxable
year, or such other method as the Internal Revenue Service may prescribe.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class A
shares.
The Code requires the 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.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as described in the Prospectus.
Some of these high yield/high risk securities may be purchased at a discount and
may therefore cause the Fund to accrue income before amounts due under the
obligations are paid. In addition, a portion of the interest payments on such
high yield/high risk securities may be treated as dividends for Federal income
tax purposes; in such case, if the issuer of such high yield/high risk
securities is a domestic corporation, dividend payments by the Fund will be
eligible for the dividends received deduction to the extent of the deemed
dividend portion of such interest payments.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may purchase or sell options, futures and forward foreign exchange
contracts. 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. Unless such contract is a
non-equity
35
<PAGE>
option or a regulated futures contract for a non-U.S. currency and the Fund
elects to have gain or loss in connection with the contract treated as ordinary
gain or loss under Code Section 988 (as described below), gain or loss from
Section 1256 contracts will be 60% long-term and 40% short-term capital gain or
loss. The mark-to-market rules outlined above, however, will not apply to
certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest or currency exchange rates with respect to its
investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options and futures contracts. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures
contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the Fund
may be restricted in effecting closing transactions within three months after
entering into an options or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund. The Fund may
request a private letter ruling from the Internal Revenue Service on some or all
of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In general,
foreign currency gains or losses from certain debt instruments, from certain
forward contracts, from futures contracts that are not "regulated futures
contracts" and from unlisted options will be treated as ordinary income or loss
under Code Section 988. In certain circumstances, the Fund may elect capital
gain or loss treatment for such transactions. Regulated futures contracts, as
described above, will be taxed under Code Section 1256 unless application of
Section 988 is elected by the Fund. In general, however, Code Section 988 gains
or losses will increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each shareholder's Fund
shares. These rules and the mark to market rules described above, however, will
not apply to certain transactions entered into by the Fund solely to reduce the
risk of currency fluctuations with respect to its investments.
36
<PAGE>
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income dividends 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.
------------------------
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 in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A shares and
Class B shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A shares and
the contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods of time.
37
<PAGE>
Set forth below is total return information for the Class A and Class B
shares of the Fund for the period indicated.
<TABLE> <CAPTION>
CLASS A SHARES CLASS B SHARES
-------------------------------------- --------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ------------------------------------- ------------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
August 27, 1993
(commencement of operations)
to December 31, 1993............... 25.46% $ 1,081.50 25.97% $ 1,083.00
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
August 27, 1993
(commencement of operations)
to December 31, 1993............... 11.49% $ 1,114.90 11.30% $ 1,113.00
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
August 27, 1993
(commencement of operations)
to December 31, 1993............... 8.15% $ 1,081.50 8.30% $ 1,083.00
</TABLE>
In order to reflect the reduced sales charges, in the case of Class A
shares, or the waiver of the contingent deferred sales charge, in the case of
Class B shares, applicable to certain investors, as described under "Purchase of
Shares" and "Redemption of Shares", respectively, the total return data quoted
by the Fund in advertisements directed to such investors may take into account
reduced, and not the maximum, sales charge or may not take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a lower
amount of expenses may be deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on June 10, 1993. It has an
authorized capital of 200,000,000 shares of common stock, par value $0.10 per
share, divided into two classes, designated Class A common stock and Class B
common stock, each of which consists of 100,000,000 shares. Both Class A common
stock and Class B common stock represent an interest in the same assets of the
Fund and are identical in all respects except that the expenses of the account
maintenance fee with respect to Class A shares are borne solely by the Class A
shares and the expenses of the account maintenance fee and the distribution fee
with respect to Class B shares are borne solely by the Class B shares and the
Class A shares and Class B shares have exclusive voting rights with respect to
matters relating to such account maintenance and distribution expenditures. The
Fund has received an order from the Commission permitting the issuance and sale
of two classes of common stock. The Fund has applied for an additional order
from the Commission to issue additional classes of shares also representing
interests in the Fund. If such order is received, it is presently expected that
the Fund would issue additional
38
<PAGE>
class(es) of shares with different sales arrangements than those for Class A
shares and Class B shares. There can be no assurance that the additional order
will be granted.
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 on which shareholders are entitled to vote. The Fund does not
intend to hold annual meetings of shareholders in any year in which the
Investment Company Act does not require shareholders to elect Directors. Also,
the by-laws of the Fund require that a special meeting of stockholders be held
upon the written request of at least 10% of the outstanding shares of the Fund
entitled to vote at such meeting, if they comply with applicable Maryland law.
Voting rights for Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive or conversion rights. Redemption rights
are discussed elsewhere herein and in the Prospectus. Each share of Class A
common stock or Class B 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 expenses related to the distribution of the shares
within a class will be borne solely by such class. Stock certificates are issued
by the transfer agent only on specific request. Certificates for fractional
shares are not issued in any case.
