<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1997
SECURITIES ACT FILE NO. 33-64398
INVESTMENT COMPANY ACT FILE NO. 811-7794
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 5 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 8 [X]
(CHECK APPROPRIATE BOX OR BOXES)
---------------------
MERRILL LYNCH AMERICAS INCOME FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH AMERICAS INCOME FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
COPIES TO:
<TABLE>
<S> <C>
COUNSEL TO THE FUND:
BROWN & WOOD LLP PHILIP L. KIRSTEIN, ESQ.
ONE WORLD TRADE CENTER MERRILL LYNCH ASSET MANAGEMENT
NEW YORK, NEW YORK 10048-0557 P.O. BOX 9011
ATTENTION: THOMAS R. SMITH, JR., ESQ. PRINCETON, NEW JERSEY 08543-9011
</TABLE>
---------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date), pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
---------------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF COMMON
STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE
REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON FEBRUARY 24, 1997.
================================================================================
<PAGE> 2
MERRILL LYNCH AMERICAS INCOME FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- -------------------------------------------------------- --------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Fee Table; Merrill Lynch Select
Pricing(SM) System
Item 3. Condensed Financial Information....... Financial Highlights
Item 4. General Description of Registrant..... Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund................ Fee Table; Investment Objective and
Policies; Portfolio Transactions;
Management of the Fund; Inside Back
Cover Page
Item 5A. Management's Discussion of Fund
Performance......................... Not Applicable
Item 6. Capital Stock and Other Securities.... Cover Page; Additional Information
Item 7. Purchase of Securities Being
Offered............................. Cover Page; Fee Table; Merrill Lynch
Select Pricing(SM) System; Purchase
of Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase.............. Fee Table; Merrill Lynch Select
Pricing(SM) System; Shareholder
Services; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Proceedings............. Not Applicable
PART B
Item 10. Cover Page............................ Cover Page
Item 11. Table of Contents..................... Back Cover Page
Item 12. General Information and History....... Not Applicable
Item 13. Investment Objectives and Policies.... Investment Objective and Policies
Item 14. Management of the Fund................ Management of the Fund
Item 15. Control Persons and Principal Holders
of Securities....................... Management of the Fund; General
Information
Item 16. Investment Advisory and Other
Services............................ Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other
Practices........................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities.... General Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............ Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; General
Information
Item 20. Tax Status............................ Dividends and Distributions; Taxes
Item 21. Underwriter........................... Purchase of Shares
Item 22. Calculation of Performance Data....... Performance Data
Item 23. Financial Statements.................. Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
APRIL 29, 1997
MERRILL LYNCH AMERICAS INCOME FUND, INC.
P.O. 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 that seeks 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." For more information on the Fund's investment
objective and policies, please see "Investment Objective and Policies" on page
10.
------------------------
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. As a
result of the implementation of the Merrill Lynch Select Pricing(SM) System,
Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares. The Class A shares offered by this Prospectus
differ from the Class A shares offered prior to October 21, 1994 in many
respects, including sales charges, exchange privilege and the classes of persons
to whom such shares are offered. See "Merrill Lynch Select Pricing(SM) System"
on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800] and other securities dealers that have entered into selected dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100, and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85, but as of May
1, 1997, $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through Merrill Lynch Financial Data Services, Inc.,
the Fund's transfer agent (the "Transfer Agent"), are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be retained
for future reference. A statement containing additional information about the
Fund, dated April 29, 1997 (the "Statement of Additional Information"), has been
filed with the Securities and Exchange Commission (the "Commission") and is
available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
------------ ------------------------------------- ------------------ --------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)................ 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments.................. None None None None
Deferred Sales Charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)............ None(d) 4.0% during the first year, 1.0% for one None(d)
decreasing 1.0% annually year(f)
thereafter to 0.0% after
the fourth year(e)
Exchange Fee..................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE NET
ASSETS):
Investment Advisory Fees(g)...... 0.63% 0.63% 0.63% 0.63%
12b-1 Fees(h):
Account Maintenance Fees....... None 0.25% 0.25% 0.25%
Distribution Fees.............. None 0.50% 0.55% None
(Class B shares convert to Class D
shares automatically after
approximately ten years and cease
being subject to distribution fees)
Other Expenses:
Custodial Fees................. 0.04% 0.04% 0.04% 0.04%
Shareholder Servicing
Costs(i)..................... 0.16% 0.19% 0.21% 0.17%
Other.......................... 0.49% 0.49% 0.49% 0.49%
------ --- --- ----
Total Other Expenses....... 0.69% 0.72% 0.74% 0.70%
------ --- --- ----
Total Fund Operating Expenses.... 1.32% 2.10% 2.17% 1.58%
====== === === ====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" on page 30 and "Shareholder
Services -- Fee-Based Programs" on page 42.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" on page 33.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A or Class D purchases of $1,000,000
or more may not be subject to an initial sales charge. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D Shares"
on page 30.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" on page 42.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" on page 42.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" on page 42.
(g) See "Management of the Fund -- Advisory and Management Arrangements" on page
26.
(h) See "Purchase of Shares -- Distribution Plans" on page 36.
(i) See "Management of the Fund -- Transfer Agency Services" on page 27.
2
<PAGE> 5
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $40 initial sales charge
(Class A and Class D shares only) and assuming (1) the
Total Fund Operating Expenses for each class set forth on
page 2, (2) a 5% annual return throughout the periods and
(3) redemption at the end of the period (including any
applicable CDSC for Class B and Class C shares):
Class A................................................. $ 53 $80 $ 109 $193
Class B................................................. $ 61 $86 $ 113 $243
Class C................................................. $ 32 $68 $ 116 $250
Class D................................................. $ 55 $88 $ 123 $220
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of the
period:
Class A................................................. $ 53 $80 $ 109 $193
Class B................................................. $ 21 $66 $ 113 $243
Class C................................................. $ 22 $68 $ 116 $250
Class D................................................. $ 55 $88 $ 123 $220
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who 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 Conduct
Rules of the National Association of Securities Dealers, Inc. (the "NASD").
Merrill Lynch may charge its customers a processing fee (presently $4.85, but as
of May 1, 1997, $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through the Transfer Agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."
3
<PAGE> 6
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share, subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 registered investment companies advised by Merrill Lynch Asset Management,
L.P. ("MLAM" or the "Investment Adviser") or its affiliate, Fund Asset
Management, L.P. ("FAM"). Funds advised by MLAM or FAM that utilize the Merrill
Lynch Select Pricing(SM) System are referred to herein as "MLAM-advised mutual
funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs and distribution and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges and distribution fees with respect to the
Class B and Class C shares in that the sales charges and distribution fees
applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling different
classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is the most beneficial under his or her
4
<PAGE> 7
particular circumstances. More detailed information as to each class of shares
is set forth under "Purchase of Shares."
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(2)(3)
- -----------------------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.50% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(4) ten years(5)
- -----------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.55% No
- -----------------------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(3)
- -----------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply. See "Class A" and "Class D"
below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an
eight-year conversion period. If Class B shares of the Fund are exchanged
for Class B shares of another MLAM-advised mutual fund, the conversion
period applicable to the Class B shares acquired in the exchange will apply,
and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional
Class A shares of the Fund in that account. Other eligible investors
include certain retirement plans and participants in certain fee-based
programs. In addition, Class A shares will be offered at net asset
value to Merrill Lynch & Co., Inc. ("ML&Co.") and its subsidiaries
(the term "subsidiaries," when used herein with respect to ML&Co.,
includes MLAM, FAM and certain other entities directly or indirectly
wholly owned and controlled by ML&Co.) and to their directors and
employees and to members of the Boards of MLAM-advised mutual funds.
The maximum initial sales charge of 4.00% is reduced for purchases of
$25,000 and over, and waived for purchases by certain retirement plans
and participants in connection with certain fee-based programs.
Purchases of $1,000,000 or more may not be subject to an initial sales
charge but, if the initial sales charge is waived, such purchases may
be subject to a 1.0% CDSC if the shares are redeemed within one year
after purchase. Such CDSC may be waived in connection with certain
5
<PAGE> 8
fee-based programs. Sales charges also are reduced under a right of
accumulation that takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.50% of the Fund's average net
assets attributable to the Class B shares, and a CDSC if they are
redeemed within four years of purchase. The CDSC may be modified in
connection with certain fee-based programs. Approximately ten years
after issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately eight years. If Class B
shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period
for the shares acquired. Automatic conversion of Class B shares into
Class D shares will occur at least once each month on the basis of the
relative net asset values of the shares of the two classes on the
conversion date, without the imposition of any sales load, fee or
other charge. Conversion of Class B shares to Class D shares will not
be deemed a purchase or sale of the shares for Federal income tax
purposes. Shares purchased through reinvestment of dividends on Class
B shares also will convert automatically to Class D shares. The
conversion period for dividend reinvestment shares, and the conversion
and holding periods for certain retirement plans, are modified as
described under "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B
Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.55% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a 1.0% CDSC if they are redeemed within one year of purchase. Such
CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 4.00% is
reduced for purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but, if the initial
sales charge is waived, such purchases may be subject to a 1.0% CDSC
if the shares are redeemed within one year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. The
schedule of initial sales charges and reductions for Class D shares is
the same as the schedule for Class A shares, except that there is no
waiver for purchases in connection with certain fee-based programs.
Class D shares also will be issued upon conversion of Class B shares
as described above under "Class B." See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares."
6
<PAGE> 9
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Class A, Class B, Class C and Class D share
holdings will count toward a right of accumulation which may qualify the
investor for reduced initial sales charges on new initial sales charge
purchases. In addition, the ongoing Class B and Class C account maintenance and
distribution fees will cause Class B and Class C shares to have higher expense
ratios, pay lower dividends and have lower total returns than the initial sales
charge shares. The ongoing Class D account maintenance fees will cause Class D
shares to have a higher expense ratio, pay lower dividends and have a lower
total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately ten years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forego the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred
Sales Charges."