The Investment Adviser provided the initial capital for the Fund by
purchasing 5,000 Class A shares of common stock and 5,000 Class B shares of
common stock for an aggregate of $100,000. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Fund (estimated at approximately $97,151) will be paid by the
Fund and amortized over a period not exceeding five years. The proceeds realized
by the Investment Adviser (or any subsequent holder) upon redemption of any of
such shares will be reduced by the proportionate amount of the unamortized
organizational expenses which the number of shares redeemed bears to the number
of shares initially purchased.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A and
Class B shares of the Fund based on the value of the Fund's net assets on
December 31, 1993, and its shares outstanding on that date is as follows:
<TABLE> <CAPTION>
CLASS A CLASS B
-------------- --------------
<S> <C> <C>
Net Assets....................................................................... $ 15,075,848 $ 98,848,324
-------------- --------------
-------------- --------------
Number of Shares Outstanding..................................................... 1,391,143 9,120,906
-------------- --------------
-------------- --------------
Net Asset Value Per Share (net assets divided by number of shares outstanding)... $ 10.84 $ 10.84
Sales Charge (for Class A shares: 3.00% of offering price
(3.09% of net amount invested*))............................................... $ 0.34 $ **
-------------- --------------
Offering Price................................................................... $ 11.18 $ 10.84
-------------- --------------
-------------- --------------
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B shares are not subject to an initial sales charge but may be subject
to a contingent deferred sales charge on redemption of shares within three
years of purchase. See "Purchase of Shares-- Deferred Sales Charge
Alternative--Class B Shares" in the Prospectus and "Redemption of
Shares--Contingent Deferred Sales Charge--Class B Shares" herein.
39
<PAGE>
INDEPENDENT AUDITORS
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540, has 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
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian"), acts as the custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the Fund
to be held in its offices outside the U.S. and with certain foreign banks and
securities depositories. The Custodian is responsible for safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 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 December 31 of each year. The Fund
sends to its shareholders at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933, as amended, and
the Investment Company Act, to which reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's common stock on December 31, 1993.
40
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders,
MERRILL LYNCH AMERICAS INCOME FUND, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Americas Income Fund, Inc. as of
December 31, 1993, the related statements of operations, changes in net assets,
and cash flows, and the financial highlights for the period August 27, 1993
(commencement of operations) to December 31, 1993. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at December 31, 1993 by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides 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
Americas Income Fund, Inc. as of December 31, 1993, the results of its
operations, the changes in its net assets, its cash flows, and the financial
highlights for the period August 27, 1993 to December 31, 1993 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE
Princeton, New Jersey
February 14, 1994
41
<PAGE>
<TABLE> <CAPTION>
SCHEDULE OF INVESTMENTS
(in US dollars)
Interest Maturity Value Percent of
Face Amount Issue Rate Date (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C> <C>
Argentina Bonds $ 6,000,000 Banco de Credito Argentino(2) 8.50 % 10/29/1998 $ 6,015,000 5.3%
6,000,000 Banco de Galicia y Buenos Aires S.A.
--Yankee (2) 9.00 11/01/2003 6,090,000 5.4
6,000,000 Banco Frances del Rio de la Plata S.A.
--Yankee (2) 8.75 12/15/2003 6,075,000 5.3
1,000,000 Compania Naviera Perez Companc (3) 8.375 7/30/1998 1,021,250 0.9
3,000,000 Republic of Argentina--Global (1) 8.375 12/20/2003 3,041,250 2.7
3,000,000 Telecom Argentina Stet S.A. (4) 8.375 10/18/2000 3,075,000 2.7
5,000,000 Telefonica de Argentina S.A. (4) 8.375 10/01/2000 5,118,750 4.5
Brady Bonds 15,000,000 Argentina Par Series "L" (1)* 4.00 3/31/2023 10,293,750 9.0
5,000,000 Republic of Argentina FLRB (1)* 4.187 3/31/2005 4,387,500 3.9
Total Investments in Argentina
(Cost--$43,260,729) 45,117,500 39.7
Brazil Bonds 4,000,000 Banco de Estada Sao Paulo
(Banespa) (2) 9.25 10/04/1996 4,015,000 3.5
4,000,000 Banco do Estada do Parana (2) 10.00 2/27/1996 4,005,000 3.5
1,500,000 Banco Real, S.A. (2) 10.00 5/27/1995 1,526,250 1.4
2,000,000 Brazil Exit Bonds(1) 6.00 9/15/2013 1,415,000 1.2
12,000,000 Republic of Brazil, IDU (1) 8.75 1/01/2001 9,975,000 8.8
3,000,000 Uniao de Bancos Brasileiros S.A.