7
<PAGE> 10
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial statements and the
independent auditors' report thereon for the fiscal year ended December 31,
1996, are included in the Statement of Additional Information. Further
information about the performance of the Fund is contained in the Fund's most
recent annual report to shareholders which may be obtained, without charge, by
calling or by writing the Fund at the telephone number or address on the front
cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR FOR THE PERIOD FOR THE PERIOD
ENDED OCT. 21, FOR THE YEAR ENDED AUG. 27,
DEC. 31, 1994+ TO DEC. 31, 1993+ TO
----------------- DEC. 31, -------------------------------------------------- DEC. 31,
1996++ 1995 1994 1996++ 1995 1994 1993
------- ------ -------------- -------------- -------------- -------------- --------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 9.70 $ 8.51 $ 9.08 $ 9.65 $ 8.48 $ 10.84 $ 10.00
------- ------ ------ -------- -------- -------- -------
Investment
income -- net.......... .97 .94 .17 .88 .88 .75 .24
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions -- net.... 2.14 1.19 (.57) 2.15 1.17 (2.36) .88
------- ------ ------ -------- -------- -------- -------
Total from investment
operations............. 3.11 2.13 (.40) 3.03 2.05 (1.61) 1.12
------- ------ ------ -------- -------- -------- -------
Less dividends and
distributions:
Investment
income -- net........ (1.00) (.94) (.14) (.93) (.88) (.64) (.24)
In excess of investment
income -- net........ (.13) -- -- (.12) -- -- --
Realized gain on
investments -- net... (.32) -- (.03) (.32) -- (.11) (.04)
------- ------ ------ -------- -------- -------- -------
Total dividends and
distributions.......... (1.45) (.94) (.17) (1.37) (.88) (.75) (.28)
------- ------ ------ -------- -------- -------- -------
Net asset value, end of
period................. $ 11.36 $ 9.70 $ 8.51 $ 11.31 $ 9.65 $ 8.48 $ 10.84
======= ====== ====== ======== ======== ======== =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share................ 33.64% 27.27% (4.45)%# 32.75% 26.10% (15.08)% 11.30%#
======= ====== ====== ======== ======== ======== =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
interest expense and
net of reimbursement... 1.05% 1.20% 1.22%* 1.83% 1.97% 1.79% 1.03%*
======= ====== ====== ======== ======== ======== =======
Expenses, excluding
interest expense....... 1.05% 1.20% 1.22%* 1.83% 1.97% 2.00% 2.45%*
======= ====== ====== ======== ======== ======== =======
Expenses................. 1.32% 1.36% 1.91%* 2.10% 2.13% 2.70% 2.53%*
======= ====== ====== ======== ======== ======== =======
Investment
income -- net.......... 8.97% 11.25% 8.63%* 8.36% 10.40% 8.14% 6.76%*
======= ====== ====== ======== ======== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)......... $28,136 $1,165 $ 253 $ 160,204 $ 103,465 $ 101,933 $ 98,848
======= ====== ====== ======== ======== ======== =======
Portfolio turnover....... 420.35% 127.17% 353.33% 420.35% 127.17% 353.33% 75.18%
======= ====== ====== ======== ======== ======== =======
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effect of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
8
<PAGE> 11
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C CLASS D
--------------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR FOR THE PERIOD FOR THE PERIOD
ENDED OCT. 21, FOR THE YEAR ENDED AUG. 27,
DEC. 31, 1994+ TO DEC. 31, 1993+ TO
----------------- DEC. 31, -------------------------------------------------- DEC. 31,
1996++ 1995 1994 1996++ 1995 1994 1993
------- ------ -------------- ------- ------- ------- --------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 9.65 $ 8.47 $ 9.08 $ 9.65 $ 8.48 $ 10.84 $ 10.00
------- ------ ------ -------- -------- -------- -------
Investment
income -- net.......... .87 .87 .15 .95 .92 .80 .26
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions -- net.... 2.15 1.18 (.61) 2.13 1.17 (2.36) .88
------- ------ ------ -------- -------- -------- -------
Total from investment
operations............. 3.02 2.05 (.46) 3.08 2.09 (1.56) 1.14
------- ------ ------ -------- -------- -------- -------
Less dividends and
distributions:
Investment
income -- net........ (.92) (.87) (.13) (.97) (.92) (.68) (.26)
In excess of investment
income -- net........ (.12) -- -- (.13) -- -- --
Realized gain on
investments -- net... (.32) -- (.02) (.32) -- (.12) (.04)
------- ------ ------ -------- -------- -------- -------
Total dividends and
distributions.......... (1.36) (.87) (.15) (1.42) (.92) (.80) (.30)
------- ------ ------ -------- -------- -------- -------
Net asset value, end of
period................. $ 11.31 $ 9.65 $ 8.47 $ 11.31 $ 9.65 $ 8.48 $ 10.84
======= ====== ====== ======== ======== ======== =======
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share........ 32.66% 26.18% (5.06)%# 33.44% 26.75% (14.65)% 11.49%#
======= ====== ====== ======== ======== ======== =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
interest expense and
net of reimbursement... 1.90% 2.05% 2.24%* 1.31% 1.44% 1.28% .50%*
======= ====== ====== ======== ======== ======== =======
Expenses, excluding
interest expense....... 1.90% 2.05% 2.24%* 1.31% 1.44% 1.48% 1.93%*
======= ====== ====== ======== ======== ======== =======
Expenses................. 2.17% 2.19% 3.05%* 1.58% 1.60% 2.17% 2.03%*
======= ====== ====== ======== ======== ======== =======
Investment
income -- net.......... 8.17% 10.23% 8.87%* 8.92% 10.85% 8.65% 7.14%*
======= ====== ====== ======== ======== ======== =======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)......... $11,436 $1,396 $ 75 $ 18,402 $ 14,169 $ 14,938 $ 15,076
======= ====== ====== ======== ======== ======== =======
Portfolio turnover....... 420.35% 127.17% 353.33% 420.35% 127.17% 353.33% 75.18%
======= ====== ====== ======== ======== ======== =======
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effect of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
9
<PAGE> 12
As discussed elsewhere herein, the Fund is authorized to borrow funds and
to utilize leverage in amounts not to exceed 33 1/3% of its total assets
(including the amount borrowed) and to borrow up to an additional 5% of its
total assets for temporary purposes. 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. The following chart provides certain information for
the periods indicated with respect to such borrowings (including bank loans):
<TABLE>
<CAPTION>
AVERAGE NUMBER
AMOUNT OF DEBT AVERAGE AMOUNT OF OF FUND SHARES AVERAGE AMOUNT OF
OUTSTANDING AT DEBT OUTSTANDING OUTSTANDING DURING DEBT PER SHARE
PERIOD END OF PERIOD DURING THE PERIOD THE PERIOD DURING THE PERIOD
- ------------------------------- -------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
August 27, 1993,* to December
31, 1993..................... $ 21,546,000 $18,977,362 10,512,049 $1.81
For the Fiscal Year Ended
December 31, 1994............ $ 17,058,000 $17,315,402 14,565,482 $1.19
For the Fiscal Year Ended
December 31, 1995............ $ 10,265,476 $ 2,639,633 13,142,615 $0.20
For the Fiscal Year Ended
December 31, 1996............ $ 22,350,300 $ 8,277,000 17,243,450 $0.48
</TABLE>
- ---------------
* Commencement of Operations.
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 of 1940, as amended (the
"Investment Company Act"). There can be no assurance that the Fund's investment
objective will be achieved.
MLAM, the Fund's 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
10
<PAGE> 13
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. The Fund also is authorized to invest up to 20% of its total assets in
debt securities denominated in currencies of countries located outside of the
Western Hemisphere.
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 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 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 may invest in securities whose potential investment return is
based on the change in particular measurements of value or rate (an "index"). As
an illustration, the Fund may invest in 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
11
<PAGE> 14
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 Ratings Services ("S&P") and Moody's Investors Services,
Inc. ("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 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
12
<PAGE> 15
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 up to 33 1/3% of its total assets
(including the amount borrowed) and to borrow up to an additional 5% of its
total assets for temporary purposes. 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 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. The Fund may invest in
securities of foreign issuers that are U.S. dollar-linked or hedged or are
denominated in currencies other than the U.S. dollar. Settlement of such
securities will be in currencies other than U.S. dollars. When the Fund acquires
currencies other than the U.S. dollar, as a result of changes in foreign law or
financial developments, the Fund may be unable to convert such other currency
into U.S. dollars or other freely tradeable currencies.
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
13
<PAGE> 16
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, certain countries in which
the Fund can invest experienced difficulties in the past decade, including high
rates of inflation, interest, underemployment, low or negative rates of growth,
civil unrest and unstable currencies. The Fund cannot predict the potential
impact of such events on the economies of the countries in which it may invest.
Past problems have affected the ability of certain countries to service their
sovereign debt.
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 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.
Brady Bonds. The Fund may invest in Brady Bonds. Brady Bonds are debt
obligations which are created through the exchange of existing commercial bank
loans to sovereign entities for new obligations in connection with debt
restructuring under a plan introduced in 1989 by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented to date in Mexico, Venezuela, Argentina, Uruguay, Costa
Rica, Nigeria, the Philippines, Brazil, Peru, Ecuador, Panama, Poland and
Bulgaria. To date, Brady Bonds aggregating approximately $150 billion have been
issued, based on current estimates, with the largest proportion of Brady Bonds
having been issued by Mexico, Argentina and Venezuela. The Fund anticipates that
it will invest in bank loans (through participations or assignments) that may be
restructured as Brady Bond obligations.
Brady Bonds have been issued relatively recently and, accordingly, do not
have a long payment history. They may be collateralized and issued in various
currencies (although most are U.S. dollar-denominated) and they are actively
traded in the over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal by U.S. Treasury zero coupon bonds which
14
<PAGE> 17
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized on a one-year or longer rolling-forward basis
by cash or securities in an amount that, in the case of fixed rate bonds, is
equal to at least one year of interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest payments
but generally are not collateralized. For example, some Mexican and Venezuelan
Brady Bonds include attached value recovery options which increase interest
payments if oil revenues rise. Brady Bonds are often viewed as having three or
four valuation components: (i) the collateralized repayment of principal at
final maturity; (ii) the collateralized interest payments; (iii) the
uncollateralized interest payments; and (iv) any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constitute the "residual
risk"). In light of the residual risk of Brady Bonds and, among other factors,
the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds, investments in Brady Bonds
are considered speculative.