(UNIBANCO) (2) 8.50 7/29/1996 2,996,400 2.6
Total Investments in Brazil
(Cost--$23,139,398) 23,932,650 21.0
Colombia Bonds 2,000,000 Banco de Colombia (2) 7.50 10/21/1998 1,955,000 1.7
Total Investments in Colombia
(Cost--$1,952,500) 1,955,000 1.7
Mexico Bonds 1,000,000 Banco de Atlantico, S.A. (2) 7.875 11/05/1998 1,010,000 0.9
2,000,000 Banco Nacional de Mexico, S.A. (2) 9.125 4/06/2000 2,187,500 1.9
1,000,000 Bancomer, S.A. (2) 8.00 7/07/1998 1,045,000 0.9
2,000,000 ++Grupo Simec, S.A. de C.V., guaranteed
by Grupo Sidek, S.A. (5) 8.875 12/15/1998 2,025,000 1.8
3,500,000 Grupo Situr, S.A. de C.V., guaranteed
by Grupo Sidek, S.A. (6) 8.75 9/14/1998 3,543,750 3.1
Brady Bonds 4,000,000 United Mexican States Discount "A"(1)* 4.187 12/31/2019 3,835,000 3.4
2,000,000 United Mexican States Discount "D"(1) 4.328 12/31/2019 1,917,500 1.7
5,000,000 United Mexican States Par "A"(1) 6.25 12/31/2019 4,162,500 3.6
13,000,000 United Mexican States Par "B"(1)* 6.25 12/31/2019 10,822,500 9.5
<PAGE>
Cetes 10,814,040 Mexican Cetes (1) 12.80 10/20/1994 3,207,291 2.8
Repurchase
Agreement 5,600,000 Banco de Mexico, purchased on 12/29/93 5.25 1/03/1994 5,604,083 4.9
Total Investments in Mexico
(Cost--$37,327,692) 39,360,124 34.5
Peru Loan Agreement $ 4,000,000 Republic of Peru--Citibank (1) 5.00 11/15/2013 2,760,000 2.4
Total Investments in Peru
(Cost--$2,020,000) 2,760,000 2.4
Venezuela Bonds 1,000,000 Bariven, S.A. (8) 10.625 3/17/2002 1,051,250 0.9
750,000 ++Venezolana de Cementos S.A.C.A.
(VENCEMOS) (7) 9.25 11/22/1996 753,750 0.7
Brady Bonds 15,000,000 Republic of Venezuela Par "A"(1) 6.75 3/31/2020 11,156,250 9.8
10,000,000 Republic of Venezuela Par "B"(1) 6.75 3/31/2020 7,437,500 6.5
Total Investments in Venezuela
(Cost--$19,535,522) 20,398,750 17.9
United States Commercial Paper** 4,948,000 General Electric Capital Corp. 3.22 1/03/1994 4,948,000 4.3
Total Investments in the United States
(Cost--$4,948,000) 4,948,000 4.3
Total Investments (Cost--$132,183,841) 138,472,024 121.5
Liabilities in Excess of Other Assets (24,547,852) (21.5)
------------ ------
Net Assets $113,924,172 100.0%
============ ======
<FN>
++Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $2,779,000, representing 2.44% of
net assets.
</TABLE>
<TABLE> <CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Grupo Simec, S.A. de C.V., guaranteed
by Grupo Sidek, S.A. 12/02/93 $1,990,880 $2,025,000
Venezolana de Cementos S.A.C.A.
(VENCEMOS) 12/23/93 753,750 753,750
Total $2,744,630 $2,778,750
========== ==========
</TABLE>
<PAGE>
*Security represents collateral in connection with reverse repurchase
agreements (Note 5).
**Commercial Paper is traded on a discount basic; the interest rate shown is
the
discount rate paid at the time of purchase by the Fund.
Corresponding industry groups for securities (percent of net assets):
(1) Sovereign Government Obligations--65.3%
(2) Banking--32.4%
(3) Industrial--0.9%
(4) Telecommunications--7.2%
(5) Steel--1.8%
(6) Tourism--3.1%
(7) Cement--0.7%
(8) Oil--0.9%
See Notes to Financial Statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE> <CAPTION>
As of December 31, 1993
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$132,183,841) (Note 1a) $138,472,024
Cash 761,259
Receivables:
Securities sold $ 2,875,000
Interest 2,489,503
Beneficial interest sold 1,094,887
Investment adviser (Note 2) 273,010 6,732,400
------------
Deferred organization expenses (Note 1f) 97,151
Prepaid registration fees and other assets (Note 1f) 27,695
------------
Total assets 146,090,529
------------
Liabilities: Payables:
Reverse repurchase agreement (Note 5) 21,546,000
Securities purchased 9,382,101
Dividends to shareholders (Note 1g) 799,284
Interest expense (Note 5) 111,492
Beneficial interest redeemed 87,238
Distributor (Note 2) 66,498 31,992,613
------------
Accrued expenses and other liabilities 173,744
------------
Total liabilities 32,166,357
------------
Net Assets: Net assets $113,924,172
============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized $ 139,114
Consist of: Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 912,091
Paid-in capital in excess of par 104,942,477
Undistributed realized capital gains on investments and foreign currency
transactions--net 1,642,291
Unrealized appreciation on investments and foreign currency transactions--net 6,288,199
------------
Net assets $113,924,172
============
Net Asset Class A--Based on net assets of $15,075,848 and 1,391,143 shares outstanding $ 10.84
Value: ============
Class B--Based on net assets of $98,848,324 and 9,120,906 shares outstanding $ 10.84
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS
<TABLE> <CAPTION>
For the Period
August 27, 1993++ to
December 31, 1993
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 2,587,246
Income ------------
(Notes 1d & 1e):
Expenses: Distribution and account maintenance fees--Class B (Note 2) 206,464
Investment advisory fees (Note 2) 197,936
Interest expense (Note 5) 111,492
Registration fees (Note 1e) 110,828
Custodian fees 64,100
Transfer agent fees--Class B (Note 2) 22,682
Printing and shareholder reports 21,986
Accounting services (Note 2) 21,800
Account maintenance fee--Class A (Note 2) 13,652
Directors' fees and expenses 11,450
Professional fees 9,285
Amortization of organization expenses (Note 1e) 7,447
Transfer agent fees--Class A (Note 2) 4,254
Other 4,878
------------
Total expenses before reimbursement 808,254
Reimbursement of expenses (Note 2) (470,946)
------------
Total expenses after reimbursement 337,308
------------
Investment income--net 2,249,938
------------
Realized & Realized gain from:
Unrealized Investments--net $ 2,019,841
Gain (Loss) Foreign currency transactions 4,058 2,023,899
on Invest- ------------
ments & Unrealized appreciation on:
Foreign Investments--net 6,288,183
Currency Foreign currency transactions 16 6,288,199
Trans- ------------ ------------
actions--Net Net realized and unrealized gain on investments and foreign currency transactions 8,312,098
(Notes 1b, ------------
1d & 3): Net Increase in Net Assets Resulting from Operations $ 10,562,036
============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE> <CAPTION>
For the Period
August 27, 1993++ to
December 31, 1993
Increase (Decrease) in Net Assets:
<S> <S> <C>
Operations: Investment income--net $ 2,249,938
Realized gain on investments and foreign currency transactions--net 2,023,899
Unrealized appreciation on investments and foreign currency transactions--net 6,288,199
------------
Net increase in net assets resulting from operations 10,562,036
------------
Dividends & Investment income--net:
Distribu- Class A (390,108)
tions to Class B (1,859,830)
Shareholders Realized gain on investments--net:
(Note 1g): Class A (50,931)
Class B (330,677)
------------
Net decrease in net assets resulting from dividends and distributions to shareholders (2,631,546)
------------
Capital Share Net increase in net assets derived from capital share transactions 105,893,682
Transactions ------------
(Note 4):
Net Assets: Total increase in net assets 113,824,172
Beginning of period 100,000
------------
End of period $113,924,172
============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE> <CAPTION>
For the Period
August 27, 1993++ to
December 31, 1993
<S> <S> <C>
Cash Used Net increase in net assets resulting from operations $ 10,562,036
for Operating Adjustments to reconcile net increase (decrease) in net assets resulting from operations
Activities: to net cash used for operating activities:
Increase in receivables (2,762,513)
Increase in other assets (124,846)
Increase in other liabilities 351,734
Amortization of organization expenses 7,447
Realized and unrealized gain on investments and foreign currency transactions--net (8,312,098)
------------
Net cash used for operating activities (278,240)
------------
Cash Used Proceeds from sales of long-term securities 50,369,843
for Investing Purchases of long-term securities (166,510,759)
Activities: Purchases of short-term investments (931,476,943)
Proceeds from sales and maturities of short-term investments 923,957,587
------------
Net cash used for investing activities (123,660,272)
------------
Cash Provided Cash receipts from issuance of Common Stock 116,426,916
by Financing Cash receipts from Reverse Repurchase Agreements 21,546,000
Activities: Cash payments on capital shares redeemed (12,611,006)
Dividends paid to shareholders (762,139)
------------
Net cash provided by financing activities 124,599,771
------------
Cash: Net increase (decrease) in cash 661,259
Cash at beginning of period 100,000
------------
Cash at end of period $ 761,259
============
Cash Flow Cash paid for interest $ 111,492
Information: ============
Noncash Capital shares issued in reinvestment of dividends paid to shareholders $ 1,070,123
Financing ============
Activities:
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE> <CAPTION>
For the Period
The following per share data and ratios have been derived August 27, 1993++ to
from information provided in the financial statements. December 31, 1993
Increase (Decrease) in Net Asset Value: Class A Class B
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00
Operating ------- -------
Performance: Investment income--net .26 .24
Realized and unrealized gain on investments
and foreign currency transactions--net .88 .88
------- -------
Total from investment operations 1.14 1.12
------- -------
Less dividends and distributions:
Investment income--net (.26) (.24)
Realized gain on investments--net (.04) (.04)
------- -------
Total dividends and distributions (.30) (.28)
------- -------
Net asset value, end of period $ 10.84 $ 10.84
======= =======
Total Based on net asset value per share 11.49%+++ 11.30%+++
Investment ======= =======
Return:**
Ratios to Expenses, net of reimbursement and excluding account
Average maintenance and distribution fees .35%* .35%*
Net Assets: ======= =======
Expenses, net of reimbursement .60%* 1.10%*
======= =======
Expenses 2.03%* 2.53%*
======= =======
Investment income--net 7.14%* 6.76%*
======= =======
Supplemental Net assets, end of period (in thousands) $15,076 $98,848
Data: ======= =======
Portfolio turnover 75.18% 75.18%
======= =======
<FN>
++Commencement of Operations.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Americas Income Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified,
open-end management investment company. Prior to commencement
of operations on August 27, 1993, the Fund had no operations other
than those relating to organizational matters and the issuance of
5,000 Class A Shares of beneficial interest and 5,000 Class B Shares
of beneficial interest of the Fund to Merrill Lynch Asset Management,
Inc. ("MLAM") for $100,000. The Fund offers both Class A and
Class B Shares. Class A Shares are sold with a front-end sales charge.