Most Mexican Brady Bonds issued to date have principal repayments at final
maturity fully collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and interest coupon payments
collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. A significant portion of the Brady Bonds issued to
date by Costa Rica, Nigeria, the Philippines, Brazil, Peru, Ecuador, Panama,
Poland, Bulgaria, Venezuela and Argentina have principal repayments at final
maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for Argentina)
rolling-forward basis by securities held by the Federal Reserve Bank of New York
as collateral agent.
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
15
<PAGE> 18
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 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.
The table below shows the market value, by S&P or Moody's rating category,
of all bonds held by the Fund at December 31, 1996:
<TABLE>
<CAPTION>
PERCENT OF
RATING* NET ASSETS
------------------------------------------------- ------------
<S> <C>
AAA.............................................. 16.01
BB+.............................................. 6.86
BB............................................... 32.38
BB-.............................................. 3.99
Ba2.............................................. 22.72
B3............................................... 1.30
Not Rated**...................................... 33.53
------
116.79
======
</TABLE>
- ---------------
* For a description of these ratings, see Appendix B to this Prospectus.
** Bonds that are not rated by S&P or Moody's. Such bonds may be rated by
nationally recognized statistical rating organizations other than S&P or
Moody's or may not be rated by any such organization. With respect to the
percentage of the Fund's assets invested in unrated securities, the Fund's
Investment Adviser believes that the following percentages of assets are of
comparable quality to obligations with the specified S&P rating: 5.56% -- BB;
5.22% -- BB-; 10.77% -- B+; and 11.98% -- B. This determination is based on
the Investment Adviser's own internal evaluation and does not necessarily
reflect how such securities would be rated by S&P if it were to rate the
securities.
16
<PAGE> 19
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 up to 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. The Fund's investments will
be limited, however, in order to qualify for the special tax treatment afforded
regulated investment companies under the Internal Revenue Code of 1986, as
amended (the "Code") 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 single 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.
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 the Government National Mortgage Association ("GNMA") or issued
by the Federal National Mortgage
17
<PAGE> 20
Association ("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 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
18
<PAGE> 21
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 certain recent years 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 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
19
<PAGE> 22
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 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. 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.
OTHER INVESTMENT PRACTICES
Leverage and Borrowing. The Fund is authorized to borrow money from banks
(as defined in the Investment Company Act) in amounts 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
20
<PAGE> 23
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 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.
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 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 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
21
<PAGE> 24
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. When
the Fund engages in transactions denominated in foreign currencies, it will be
subject to the risks of adverse changes in the exchange rates between such
foreign currencies and the U.S. dollar, the currency used to value the Fund's
assets. Reference is made to Appendix A 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 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 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 Conduct Rules of the NASD, 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.
22
<PAGE> 25
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
which could result in a portfolio turnover rate which is higher than that of
other investment companies; however, it is extremely difficult to predict
portfolio turnover rates with any degree of accuracy. For the fiscal years ended
December 31, 1996 and 1995, the Fund's portfolio turnover rates were 420.35% and
127.71%, respectively. The increased portfolio turnover rate for the fiscal year
ended December 31, 1996 resulted from increased sales of portfolio securities to
take advantage of profit-taking opportunities. 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. A high portfolio turnover rate involves certain tax
consequences and correspondingly greater transaction costs in the form of dealer
spreads and brokerage commissions, which are borne directly by the Fund. The
Fund will, however, monitor its trading so as to comply with the federal income
tax requirement that it derive less than 30% of its gross income from the sale
or other disposition of securities held for less than three months.
Repurchase Agreements; 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 financial institutions which
(i) have, in the opinion of the Investment Adviser, substantial capital relative
to the Fund's exposure, or (ii) have provided the Fund with a third-party
guaranty or other credit enhancement. Under such agreements, the seller agrees,
upon entering into the contract with the Fund, to repurchase a security
(typically a security issued or guaranteed by the U.S. Government) 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. A purchase and sale contract is similar to a
repurchase agreement, but purchase and sale contracts, unlike repurchase
agreements, allocate interest on the underlying security to the purchaser during
the term of the agreement. In all instances, the Fund takes possession of the
underlying securities when investing in repurchase agreements or purchase and
sale contracts. Nevertheless, if the seller were to default on its obligation to
repurchase a security under a repurchase agreement or purchase and sale contract
and the market value of the underlying security at such time was less than the
Fund had paid to the seller, the Fund would realize a loss. The Fund may not
invest more than 15% of its total assets in repurchase agreements or purchase
and sale contracts maturing in more than seven days, together with all other
illiquid securities.
23
<PAGE> 26
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 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.
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.
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
more than 25% of its total assets (taken at market value at the time of each
investment) in the 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. In addition, the Fund has adopted non-fundamental restrictions which
may be changed by the Board of Directors without shareholder approval.
As a non-fundamental policy, the Fund may not borrow money or pledge its
assets, except that the Fund (a) may borrow from a bank in amounts not exceeding
33 1/3% (taken at market value) of its total assets and
24
<PAGE> 27
pledge its assets to secure such borrowings, (b) may borrow up to an additional
5% of its total assets for temporary purposes and (c) may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities. The purchase of securities while borrowings are outstanding will
have the effect of leveraging the Fund. Such leveraging or borrowing increases
the Fund's exposure to capital risk, and borrowed funds are subject to interest
costs which will reduce net income.
As a non-fundamental policy, the Fund will not invest in securities which
cannot be readily resold because of legal or contractual restrictions or which
cannot otherwise be marketed, redeemed or put to the issuer or a third party, if
at the time of acquisition more than 15% of its total assets would be invested
in such securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund has
otherwise determined to be liquid pursuant to applicable law. Notwithstanding
the foregoing, the Fund may purchase, without regard to this 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. 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.
As described above, the Fund has registered as a "non-diversified"
investment company under the Investment Company Act, but its investments will be
limited so as to qualify as a regulated investment company under the Code.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL* -- President of the Investment Adviser and its affiliate,
FAM; President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML&Co.; and Director of the Distributor.
DONALD CECIL -- Special Limited Partner of Cumberland Partners (an
investment partnership).
25
<PAGE> 28
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.
RICHARD R. WEST -- Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
EDWARD D. ZINBARG -- Former Executive Vice President of The Prudential
Insurance Company of America.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
ADVISORY AND MANAGEMENT ARRANGEMENTS
MLAM acts as the investment adviser of the Fund and provides the Fund with
management and investment advisory services. MLAM is a limited partnership of
which ML&Co. is the sole limited partner and Princeton Services is the sole
general partner. ML&Co. is a financial services holding company and the parent
of Merrill Lynch. ML&Co. and Princeton Services are "controlling persons" of the
Investment Adviser as defined under the Investment Company Act because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management or policies. The Investment Adviser or its
affiliate, FAM, acts as the investment adviser to more than 130 registered
investment companies and offers portfolio management and portfolio analysis
services to individuals and institutions. As of March 31, 1997, the Investment
Adviser and FAM had a total of approximately $247.2 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.
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 year ended
December 31, 1996, the Fund paid the Investment Adviser a fee at the effective
rate of 0.63% of average daily net assets. For the fiscal year ended December
31, 1996, the fee paid by the Fund to the Investment Adviser was $1,139,364
(based upon average net assets of approximately $181.4 million).
The Investment Adviser has also entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), a wholly-owned, indirect
26
<PAGE> 29
subsidiary of ML&Co. and an affiliate of the Investment Adviser, pursuant to
which the Investment Adviser pays MLAM U.K. a fee computed at a rate to be
determined from time to time between the Investment Adviser and MLAM U.K. for
providing investment advisory services to the Investment Adviser with respect to
the Fund. MLAM U.K. has offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA,
England.
The Fund also pays certain other expenses incurred in its operations,
including, among other things, legal and audit fees, unaffiliated Directors'
fees and expenses, registration fees, custodian and transfer agency fees,
accounting and pricing costs, and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information.
Accounting services are provided to the Fund by the 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 year ended December 31, 1996,
the Fund reimbursed the Investment Adviser $57,697 for accounting services. For
the fiscal year ended December 31, 1996, the ratio of total expenses to average
net assets for Class A, Class B, Class C and Class D shares was 1.32%, 2.10%,
2.17% and 1.58%, respectively.
Paolo H. Valle, Vice President of the Fund, is the Fund's Portfolio
Manager. Mr. Valle has been a Vice President and Senior Portfolio Manager of the
Investment Adviser since 1992; prior thereto, he was Vice President and Manager,
Emerging Markets Trading, PNC Bank. Mr. Valle has been primarily responsible for
the day-to-day management of the Fund's investment portfolio since it commenced
operations.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a wholly-owned subsidiary of ML&Co., acts as
the Fund's transfer agent pursuant to a Transfer Agency, Dividend Disbursing
Agency and Shareholder Servicing Agency Agreement (the "Transfer Agency
Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening
and maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives an annual fee of up to $11.00 per Class A
or Class D account and up to $14.00 per Class B or Class C account and is
entitled
27
<PAGE> 30
to reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. The term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing a beneficial
interest of a person in the relevant share class or a recordkeeping system,
provided the recordkeeping system is maintained by a subsidiary of ML&Co. For
the fiscal year ended December 31, 1996, the Fund paid the Transfer Agent
$332,290 pursuant to the Transfer Agency Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Investment Adviser and Merrill
Lynch, acts as the distributor of the 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 $100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
Pricing(SM) System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (the "NYSE") (generally, 4:00 p.m., New York time), which
includes orders received after the close of business on the previous day, the
applicable offering price will be based on the net asset value determined as of
15 minutes after the close of business on the NYSE on that day, provided the
Distributor in turn receives the order from the securities dealer prior to 30
minutes after the close of business on the NYSE on that day. If the purchase
orders are not received by the Distributor prior to 30 minutes after the close
of business on the NYSE, 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 of
any class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee (presently
$4.85, but as of May 1, 1997, $5.35) to confirm a sale of shares to such
customers. Purchases directly through the Transfer Agent are not subject to the
processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees. A discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(SM) System is set forth
under "Merrill Lynch Select Pricing(SM) System" on page 4.
28
<PAGE> 31
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution fees and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ only to
the extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). See "Distribution Plans"
below. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
29
<PAGE> 32
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -----------------------------------------------------------------------------------------------------
A Maximum 4.00% initial No No No
sales charge(2)(3)
- -----------------------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.50% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(4) ten years(5)
- -----------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.55% No
- -----------------------------------------------------------------------------------------------------
D Maximum 4.00% initial 0.25% No No
sales charge(3)
- -----------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an
eight-year conversion period. If Class B shares of the Fund are exchanged
for Class B shares of another MLAM-advised mutual fund, the conversion
period applicable to the Class B shares acquired in the exchange will apply,
and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
30
<PAGE> 33
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
DISCOUNT TO
SALES LOAD AS SELECTED DEALERS
SALES LOAD AS PERCENTAGE* AS PERCENTAGE OF
PERCENTAGE OF OF THE NET THE OFFERING
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED PRICE
- --------------------------------------------------- --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000.................................. 4.00% 4.17% 3.75%
$25,000 but less than $50,000...................... 3.75 3.90 3.50
$50,000 but less than $100,000..................... 3.25 3.36 3.00
$100,000 but less than $250,000.................... 2.50 2.56 2.25
$250,000 but less than $1,000,000.................. 1.50 1.52 1.25
$1,000,000 and over**.............................. 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994 and on Class A purchases
in connection with certain fee-based programs. If the sales charge is waived
in connection with a purchase of $1,000,000 or more, such purchases may be
subject to a 1.0% CDSC if the shares are redeemed within one year after
purchase. Such CDSC may be waived in connection with certain fee-based
programs. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. A sales
charge of 0.75% will be charged on purchases of $1,000,000 or more of Class A
or Class D shares by certain employer-sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. The
proceeds from the account maintenance fees are used to compensate Merrill Lynch
for providing continuing account maintenance activities.
As noted above, as a result of the implementation of the Merrill Lynch
Select Pricing(SM) System, Class A shares of the Fund outstanding prior to
October 21, 1994, were redesignated Class D shares. The Class A shares offered
by this Prospectus differ from the Class A shares offered prior to October 21,
1994, in many respects, including sales charges, exchange privilege and the
classes of persons to whom such shares are offered. For the fiscal year ended
December 31, 1996, the Fund sold 3,188,362 Class A shares for aggregate net
proceeds to the Fund of $33,640,007. The gross sales charges for the sale of
Class A shares of the Fund for the year were $1,372, of which $135 and $1,237
were received by the Distributor and Merrill Lynch, respectively. During such
year, the Distributor received no CDSCs with respect to redemptions within one
year after purchase of Class A shares purchased subject to a front-end sales
charge waiver.
For the fiscal year ended December 31, 1996, the Fund sold 1,242,352 Class
D shares for aggregate net proceeds to the Fund of $12,804,879. The gross sales
charges for the sale of Class D shares for the year were $45,889, of which
$3,912 and $41,977 were received by the Distributor and Merrill Lynch,
respectively. During such year, the Distributor received no CDSCs with respect
to redemptions within one year after purchase of Class D shares purchased
subject to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional Class A shares
of the Fund in
31
<PAGE> 34
that account. Certain employer-sponsored retirement or savings plans, including
eligible 401(k) plans, may purchase Class A shares of the Fund at net asset
value provided such plans meet the required minimum number of eligible employees
or required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment programs including
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and purchases made in connection with
certain fee-based programs. In addition, Class A shares are also offered at net
asset value to ML&Co. and its subsidiaries and their directors and employees and
to members of the Boards of MLAM-advised investment companies, including the
Fund. Certain persons who acquired shares of certain MLAM-advised closed-end
funds in their initial offerings who wish to reinvest the net proceeds from a
sale of their closed-end fund shares of common stock in shares of the Fund also
may purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met. In addition, Class A shares of the
Fund and certain other MLAM-advised mutual funds are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer
conducted by these closed-end funds in shares of the Fund and certain other
MLAM-advised funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Class A shares are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and,
subject to certain conditions, Class A and Class D shares are offered at net
asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest in
shares of the Fund the net proceeds from a sale of certain of their shares of
common stock pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
32
<PAGE> 35
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC
which declines each year, while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately ten years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B
and Class C shares are subject to an account maintenance fee of 0.25% of net
assets and Class B and Class C shares are subject to a distribution fee of 0.50%
and 0.55%, respectively, of net assets, as discussed below under "Distribution
Plans." The proceeds from the account maintenance fees are used to compensate
Merrill Lynch for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans."
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares from its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. Approximately ten years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately eight years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder
Services -- Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares that
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in
33
<PAGE> 36
net asset value above the initial purchase price. In addition, no CDSC will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
- ----------------------------------------------------------------------------- ------------------
<S> <C>
0-1.......................................................................... 4.00%
1-2.......................................................................... 3.00%
2-3.......................................................................... 2.00%
3-4.......................................................................... 1.00%
4 and thereafter............................................................. 0.00%
</TABLE>
Class B shares purchased prior to October 21, 1994, and redeemed within
three years of purchase are subject to a CDSC at the rates set forth below:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
- ----------------------------------------------------------------------------- ------------------
<S> <C>
0-1.......................................................................... 3.00%
1-2.......................................................................... 2.00%
2-3.......................................................................... 1.00%
3 and thereafter............................................................. 0.00%
</TABLE>
For the fiscal year ended December 31, 1996, the Distributor received CDSCs of
$405,525 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer 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 purchases 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 or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase for shares purchased on or
after October 21, 1994).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death
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or disability (as defined in the Code) of a shareholder. The Class B CDSC also
is waived on redemptions of shares by certain eligible 401(a) and eligible
401(k) plans. The CDSC also is waived for any Class B shares that are purchased
by eligible 401(k) or eligible 401(a) plans that are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at
the time of redemption. Effective on or about May 12, 1997, the Class B CDSC
also will be waived for any Class B shares purchased within eligible Employee
Access(SM) Accounts. The Class B CDSC also is waived for any Class B shares
which are purchased by a Merrill Lynch rollover IRA that was funded by a
rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
Group and held in such account at the time of redemption. Additional information
concerning the waiver of the Class B CDSC is set forth in the Statement of
Additional Information. The terms of the CDSC may be modified in connection with
certain fee-based programs. See "Shareholder Services -- Fee-Based Programs."
Contingent Deferred Sales Charges -- Class C Shares. Class C shares that
are redeemed within one year of purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs." For the fiscal year ended December 31, 1996,
the Distributor received CDSCs of $4,459 with respect to redemptions of Class C
shares, all of which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another will be assumed to be made in the same
order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25 % of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
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<PAGE> 38
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value.
The Conversion Period also may be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rates of 0.50%,
with respect to Class B shares, and 0.55% with respect to Class C shares, of the
average daily net assets of the Fund attributable to the shares of the relevant
class in order to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing shareholder and distribution services, and bearing
certain distribution-related expenses of the Fund, including payments to
financial consultants for selling Class B and Class C shares of the Fund. The
Distribution Plans relating to Class B and Class C shares are designed to permit
an investor to purchase Class B and Class C shares through dealers
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<PAGE> 39
without the assessment of an initial sales charge and at the same time permit
the dealer to compensate its financial consultants in connection with the sale
of the Class B and Class C shares. In this regard, the purpose and function of
the ongoing distribution fees and the CDSC are the same as those of the initial
sales charge with respect to the Class A and Class D shares of the Fund in that
the deferred sales charges provide for the financing of the distribution of the
Fund's Class B and Class C shares.
For the fiscal year ended December 31, 1996, the Fund paid the Distributor
$1,048,581 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $139.8
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended December 31, 1996, the Fund paid the
Distributor $59,213 pursuant to the Class C Distribution Plan (based on average
net assets subject to such Class C Distribution Plan of approximately $7.4
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended December 31, 1996, the Fund paid the
Distributor $41,769 pursuant to the Class D Distribution Plan (based on average
net assets subject to such Class D Distribution Plan of approximately $16.7
million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a fully allocated accrual basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
account maintenance fees, distribution fees, CDSCs and certain other related
revenues, and expenses consist of financial consultant compensation, branch
office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of account maintenance fees, distribution fees and CDSCs and
expenses consist of financial consultant compensation.