Class B Shares may be subject to a contingent deferred sales charge.
Both classes of shares have identical voting, dividend, liquidation
and other rights and the same terms and conditions, except that
Class A Shares bear the expenses of their account maintenance
fee and Class B Shares bear certain expenses related to their dis-
tribution of such shares. Each class has exclusive voting rights
with respect to matters relating to their respective distribution and
account maintenance expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of Securities--Securities traded in the over-the-
counter market are valued at the last available bid price or yield
equivalents obtained from one or more dealers in the over-the-counter
market prior to the time of valuation. Portfolio securities which are
traded on stock exchanges are valued at the last sale price on the
principal market on which such securities are traded, as of the close
of business on the day the securities are being valued or, lacking
any sales, at the last available bid price.
Options written are valued based upon the last asked price in the
case of exchange-traded options or, in the case of options traded in
the over-the-counter market, the average of the last asked price as
obtained from one or more dealers. Options purchased by the Fund
are valued at their last bid price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter
market, the average of the last bid price as obtained from two or
more dealers.
Other investments, including futures contracts and related options,
are stated at market value or at the fair value at which it
is expected they may be resold, as determined in good faith by or
under the direction of the Board of Directors of the Fund.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Directors of the Fund.
(b) Foreign Currency Transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or valuing
(unrealized) such transactions expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
The Fund is authorized to enter into forward foreign exchange
contracts as a hedge against either specific transactions or portfolio
positions. Such contracts are not entered on the Fund's records.
However, the effect on operations is recorded from the date the Fund
enters into such contracts. Premium or discount is amortized over
the life of the contracts.
(c) Options--When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
<PAGE>
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 is less than or exceeds the premium paid or received).
Written and purchased options are non-income producing
investments.
(d) Income Taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to
its shareholders. Therefore, no Federal income tax provision is
required. Under the applicable foreign tax law, a withholding tax
may be imposed on interest and capital gains at various rates.
(e) Security Transactions and Investment Income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified
cost basis.
(f) Deferred Organization Expenses and Prepaid Registration Fees--
Deferred organization expenses and expenses relating to the organi-
zation of the second class of shares are charged to expense over a
five-year period. Prepaid registration fees are charged to expense
as the related shares are issued.
(g) Dividends and Distributions--Dividends from net investment
income are declared daily and paid monthly. Distribution of capital
gains are recorded on the ex-dividend dates.
(h) Financial Futures Contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
as a hedge against adverse changes in interest rates. A futures
contract is an agreement between two parties to buy and sell a
security, respectively, for a set price on a future date. 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 margin and are recorded by the Fund as unreal-
ized 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 (concluded)
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement
with Merrill Lynch Asset Management ("MLAM"). MLAM is the
name under which Merrill Lynch Investment Management, Inc.
("MLIM") does business. MLIM is an indirect wholly-owned sub-
sidiary of Merrill Lynch & Co., Inc. The Fund has also entered into a
Distribution Agreement and a Distribution Plan with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of MLIM.
<PAGE>
Effective January 1, 1994, the investment advisory business of MLAM
was reorganized from a corporation to a limited partnership. The
general partner of MLAM is Princeton Services, Inc., an indirect
wholly-owned subsidiary of Merrill Lynch & Co.
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operation of the Fund.
For such services, the Fund pays a monthly fee of 0.60%, on an annual
basis, of the average daily value of the Fund's net assets. The most
restrictive annual expense limitation requires that the Investment
Adviser reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and com-
missions, and extraordinary items) exceed 2.5% of the Fund's first
$30 million of average daily net assets, 2.0% of the next $70 million of
average daily net assets, and 1.5% of the average daily net assets in
excess thereof. The Investment Adviser's obligation to reimburse
the Fund is limited to the amount of the investment advisory fee.
No fee payment will be made to the Investment Adviser during any
fiscal year which will cause such expenses to exceed the most
restrictive expense limitation at the time of such payment. For the
period August 27, 1993 to December 31, 1993, MLAM earned fees of
$197,936, all of which was voluntarily waived. In addition, MLAM
voluntarily reimbursed the Fund $273,010 for additional expenses.
The Fund has adopted Plans of Distribution (the "Distribution Plans")
pursuant to Rule 12b-1 under the Investment Company Act of 1940
pursuant to which MLFD receives a fee from the Fund at the end of
each month at the annual rate of 0.25% of average daily net assets of
the Fund attributable to Class A Shares in order to compensate the
distributor and Merrill Lynch for account maintenance activities, and
0.50% and 0.25%, respectively, of average daily net assets of the Fund
attributable to Class B Shares. This fee is to compensate the Distributor
for the services it provides and the expenses borne by the Distributor
under the Distribution Agreement. As authorized by the Plan, the
Distributor has entered into an agreement with Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S") which provides for the
compensation of MLPF&S for providing distribution-related services
to the Fund. For the period August 27, 1993 to December 31, 1993,
MLFD earned $220,116 under the Plan, all of which was paid to
MLPF&S pursuant to the agreement.
For the period August 27, 1993 to December 31, 1993, MLFD earned
underwriting discounts of $5,926, and MLPF&S earned dealer
concessions of $311,817 on sales of Class A Shares. MLPF&S also
received contingent deferred sales charges of $51,471 relating to
Class B Share transactions.
Financial Data Services, Inc. (FDS), a wholly-owned subsidiary of
Merrill Lynch & Co., Inc., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, MLPF&S, MLFD, FDS, and/or Merrill Lynch &
Co., Inc.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period ended December 31, 1993 were $175,892,860 and
$54,339,234, respectively.
<PAGE>
Realized and unrealized gains as of December 31, 1993 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $2,019,841 $6,288,183
Foreign currency transactions 4,058 16
---------- ----------
Total $2,023,899 $6,288,199
========== ==========
As of December 31, 1993, net unrealized appreciation for Federal
income tax purposes aggregated $6,288,183, of which $6,339,433
related to appreciated securities and $51,250 related to depreciated
securities. At December 31, 1993, the aggregate cost of investments,
including options purchased less premiums received for options
written, for Federal income tax purposes was $132,183,841.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest transactions
was $105,893,682 for the period December 31, 1993.
Transactions in shares of beneficial interest were as follows:
Class A Shares for the Period
Aug. 27, 1993++ Dollar
To December 31, 1993 Shares Amount
Shares sold 1,903,377 $19,440,340
Shares issued to shareholders
in reinvestment of dividends
and distributions 13,895 147,557
--------- -----------
Total issued 1,917,272 19,587,897
Shares redeemed (531,129) (5,477,202)
--------- -----------
Net increase 1,386,143 $14,110,695
========= ===========
[FN]
++ Prior to August 27, 1993 (commencement of operations), the
Fund issued 5,000 shares to MLAM for $50,000.
Class B Shares for the Period
Aug. 27, 1993++ Dollar
To December 31, 1993 Shares Amount
Shares sold 9,729,435 $98,081,463
Shares issued to shareholders
in reinvestment of dividends
and distributions 86,577 922,566
--------- -----------
Total issued 9,816,012 99,004,029
Shares redeemed (700,106) (7,221,042)
--------- -----------
Net increase 9,115,906 $91,782,987
========= ===========
[FN]
++ Prior to August 27, 1993 (commencement of operations), the
Fund issued 5,000 shares to MLAM for $50,000.
5. Reverse Repurchase Agreements:
Under a reverse repurchase agreement, the Fund sells securities
and agrees to repurchase them at a mutually agreed upon date and
price. At the time the Fund enters into a reverse repurchase agree-
ment, it may establish a segregated account with the custodian
containing cash, cash equivalents or liquid high grade debt securities
having a value at least equal to the repurchase price.
As of December 31, 1993, the Fund had entered into reverse repur-
chase agreements in the amount of $21,546,000. For the period
<PAGE>
August 27, 1993 to December 31, 1993, the maximum amount
entered into was $21,546,000, the average amount outstanding was
$18,977,362, and the daily weighted average interest rate was 4.50%.
<PAGE>
[This page is intentionally left blank.]
<PAGE>
APPENDIX
RATING OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE RATINGS
<TABLE>
<S> <C>
Aaa --Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt edge". Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa --Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in Aaa securities.
A --Bonds which are rated A possess many favorable investment attributes and are to be considered as
upper-medium grade obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to impairment sometime in the
future.
Baa --Bonds which are rated Baa are considered as medium-grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically unreliable over any great length
of time. Such bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba --Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as
well assured. Often the protection of interest and principal payments may be very moderate, and 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 desirable investments. Assurance of interest
and principal payments or of maintenance of other terms of the contract over any long period of time may
be small.