As of December 31, 1996, the fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch with respect to Class B shares for the period
since August 27, 1993 (commencement of operations) exceeded fully allocated
accrual revenues by approximately $1,431,000 (0.89% of Class B net assets at
that date). As of December 31, 1996, direct cash revenues for the period since
the commencement of operations of Class B shares exceeded direct cash expenses
by $1,612,180 (1.01% of Class B net assets at that date). As of December 31,
1996, the fully allocated accrual expenses incurred by the Distributor and
Merrill Lynch with respect to Class C shares for the period since October 21,
1994 (commencement of operations) exceeded fully allocated accrual revenues by
approximately $16,000 (0.14% of Class C net assets at that date). As of December
31, 1996, direct cash revenues for the period since the commencement of
operations of Class C shares exceeded direct cash expenses by $42,286 (0.37% of
Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In
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<PAGE> 40
their review of the Distribution Plans, the Directors will be asked to take into
consideration expenses incurred in connection with the account maintenance
and/or distribution of each class of shares separately. The initial sales
charges, the account maintenance fee, the distribution fee and/or the CDSCs
received with respect to one class will not be used to subsidize the sale of
shares of another class. Payments of the distribution fee on Class B shares will
terminate upon conversion of those Class B shares into Class D shares as set
forth under "Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Conversion of Class B Shares to Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares but not the account maintenance
fee. The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible
gross sales of Class B shares and Class C shares, computed separately (defined
to exclude shares issued pursuant to dividend reinvestments and exchanges) plus
(2) interest on the unpaid balance for the respective class, computed
separately, at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fee
and the CDSC). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in excess of
0.50% of eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in connection with the
Class B shares is 6.75% of eligible gross sales. The Distributor retains the
right to stop waiving the interest charges at any time. To the extent payments
would exceed the voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares, and any CDSCs will be paid
to the Fund rather than to the Distributor; however, the Fund will continue to
make payments of the account maintenance 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.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all 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 CDSC which may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to Merrill
Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in
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<PAGE> 41
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 redemption request 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 "Exchange Act"), the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Notarized signatures are not sufficient. In certain instances, the
Transfer Agent may require additional documents, such as, but not limited to,
trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, 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 NYSE
(generally, 4:00 p.m., New York time) on the day received and that such request
is received by the Fund from such dealer not later than 30 minutes after the
close of business on the NYSE, on the same day. Dealers have the responsibility
of submitting such repurchase requests to the Fund not later than 30 minutes
after the close of business on the NYSE in order to obtain that day's closing
price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms 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, but as of May 1, 1997, $5.35) to
confirm a repurchase of shares to such customers. Repurchases made 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. However, a shareholder whose order for repurchase is rejected by the
Fund may redeem shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
certificates, if any, and stock power or letter requesting redemption, in each
instance with signatures guaranteed as noted above.
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REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to each
of such services, copies of the various plans described below and instructions
as to how to participate in the various services or plans, or to change options
with respect thereto, can be obtained from the Fund by calling the telephone
number on the cover page hereof or from the Distributor or Merrill Lynch.
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, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. These statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gain distributions. A shareholder may
make additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent. Shareholders also may maintain their accounts
through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch
brokerage account, an Investment Account in the transferring shareholder's name
will be opened automatically, without charge, at the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent.
Shareholders considering transferring a tax-deferred retirement account such as
an 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
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applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his or her account in which the exchange is made at the time of the exchange or
is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the shareholder
holds Class A shares of the second fund in the account in which the exchange is
made or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period for the newly acquired shares of the
other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of the CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the
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<PAGE> 44
Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating
to the Class B shares of the MLAM-advised mutual fund from which the exchange
has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services -- Exchange Privilege" in the
Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS 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 business on the NYSE 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. Cash payments
can also be directly deposited to the shareholder's bank account. No CDSC will
be imposed on redemptions of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to his or her bank account on either
a monthly or quarterly basis. A Class A or Class D shareholder whose shares are
held within a CMA(R), CBA(R) or Retirement Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the CMA(R) or CBA(R) Systematic Redemption Program, subject to certain
conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by pre-arranged charges of $50 or more
to his or her regular bank account. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA(R) account or in certain related accounts in amounts of $100 or
more through the CMA(R) or CBA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions, (each referred to in this paragraph as a "Program")
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund.
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<PAGE> 45
In addition, upon termination of participation in a Program, shares that have
been held for less than specified periods within such Program may be subject to
a fee based upon the current value of such shares. These programs also generally
prohibit such shares from being transferred to another account at Merrill Lynch,
to another broker-dealer or to the Transfer Agent. Except in limited
circumstances (which may also involve an exchange as described above), such
shares must be redeemed and another class of shares purchased (which may involve
the imposition of initial or deferred sales charges and distribution and account
maintenance fees) in order for the investment not to be subject to Program fees.
Additional information regarding a specific Program (including charges and
limitations on transferability applicable to shares that may be held in such
Program) is available in such Program's client agreement and from Merrill Lynch
Investor Services at (800) MER-FUND or (800) 637-3863.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with a
formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge in the case of Class A and Class D shares and
any CDSC that would be applicable to a complete redemption of the investment at
the end of the specified period such as in the case of Class B and Class C
shares. Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance and
distribution fees and any incremental transfer agency costs relating to each
class of shares will be borne exclusively by that class. The Fund will include
performance data for all classes of shares of the Fund in any advertisement or
information including performance data of the Fund.
The Fund 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 waiver of
the CDSC in the case of Class B and Class C shares (such as investors in certain
retirement plans) or to reduced sales charges in the case of Class A and Class D
shares, performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
43
<PAGE> 46
CDSC, a lower amount of expenses may be deducted. See "Purchase of Shares." The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate the effect of such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Index, the Dow Jones Industrial Average, or 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 indicative 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 daily prior
to the determination of the net asset value which is calculated 15 minutes after
the close of business on the NYSE (generally, 4:00 p.m., New York time) 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 fees and/or
distribution fees, as applicable, 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 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 each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class. See "Additional Information -- Determination of
Net Asset Value."
Gains or losses attributable to certain foreign currency transactions 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 income dividend distributions,
and (b) all or a portion of distributions made before the losses were realized
but in the same taxable year would be recharacterized as a return of capital to
shareholders, rather than as ordinary income dividends, thereby
44
<PAGE> 47
reducing each shareholder's tax basis in the Fund shares for Federal income tax
purposes and resulting in a capital gain for any shareholder who received a
distribution greater than such shareholder's basis in Fund shares (assuming the
shares were held as a capital asset). See "Additional Information -- Taxes."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute substantially all
of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, 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 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
45
<PAGE> 48
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 ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that 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
income dividend distributions, and all or a portion of 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 and resulting in a capital gain for any shareholder
who received a distribution greater than such shareholder's basis in Fund shares
(assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The 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
46
<PAGE> 49
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
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
The net asset value of the shares of all classes of the Fund is determined
once daily as of 15 minutes after the close of business on the NYSE (generally,
4:00 p.m., New York time) on each day during which the NYSE is open for trading.
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 market value of the securities held by the
Fund plus any cash or other assets (including interest and dividends accrued but
not yet received) minus all liabilities (including accrued expenses) by the
total number of shares outstanding at such time. Expenses, including the
advisory fees payable to the Investment Adviser and any account maintenance
and/or distribution fees payable to the Distributor, are accrued daily. The Fund
employs Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of the
Investment Adviser, to provide certain securities prices for the Fund. During
the fiscal year ended December 31, 1996, the Fund paid MLSPS $10.00 for such
service. The per share net asset value of Class A shares will generally be
higher than the per share net asset value of shares of the other classes,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares and the daily expense accruals of the account maintenance fees applicable
with respect to Class D shares; moreover, the per share net asset value of Class
D shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares and the per share net asset value of Class B shares generally will be
higher than the per share net asset value of Class C shares, reflecting the
daily expense accruals of the higher distribution fees applicable with respect
to Class C shares. It is expected, however, that the per share net asset value
of the classes will tend to converge (although not necessarily meet) immediately
after the payment of dividends or distributions which will differ by
approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Securities
that are traded in both the OTC market and on a stock exchange will be valued
according to the broadest and most representative market. When the Fund
47
<PAGE> 50
writes an option, the amount of the premium received is recorded on the books of
the Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Other investments, including futures contracts and related
options, are stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on June 10, 1993. As of the
date of this Prospectus, it has an authorized capital of 400,000,000 shares of
common stock, par value $0.10 per share, divided into four classes, designated
Class A, Class B, Class C and Class D Common Stock, each of which consists of
100,000,000 shares. Shares of Class A, Class B, Class C and Class D Common Stock
represent an interest in the same assets of the Fund and are identical in all
respects except that Class B, Class C and Class D shares bear certain expenses
related to the account maintenance fee associated with such shares, and Class B
and Class C shares bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to matters relating
to such account maintenance and/or distribution expenditures. See "Purchase of
Shares." The Directors of the Fund may classify and reclassify the shares of the
Fund into additional classes of common stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matters submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent accountants. Also, the by-laws of the Fund require that a special
meeting of shareholders be held upon the written request of shareholders of the
Fund as required by Maryland corporate law. Voting rights for Directors are not
cumulative. Shares issued are fully paid and non-assessable and have no
preemptive rights. Shares have the conversion rights described in this
Prospectus. Each share of common stock is entitled to participate equally in
dividends and distributions declared by the Fund and in the net assets of the
Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities, except that, as noted above, the Class B, Class C and Class D
shares bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
48
<PAGE> 51
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this, please call your Merrill Lynch
Financial Consultant or Merrill Lynch Financial Data Services, Inc. at
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.
49
<PAGE> 52
(THIS PAGE INTENTIONALLY LEFT BLANK)
50
<PAGE> 53
MERRILL LYNCH AMERICAS INCOME FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C shares [ ] Class D shares
of Merrill Lynch Americas Income Fund, Inc. and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. ................................ 4. ................................
2. ................................ 5. ................................
3. ................................ 6. ................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.............................................
....................................................
(Zip Code)
<TABLE>
<CAPTION>
Occupation .......................................... Name and Address of Employer.................................................
<S> <C>
Date ................................................ .............................................................................
.............................................................................
..................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] Check
or [ ] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Americas Income Fund, Inc. Authorization Form.
SPECIFY TYPE OF ACCOUNT (check one): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ..................................... Account Number ...............
Bank Address....................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor..........................................................
Signature of Depositor ................................... Date ................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
51
<PAGE> 54
MERRILL LYNCH AMERICAS INCOME FUND, INC. --
AUTHORIZATION FORM (PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
[ ]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Additional Information -- Taxes") either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am no
longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
<TABLE>
<S> <C>
......................,
19 . . . .
Dear Sir/Madam: Date of initial purchase
</TABLE>
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch 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:
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Americas Income
Fund, Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Americas Income Fund, Inc. held as security.
<TABLE>
<S> <C>
By............................................................... ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................. Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
[ ]
This form when completed should be mailed to:
Merrill Lynch Americas Income Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C>
- ----------- --------------
..............................
- ----------- --------------
Branch Code F/C No. F/C Last Name
- ----------- --------------
- ----------- --------------
Dealer's Customer Account No.
</TABLE>
52
<PAGE> 55
MERRILL LYNCH AMERICAS INCOME FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
(PLEASE PRINT) ------------------------------------
Name of Owner.......................................................................
First Name Initial Last Name ------------------------------------
Social Security Number
or Taxpayer Identification Number
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
....................................................................................
(Zip Code)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A or [ ] Class D shares in Merrill Lynch Americas Income
Fund, Inc. at cost or current offering price. Withdrawals to be made either
(check one) [ ] Monthly on the 24th day of each month, or [ ] Quarterly on the
24th day of March, June, September and December. If the 24th falls on a weekend
or holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on ________________or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [ ]
$________ or [ ] ____% of the current value of [ ] Class A or [ ] Class D shares
in the account.
SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of..........................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print)......................................................
Address.........................................................................
...........................................................................
Signature of Owner ........................................... Date ............
Signature of Co-Owner (if any)..................................................
(b) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number .......................... Account Number ..........................
Bank Address....................................................................
....................................................................
Signature of Depositor ....................................... Date ............
Signature of Depositor .........................................................
(If joint account, both must sign)
NOTE: If direct deposit is elected, your blank, unsigned check marked "VOID" or
a deposit slip from your savings account should accompany this application.
53
<PAGE> 56
MERRILL LYNCH AMERICAS INCOME FUND, INC. --
AUTHORIZATION FORM (PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C shares [ ] Class D shares
of Merrill Lynch Americas Income Fund, Inc. subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Americas Income Fund, Inc. as indicated below:
Amount of each ACH debit $...................................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month
beginning ________________ or as soon thereafter as possible.
(month)
I agree that you are preparing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip Code.......................................
As a convenience to me, I hereby request and authorize you to pay and charge
to my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: If Automatic Investment Plan is elected, your blank, unsigned check marked
"VOID" should accompany this application.
54
<PAGE> 57
APPENDIX A
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 party 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
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engage in certain interest rate transactions. Gains from transactions in
interest rate swaps distributed to shareholders will be taxable as ordinary
income or, in certain circumstances, as long-term capital gains to shareholders.
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.
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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.
To trade futures contracts, the Fund is not required to deposit funds equal
to the value of the futures contract. The Fund need only make a deposit, called
an "initial margin deposit," equal to a small percentage (typically between 2%
and 15%) of the value of the futures contract. As a result, a relatively small
adverse move in the price of a futures contract may result in immediate and
substantial losses to the Fund. For
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example, if at the time of purchase 10% of the price of a futures contract is
deposited as margin, a 10% decrease in the price of that contract would, if the
contract were then closed out, result in a total loss of the initial margin
deposit before any deduction for brokerage commissions and other transaction
costs. A decrease of more than 10% would result in a loss of more than the total
initial margin deposit.
To some extent, options on futures contracts are even more highly leveraged
than futures contracts. For example, if an in-the-money call (put) option is
sold for its intrinsic value plus a premium representing the time value of that
option, a 10% rise (drop) in the value of the underlying futures contract does
not create a loss equal to just 10% of the value of the option. Such a rise
(drop) creates a loss approximately equal to 10% of the value of the underlying
interest, less the time value, which loss may be many times greater than the
price for which the Fund sold the option. In addition, investors who sell
options are required only to deposit a percentage of the value of the option at
the time of sale as margin, thereby leveraging the investment even further.
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 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 right 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
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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.
In connection with its trading in forward foreign currency contracts, the
Fund will contract with a foreign or domestic bank, or foreign or domestic
securities dealer, to make or take future delivery of a specified amount of a
particular currency. There are no limitations on daily price moves in such
forward contracts, and banks and dealers are not required to continue to make
markets in such contracts. There have been periods during which certain banks
and dealers have refused to quote prices for such forward contracts or have
quoted prices with an unusually wide spread between the price at which the bank
or dealer is prepared to buy and that at which it is prepared to sell.
Governmental imposition of credit controls might limit any such forward contract
trading. With respect to its trading of forward contracts, if any, the Fund will
be subject to the risk of bank or dealer failure and the inability of, or
refusal by, a bank or dealer to perform with respect to such contracts. Any such
default would deprive the Fund of any profit potential or force the Fund to
cover its commitments for resale, if any, at the then-market price and could
result in a loss to the Fund.
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 its
broker, equals the market value of the futures contract, thereby ensuring that
the use of such futures contract or option strategy is unleveraged.
An order has been obtained from the 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
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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.
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APPENDIX B
RATING OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term 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 some time in
the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest 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.
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
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end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933 or issued in
conformity with any other applicable law or regulation. 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
ability for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or 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.
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DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("STANDARD & POOR'S")
CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
Investment Grade
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher rated categories.
Speculative Grade
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 exposures
to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest 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.
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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.
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 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
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.
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<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 Not rated.
</TABLE>
B-4
<PAGE> 67
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 and 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 categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+)
sign designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated B are regarded as having only 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.
A commercial paper rating is not a recommendation to purchase, sell or hold
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.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
B-5
<PAGE> 68
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 69
INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE> 70
- ------
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................... 2
Merrill Lynch Select Pricing(SM) System...... 4
Financial Highlights......................... 8
Investment Objective and Policies............ 10
Special Considerations and Risk Factors.... 13
Investments in Mortgage-Backed and Asset-
Backed Securities........................ 17
Other Investment Practices................. 20
Investment Restrictions.................... 24
Management of the Fund....................... 25
Board of Directors......................... 25
Advisory and Management Arrangements....... 26
Code of Ethics............................. 27
Transfer Agency Services................... 27
Purchase of Shares........................... 28
Initial Sales Charge Alternatives -- Class
A and Class D Shares..................... 30
Deferred Sales Charge Alternatives -- Class
B and Class C Shares..................... 33
Distribution Plans......................... 36
Limitations on the Payment of Deferred
Sales Charges............................ 38
Redemption of Shares......................... 38
Redemption................................. 38
Repurchase................................. 39
Reinstatement Privilege -- Class A and
Class D Shares........................... 40
Shareholder Services......................... 40
Investment Account......................... 40
Exchange Privilege......................... 41
Automatic Reinvestment of Dividends and
Capital Gains Distributions.............. 42
Systematic Withdrawal Plans................ 42
Automatic Investment Plans................. 42
Fee-Based Programs......................... 42
Performance Data............................. 43
Additional Information....................... 44
Dividends and Distributions................ 44
Taxes...................................... 45
Determination of Net Asset Value........... 47
Organization of the Fund................... 48
Shareholder Reports........................ 48
Shareholder Inquiries...................... 49
Authorization Form........................... 51
Appendix A -- Various Portfolio Strategies... A-1
Appendix B -- Rating of Debt Securities...... B-1
Code # 16802-0497
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
AMERICAS INCOME
FUND, INC.
PROSPECTUS [MLYNCH COMPASS]
April 29, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 71
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH AMERICAS INCOME FUND, INC.
P.O. 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 that seeks 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.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated April
29, 1997 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "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.
-------------------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
-------------------------
The date of this Statement of Additional Information is April 29, 1997.
<PAGE> 72
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). The Fund
also is authorized to invest up to 20% of its total assets in debt securities
denominated in currencies of countries located outside of the Western
Hemisphere. 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. (the "Investment Adviser"
or "MLAM") 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.
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. See "Redemption of Shares." 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.
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.
2
<PAGE> 73
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 liquid 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, could be offset if
the underlying security were sold at a loss. 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 liquid securities 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 Options Exchange, the American Stock
Exchange, the Philadelphia Stock Exchange, the Pacific Stock Exchange, the New
York Stock Exchange (the "NYSE") or the Midwest Stock Exchange. An option
position may be closed out only on an exchange which provides a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing transactions in particular options, with the
result, in the case of a covered call option, that the Fund will not be able to
sell the underlying security until the option expires or it delivers the
underlying security upon exercise. Reasons for the absence of a liquid secondary
market on an exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be imposed by an
exchange on opening transactions or closing transactions or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
3
<PAGE> 74
particular classes or series of options or underlying securities; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Clearing Corporation may not at all times
be adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that class
or series of options) would cease to exist, although outstanding options on that
exchange that had been issued by the Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
The Fund may also enter into over-the-counter ("OTC") options, which are
two-party contracts with prices and terms negotiated between the buyer and
seller. The staff of 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 typically
between 2% and 15% of the value of the futures contract, 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.
The Fund has received an order from the Commission exempting it from the
provisions of Section 17(f) of the Investment Company Act of 1940, as amended
(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
4
<PAGE> 75
currency at a specified future date and price set at the time of the contract.
The Fund's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities, the sale and redemption of shares
of the Fund or the payment of dividends and distributions by the Fund. Position
hedging is the sale of forward foreign currency with respect to portfolio
security positions denominated or quoted in such foreign currency. The Fund will
not speculate in forward foreign exchange. The Fund may not position hedge with
respect to the currency of a particular country to an extent greater than the
aggregate market value (at the time of making such sale) of the securities held
in its portfolio denominated or quoted in that particular foreign currency. If
the Fund enters into a position hedging transaction, its custodian bank will
place cash or liquid securities in a separate account of the Fund in an amount
equal to the value of the Fund's total assets committed to the consummation of
such forward contract. If the value of the securities placed in the separate
account declines, additional cash or securities will be placed in the account so
that the value of the account will equal the amount of the Fund's commitment
with respect to such contracts. The Fund will enter into such transactions only
to the extent, if any, deemed appropriate by the 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 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 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
5
<PAGE> 76
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 a number of fundamental and non-fundamental restrictions and
policies relating to the investment of its assets and its activities. The
fundamental policies set forth below may not be changed without the approval of
the holders of a majority of the Fund's outstanding voting securities (which for
this purpose and under the Investment Company Act means the lesser of (i) 67% of
the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares).
Under the fundamental investment restrictions, the Fund may not:
1. 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.
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6
<PAGE> 77
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
7. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Directors without the approval of shareholders. Under
the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law.
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the Securities Act
and determined to be liquid by the Fund's Board of Directors are not
subject to the limitations set forth in this investment restriction.
d. Notwithstanding fundamental investment restriction (6) above,
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 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
7
<PAGE> 78
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. 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. 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.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the 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 Merrill Lynch or its affiliates acting
as principal and from purchasing securities in public offerings which are not
registered under the Securities Act in which such firms or any of their
affiliates participate as an underwriter or dealer.