Caa --Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest.
Ca --Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings.
C --Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
</TABLE>
- ---------------
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.
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
A-1
<PAGE>
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. Obligations relying upon support mechanisms
such as letters-of-credit and bonds of indemnity are excluded unless explicitly
rated. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers.
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1 repayment
ability will normally be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, 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 related supporting institutions) have an
acceptable ability for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
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, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("STANDARD & POOR'S") CORPORATE
DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
A-2
<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 for 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.
<TABLE>
<S> <C>
AAA --Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA --Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the
higher 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, on balance, as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB indicates the lowest
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 risk exposures to adverse
conditions.
BB --Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However,
it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal payments. The BB rating
category is also used for debt subordinated to senior debt that is assigned an actual or implied
BBB-rating.
B --Debt rated B has a greater vulnerability to default but presently has the capacity to meet interest
payments and principal repayments. Adverse business, financial or economic conditions would likely
impair capacity or willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB-rating.
CCC --Debt rated CCC has a current identifiable vulnerability to default, and is dependent upon favorable
business, financial and economic conditions to meet timely payments of interest and 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.
CC --The rating CC is typically applied to debt subordinated to senior debt which is assigned an actual or
implied CCC rating.
</TABLE>
A-3
<PAGE>
<TABLE>
<S> <C>
C --The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or
implied CCC-debt rating. The C rating may be used to cover a situation where a bankruptcy petition has
been filed but debt service payments are continued.
CI --The rating CI is reserved for income bonds on which no interest is being paid.
D --Debt rated D is in default. The D rating category is also used when interest payments or principal
payments 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.
</TABLE>
- ---------------
<TABLE>
<S> <C>
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the addition of a plus or minus sign to
show relative standing within the major ratings categories.
Provisional ratings: The letter "p" indicates that the rating is provisional. A provisional rating assumes
the successful completion of the project being financed by the debt being rated and
indicates that payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no comment
on the likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal amount of those
bonds to the extent that the underlying deposit collateral is federally insured and
interest is adequately collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt of an executed
copy of the escrow agreement or closing documentation confirming investments and cash
flows.
NR Indicates that no rating has been requested, that there is insufficient information
on which to base a rating or that Standard & Poor's does not rate a particular type
of obligation as a matter of policy.
</TABLE>
Debt Obligations of Issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, Bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several
A-4
<PAGE>
categories, ranging from "A-1" for the highest quality obligations to "D" for
the lowest. These categories are as follows:
<TABLE>
<S> <C>
A-1 --This highest category indicates that the degree of safety regarding timely payment is strong. Those
issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2 --Capacity for timely payment on issues with this designation is 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 a 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
payments are not made on the date due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
</TABLE>
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. S&P
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.
A-5
<PAGE>
[This page is intentionally left blank.]
<PAGE>
[This page is intentionally left blank.]
<PAGE>
TABLE OF CONTENTS
PAGE
-----------
Investment Objective and Policies.............. 2
Portfolio Strategies Involving Interest Rate
Transactions, Options and Futures......... 2
Investment Restrictions...................... 6
Management of the Fund......................... 9
Directors and Officers....................... 9
Advisory and Management Arrangements......... 10
Purchase of Shares............................. 12
Alternative Sales Arrangements............... 12
Initial Sales Charge Alternative--
Class A Shares............................ 13
Reduced Initial Sales Charges--
Class A Shares............................ 14
Redemption of Shares........................... 16
Contingent Deferred Sales Charge--
Class B Shares............................ 16
Portfolio Transactions and Brokerage........... 17
Determination of Net Asset Value............... 18
Shareholder Services........................... 19
Investment Account........................... 19
Automatic Investment Plan.................... 20
Reinvestment of Dividends and Capital Gains
Distributions.................................. 20
Systematic Withdrawal Plans--
Class A Shares............................ 20
Exchange Privilege........................... 21
Taxes.......................................... 34
Tax Treatment of Options, Futures and Forward
Foreign Exchange
Transactions.............................. 35
Special Rules for Certain Foreign
Currency Transactions..................... 36
Performance Data............................... 37
General Information............................ 38
Description of Shares........................ 38
Computation of Offering Price Per Share...... 39
Independent Auditors......................... 40
Custodian.................................... 40
Transfer Agent............................... 40
Legal Counsel................................ 40
Reports to Shareholders...................... 40
Additional Information....................... 40
Independent Auditors' Report................... 41
Financial Statements........................... 42
Appendix....................................... A-1
Code #16800-0893
Statement of
Additional Information
[Art]
-----------
MERRILL LYNCH
AMERICAS INCOME
FUND, INC.
February 18, 1994
Distributor: Merrill Lynch
Funds Distributor, Inc.
<PAGE>
Graphics Appendix List
EDGAR Version Typeset Version
- ------------- ----------------
Back cover of Prospectus and Picture of North and South
back cover of Statement of America on globe viewed from
Additional Information space with montage of various
currencies.