8
<PAGE> 79
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Fund
including their ages and their principal occupations for at least the last five
years is set forth below. Unless otherwise noted, the address of each executive
officer and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (64) -- President and Director (1)(2) -- President of the
Investment Adviser (which term as used herein includes its corporate
predecessors) since 1977; President of Fund Asset Management, L.P. ("FAM")
(which term as used herein includes its corporate predecessors) since 1977;
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") since
1990; Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor")
since 1977.
DONALD CECIL (70) -- Director (2) -- 1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Partners (an 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 (70) -- 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 (65) -- Director (2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; former
Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990;
Adjunct Professor, Columbia University Graduate School of Business from 1990 to
1991; Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
RICHARD R. WEST (59) -- Director (2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, Dean from 1984 to 1993 and currently Dean
Emeritus of New York University Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado,
Inc. (real estate holding company), Smith-Corona Corporation (manufacturer of
typewriters and word processors) and Alexander's, Inc. (real estate company).
EDWARD D. ZINBARG (62) -- Director (2) -- 5 Hardwell Road, Short Hills, New
Jersey 07078-2117. Executive Vice President of The Prudential Insurance Company
of America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
TERRY K. GLENN (56) -- 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 of the Distributor
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
9
<PAGE> 80
JOSEPH T. MONAGLE, JR. (48) -- Senior Vice President (1)(2) -- Senior Vice
President of the Investment Adviser and FAM since 1990; Vice President of the
Investment Adviser from 1978 to 1990; Senior Vice President of Princeton
Services since 1993.
ALEX V. BOUZAKIS (40) -- Vice President (1)(2) -- Vice President and Senior
Portfolio Manager of the Investment Adviser and associated therewith since 1982.
DONALD C. BURKE (36) -- Vice President (1)(2) -- Vice President and
Director of Taxation of the Investment Adviser since 1990.
PAOLO H. VALLE (39) -- 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 (47) -- 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 thereof since 1984.
- ---------------
(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 certain other
investment companies for which the Investment Adviser or its affiliate, FAM,
acts as investment adviser or manager.
At March 31, 1997, the officers and Directors of the Fund as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund owned less than 1% of the outstanding shares of
common stock of ML & Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director not affiliated with the Investment Adviser
(each a "non-affiliated Director") a fee 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 and Nominating Committee (the "Committee"), which consists of all of the
non-affiliated Directors, at a rate of $500 per Committee meeting attended. The
Chairman of the Committee receives an additional fee of $250 per Committee
meeting attended. For the fiscal year ended December 31, 1996, fees and expenses
paid to non-affiliated Directors aggregated $37,600.
The following table sets forth for the fiscal year ended December 31, 1996,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1996, the aggregate
10
<PAGE> 81
compensation paid by all registered investment companies advised by the
Investment Adviser and its affiliate, FAM (the "MLAM/FAM Advised Funds") to the
non-affiliated Directors.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM FUND AND
OTHER
PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO
NAME OF DIRECTOR FROM FUND PART OF FUND EXPENSES DIRECTORS(1)
- ------------------------------------------- ------------ ---------------------- ----------------
<S> <C> <C> <C>
Donald Cecil............................... $8,500 None $268,933
Edward H. Meyer............................ $6,500 None $227,933
Charles C. Reilly.......................... $7,500 None $293,833
Richard R. West............................ $7,500 None $269,833
Edward D. Zinbarg.......................... $7,500 None $127,333
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (32 registered investment companies consisting of 32 portfolios); Mr.
Meyer (32 registered investment companies consisting of 32 portfolios); Mr.
Reilly (41 registered investment companies consisting of 54 portfolios); Mr.
West (41 registered investment companies consisting of 54 portfolios); and
Mr. Zinbarg (18 registered investment companies consisting of 18
portfolios).
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.
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 year ended December 31, 1994, the investment advisory
fees payable by the Fund to the Investment Adviser aggregated $876,465, of which
$277,033 was voluntarily waived. For the fiscal years ended December 31, 1995
and 1996, the investment advisory fees paid by the Fund to the Investment
Adviser aggregated $680,512 and $1,139,364, respectively, none of which was
waived.
As described in the Prospectus, the Investment Adviser has also entered
into a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K.") pursuant to which MLAM U.K. provides investment advisory services
to the Investment Adviser with respect to the Fund.
11
<PAGE> 82
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; 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
years ended December 31, 1994, 1995 and 1996, the amount of such reimbursement
was $100,005, $122,063 and $57,697, respectively. The Distributor will pay
certain promotional expenses of the Fund incurred in connection with the
offering of its shares. Certain expenses in connection with the distribution of
Class B, Class C and Class D shares 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 -- Distribution Plans."
The Investment Adviser is a limited partnership, the partners of which are
ML&Co. and Princeton Services. ML&Co. and Princeton Services are "controlling
persons" of the Investment Adviser as defined under the Investment Company Act
because of their ownership of its voting securities or their power to exercise a
controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein,
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.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents identical interests in
the investment portfolio of the Fund and has the same rights, except that Class
B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
12
<PAGE> 83
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan). Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select Pricing(SM)System is used by more than 50
registered investment companies advised by the Investment Adviser or its
affiliate, FAM. Funds advised by the Investment Adviser or FAM that utilize the
Merrill Lynch Select Pricing(SM) System are referred to herein as "MLAM-advised
mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Investment Advisory Agreement
described above.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
For the fiscal years ended December 31, 1994, 1995 and 1996, the Fund sold
its Class A shares through the Distributor and Merrill Lynch, as a dealer. As a
result of the implementation of the Merrill Lynch Select Pricing(SM) System,
Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares. The Class A shares currently being offered differ
from the Class A shares offered prior to October 21, 1994 in many respects,
including sales charges, exchange privilege and the classes of persons to whom
such shares are offered. The Distributor and Merrill Lynch received no sales
charges for the sale of its new Class A shares for the fiscal period October 21,
1994 (commencement of operations) to December 31, 1994. The gross sales charges
for the sale of Class A shares for the fiscal year ended December 31, 1995 were
$395, of which the Distributor received $20 and Merrill Lynch received $375. The
gross sales charges for the sale of Class A shares for the fiscal year ended
December 31, 1996, were $1,372, of which the Distributor received $135 and
Merrill Lynch received $1,237. The gross sales charges for the sale of Class D
shares (including redesignated Class A shares) for the fiscal year ended
December 31, 1994, were $18,983, of which the Distributor received $2,329 and
Merrill Lynch received $16,654. The gross sales charges for the sale of Class D
shares for the fiscal year ended December 31, 1995 were $15,631, of which the
Distributor received $1,252 and Merrill Lynch received $14,379. The gross sales
charges for the sale of Class D shares for the fiscal year ended December 31,
1996, were $45,889, of which the Distributor received $3,912 and Merrill Lynch
received $41,977. During such periods, the Distributor received no contingent
deferred sales charges ("CDSCs") with respect to redemptions within one year
after purchase of Class A or Class D shares purchased subject to a front-end
sales charge waiver.
The term "purchase" as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children under
the age of 21 years purchasing shares for his, her or their own account and to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust
13
<PAGE> 84
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Internal Revenue Code of 1986, as amended (the "Code")) although more than
one beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the 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. The
term "purchase" shall not include purchases by any group of individuals whose
sole organizational nexus is that the participants therein are credit
cardholders of a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment adviser. The term
"purchase" also includes purchases by employee benefit plans not qualified under
Section 401 of the Code, including purchases by employees or by employers on
behalf of employees, by means of a payroll deduction plan or otherwise, of
shares of the Fund. Purchases by such a company or non-qualified employee
benefit plan will qualify for the quantity discounts discussed above only if the
Fund and the Distributor are able to realize economies of scale in sales effort
and sales-related expense by means of the company, employer or plan making the
Fund's Prospectus available to individual investors or employees and forwarding
investments by such persons to the Fund and by any such employer or plan bearing
the expense of any payroll deduction plan.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or its
affiliate, FAM, who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select Pricing(SM) System commenced operations)
and wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in Eligible Class A Shares, if the conditions set forth
below are satisfied. Alternatively, closed-end fund shareholders who purchased
such shares on or after October 21, 1994, and wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class A shares (if
eligible to buy Class A shares) or Class D shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met. First, the sale of the closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D Shares. Second, the closed-end fund
shares must either have been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the Fund.
This investment option is available only with
14
<PAGE> 85
respect to eligible shares as to which no Early Withdrawal Charge or CDSC (each
as defined in the eligible fund's prospectus) is applicable. Purchase orders
from eligible fund shareholders wishing to exercise this investment option will
be accepted only on the day that the related tender offer terminates and will be
effected at the net asset value of the designated class of the Fund on such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. The reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides
plan-participant recordkeeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares but its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
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 purchased does not equal the amount stated in the Letter of
Intention (minimum of $25,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to five percent of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar amount of such Letter. If
a purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to the reduced
percentage sales charge which would be applicable to a single purchase equal to
the total dollar value of the Class A shares then being purchased under such
Letter, but there will be no retroactive reduction of the sales charges on any
previous purchase.
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<PAGE> 86
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-advised
money market fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intention from the Fund.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, ML&Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML&Co.,
includes MLAM, FAM and certain other entities directly or indirectly wholly
owned and controlled by ML&Co.) and their directors and employees, and any
trust, pension, profit-sharing or other benefit plan for such persons may
purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that such redemption had
been made within 60 days prior to the investment in the Fund, and the proceeds
from the redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated if the following conditions are satisfied: first,
the investor must purchase Class D shares of the Fund with proceeds from a
redemption of shares of the other mutual fund and such shares of such other fund
were subject to a sales charge either at the time of purchase or on a deferred
basis; and second, such purchase of Class D shares must be made within 90 days
after notice of termination.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
the other mutual fund and such shares have been outstanding for a period of no
less than six months; and second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must be
maintained in the interim in cash or a money market fund.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.