<PAGE>
MERRILL LYNCH AMERICAS INCOME FUND, INC.
------------------------
SUPPLEMENT DATED FEBRUARY 18, 1994, TO
PROSPECTUS DATED FEBRUARY 18, 1994.
------------------------
FOR USE IN ALASKA
THIS FUND MAY INVEST IN LOWER RATED BONDS, COMMONLY REFERRED TO AS "JUNK
BONDS".
CODE # 16802-AK
<PAGE>
MERRILL LYNCH AMERICAS INCOME FUND, INC.
------------------------
SUPPLEMENT DATED FEBRUARY 18, 1994, TO
PROSPECTUS DATED FEBRUARY 18, 1994.
------------------------
FOR USE IN ARIZONA
THE FUND HAS ESTABLISHED NO RATING CRITERIA FOR THE DEBT SECURITIES IN
WHICH IT MAY INVEST. THEREFORE, THE FUND MAY AT TIMES BE PREDOMINANTLY INVESTED
IN MEDIUM OR LOWER RATED BONDS. MEDIUM RATED BONDS MAY HAVE SPECULATIVE
CHARACTERISTICS. LOWER RATED BONDS, COMMONLY REFERRED TO AS "JUNK BONDS", ARE
CONSIDERED TO BE SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN
OF PRINCIPAL. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE FUND.
CODE # 16802-AZ
<PAGE>
MERRILL LYNCH AMERICAS INCOME FUND, INC.
------------------------
SUPPLEMENT DATED FEBRUARY 18, 1994, TO
PROSPECTUS DATED FEBRUARY 18, 1994.
------------------------
FOR USE IN INDIANA
THE FUND MAY INVEST WITHOUT LIMIT IN LOWER RATED BONDS, COMMONLY REFERRED
TO AS "JUNK BONDS". BONDS OF THIS TYPE ARE CONSIDERED TO BE SPECULATIVE WITH
REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. FOR FURTHER
INFORMATION CONCERNING THE RISKS INVOLVED IN INVESTING IN SUCH SECURITIES, SEE
"INVESTMENT OBJECTIVE AND POLICIES--SPECIAL CONSIDERATIONS AND RISK
FACTORS--HIGH YIELD SECURITIES" IN THE PROSPECTUS.
CODE # 16802-IN
<PAGE>
MERRILL LYNCH AMERICAS INCOME FUND, INC.
------------------------
SUPPLEMENT DATED FEBRUARY 18, 1994, TO
PROSPECTUS DATED FEBRUARY 18, 1994.
------------------------
FOR USE IN MISSOURI
THE FUND MAY INVEST IN DEBT SECURITIES WHICH ARE RATED BELOW INVESTMENT
GRADE, COMMONLY REFERRED TO AS "JUNK BONDS". THE FUND'S ABILITY TO INVEST IN
SUCH SECURITIES, AS WELL AS ITS ABILITY TO INVEST IN THE SECURITIES OF FOREIGN
ISSUERS AND TO UTILIZE LEVERAGE, INVOLVES CERTAIN SPECIAL CONSIDERATIONS AND
RISK FACTORS. SEE "HIGH YIELD SECURITIES", "FOREIGN INVESTMENTS" AND "LEVERAGE"
UNDER "INVESTMENT OBJECTIVE AND POLICIES--SPECIAL CONSIDERATIONS AND RISK
FACTORS" IN THE PROSPECTUS.
CODE # 16802-MO
<PAGE>
MERRILL LYNCH AMERICAS INCOME FUND, INC.
------------------------
SUPPLEMENT DATED FEBRUARY 18, 1994, TO
PROSPECTUS DATED FEBRUARY 18, 1994.
------------------------
FOR USE IN MINNESOTA
THE FUND MAY AT TIMES BE PREDOMINANTLY INVESTED IN LOWER RATED BONDS,
COMMONLY REFERRED TO AS "JUNK BONDS". BONDS OF THIS TYPE ARE CONSIDERED TO BE
SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL.
PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THE FUND. FOR FURTHER INFORMATION CONCERNING THE RISKS INVOLVED IN SUCH
SECURITIES, SEE "INVESTMENT OBJECTIVE AND POLICIES--SPECIAL CONSIDERATIONS AND
RISK FACTORS--HIGH YIELD SECURITIES" IN THE PROSPECTUS.
CODE # 16802-MN
<PAGE>
MERRILL LYNCH AMERICAS INCOME FUND, INC.
------------------------
SUPPLEMENT DATED FEBRUARY 18, 1994, TO
PROSPECTUS DATED FEBRUARY 18, 1994.
------------------------
FOR USE IN VERMONT
THE FUND MAY AT TIMES BE PREDOMINANTLY INVESTED IN LOWER RATED BONDS,
COMMONLY REFERRED TO AS "JUNK BONDS". BONDS OF THIS TYPE ARE CONSIDERED TO BE
SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL.
PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THE FUND.
CODE # 16802-VT