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<PAGE> 87
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objective and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any
MLAM-advised mutual fund. Minimum purchase requirements may be waived or varied
for such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides
that, so long as the Distribution Plan remains in effect, the selection and
nomination of Directors who are not "interested persons" of the Fund, as defined
in the Investment Company Act (the "Independent Directors"), shall be committed
to the discretion of the Independent Directors then in office. In approving each
17
<PAGE> 88
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is a reasonable likelihood that such Distribution Plan will
benefit the Fund and its related class of shareholders. Each Distribution Plan
can be terminated at any time, without penalty, by the vote of a majority of the
Independent Directors or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A Distribution Plan
cannot be amended to increase materially the amount to be spent by the Fund
without the approval of the related class of shareholders, and all material
amendments are required to be approved by the vote of the Directors, including a
majority of the Independent Directors who have no direct or indirect financial
interest in such Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Fund preserve copies of each
Distribution Plan and any report made pursuant to such plan for a period of not
less than six years from the date of such Distribution Plan or such report, the
first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
The following table sets forth comparative information as of December 31,
1996, with respect to Class B and Class C shares, indicating the maximum
allowable payments that can be made under the NASD
18
<PAGE> 89
maximum sales charge rule and, with respect to Class B shares, the Distributor's
voluntary maximum for the periods indicated.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF DECEMBER 31, 1996
(IN THOUSANDS)
---------------------------------------------------------------------------------------
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class B shares, for the period
August 27, 1993 (commencement of
operations) to December 31, 1996:
Under NASD Rule as Adopted........ $162,609 $10,163 $2,175 $12,338 $2,836 $ 9,502 $801
Under Distributor's Voluntary
Waiver.......................... $162,609 $10,163 $ 813 $10,976 $2,836 $ 8,140 $801
Class C shares, for the period
October 21, 1994 (commencement of
operations) to December 31, 1996:
Under NASD Rule as Adopted........ $ 7,063 $ 441 $ 30 $ 471 $ 49 $ 422 $ 63
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during periods
indicated other than shares acquired through dividend reinvestment and the
exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares -- Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the NASD maximum or, with respect to Class B shares, the
voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and 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 NYSE is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of shareholders
of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.
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<PAGE> 90
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in certain
instances, including in connection with certain post-retirement withdrawals from
an Individual Retirement Account ("IRA") or other retirement plan or on
redemptions of Class B shares following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies in the case of such
withdrawals are: (a) any partial or complete redemption in connection with a
tax-free distribution following retirement under a tax-deferred retirement plan
or attaining age 59 1/2 in the case of an IRA or other retirement plan, or part
of a series of equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) or any redemption resulting from the tax-free
return of an excess contribution to an IRA; or (b) any partial or complete
redemption following the death or disability (as defined in the Code) of a Class
B shareholder (including one who owns the Class B shares as joint tenant with
his or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability. For the fiscal years ended
December 31, 1994, 1995 and 1996, the Distributor received CDSCs of $257,524,
$265,027 and $405,525, respectively, with respect to redemptions of Class B
shares, all of which were paid to Merrill Lynch. For the period October 21, 1994
(commencement of operations) to December 31, 1994, the Distributor received no
CDSCs with respect to redemptions of Class C shares. For the fiscal years ended
December 31, 1995 and 1996, the Distributor received CDSCs of $552 and $4,459,
respectively, with respect to redemptions of Class C shares, all of which were
paid to Merrill Lynch.
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 Conduct
Rules of the NASD and policies established by the Directors of the Fund, the
Investment Adviser may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
For the fiscal year ended December 31, 1994, the Fund paid total brokerage
commissions of $8,109, none of which was paid to Merrill Lynch. For the fiscal
year ended
20
<PAGE> 91
December 31, 1995, the Fund did not pay any brokerage commissions. For the
fiscal year ended December 31, 1996, the Fund paid total brokerage commissions
of $3,200, none of which was paid to Merrill Lynch.
The Board of Directors has considered the possibility 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 Directors will reconsider this
matter from time to time.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information -- Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value. The
net asset value of the shares of the Fund is determined once daily Monday
through Friday as of 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time), on each day the NYSE is open for trading.
The NYSE is not open on New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. 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
investment advisory fees and any account maintenance and/or distribution fees,
are accrued daily. The per share net asset value of the Class B, Class C and
Class D shares generally will be lower than the per share net asset value of the
Class A shares reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares and the daily expense accruals of the account
maintenance fees applicable with respect to the Class D shares; moreover, the
per share net asset value of the Class B and Class C shares generally will be
lower than the per share net asset value of the Class D shares reflecting the
daily expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to the Class B and Class C shares of the Fund. The per
share net asset value of the Class B shares generally will be higher than the
per share net asset value of the Class C shares as a result of the higher
distribution fees applicable with respect to the Class C shares. It is expected,
however, that the per share net asset value of the four classes will tend to
converge (although not necessarily meet) immediately after the payment of
dividends or distributions, which will differ by approximately the amount of the
expense accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Securities
which are traded both in the OTC market and on a stock exchange will be valued
according to the broadest and most representative market. When the Fund writes
an option, the amount of the premium received is recorded on the books of the
Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of
21
<PAGE> 92
the option written, based upon the last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last asked price. Options purchased by the Fund are valued at their last sale
price in the case of exchange-traded options or, in the case of options traded
in the OTC market, the last bid price. 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. Other investments, including
futures contracts and related options, are stated at market value. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund.
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 business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE, 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, copies of the various plans described below and instructions as to how
to participate in the various services or plans, or how to change options with
respect thereto, can be obtained from the Fund, 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, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gain distributions. A shareholder may
make additions to his Investment Account at any time by mailing a check directly
to the Fund's transfer agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Fund's transfer agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account
22
<PAGE> 93
at the new firm or such shareholder must continue to maintain an Investment
Account at the transfer agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the transfer agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder at the transfer agent. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that he
or she be issued certificates for his or her shares and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax-deferred
retirement account such as an 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 CDSC)
so that the cash proceeds can be transferred to the account at the new firm, or
such shareholder must continue to maintain a retirement account at Merrill Lynch
for those shares.
AUTOMATIC INVESTMENT PLANS
A U.S. shareholder may make additions to an Investment Account at any time
by purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the transfer agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the 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) or CBA(R) account may
arrange to have periodic investments made in the Fund in amounts of $100 or more
($1 for retirement accounts) through the CMA(R) or CBA(R) Automated Investment
Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions 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, 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. Cash payments can also be
directly deposited to the shareholder's bank account. No CDSC will be imposed on
redemption of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions.
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.
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<PAGE> 94
SYSTEMATIC WITHDRAWAL PLANS -- CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of the Fund having a value, based upon cost or the
current offering price, of $5,000 or more, and monthly withdrawals are available
for shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his or her Class
A or Class D shares. Redemptions will be made at net asset value as determined
as of 15 minutes after the close of business on the NYSE (generally, 4:00 p.m.,
New York time) on the 24th day of each month or the 24th day of the last month
of each quarter, whichever is applicable. If the NYSE is not open for business
on such date, the Class A or Class D shares will be redeemed at the close of
business on the following business day. The check for the withdrawal payment
will be mailed, or the direct deposit 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 or Class D
shares in the Investment Account are automatically reinvested in Class A or
Class D shares of the Fund, respectively. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Fund's transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not knowingly accept
purchase orders for Class A or Class D shares of the Fund from investors who
maintain a Systematic Withdrawal Plan unless such purchase is equal to at least
one year's scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account in which the shareholder
has elected to make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed
on a monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(R) or CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are redeemed.
Monthly systematic redemptions will be made at net asset value on the first
Monday of each month; bimonthly systematic redemptions will be made at net asset
value on the first Monday of every other month; and quarterly, semiannual or
annual redemptions are made at net asset value on the first Monday of months
selected at the shareholder's option. If the first Monday of the month is a
holiday, the redemption will be processed at net asset value on the next
business day. The Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
24
<PAGE> 95
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch
Select Pricing(SM) System, Class A shareholders may exchange Class A shares of
the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his or her account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his or her account at the
time of the exchange and is not otherwise eligible to acquire Class A shares of
the second fund, the shareholder will receive Class D shares of the second fund
as a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase Class
A shares of the second fund. Class B, Class C and Class D shares are
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period for the newly acquired
shares of the other fund as more fully described below. Class A, Class B, Class
C and Class D shares are also exchangeable for shares of certain MLAM-advised
money market funds as follows: Class A shares may be exchanged for shares of
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund
(available only for exchanges within certain retirement plans), Merrill Lynch
U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B,
Class C and Class D shares may be exchanged for shares of Merrill Lynch
Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional
Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and any
shares utilized in an exchange must have been held by the shareholder for at
least 15 days. It is contemplated that the exchange privilege may be applicable
to other new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was paid.
Based on this formula, Class A and Class D shares of the Fund generally may be
exchanged into the Class A or Class D shares of the other funds or into shares
of certain money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively
25
<PAGE> 96
("new Class B or Class C shares"), of another MLAM-advised mutual fund on the
basis of relative net asset value per Class B or Class C share, without the
payment of any CDSC that might otherwise be due on redemption of the outstanding
shares. Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares acquired through use
of the exchange privilege. In addition, Class B shares of the Fund acquired
through use of the exchange privilege will be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares of the fund from which the exchange has been made. For purposes of
computing the sales charge that may be payable on a disposition of the new Class
B or Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period for the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund Class B shares for two and a half years. The 2% CDSC that generally
would apply to a redemption would not apply to the exchange. Three years later
the investor may decide to redeem the Class B shares of Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since by "tacking"
the two and a half year holding period of Fund Class B shares to the three year
holding period for the Special Value Fund Class B shares, the investor will be
deemed to have held the new Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Investment Adviser or its affiliates, but the
period of time that Class B or Class C shares are held in a money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC, or with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
which were acquired as a result of an exchange for Class B or Class C shares of
the Fund may, in turn, be exchanged back into Class B or Class C shares,
respectively, of any fund offering such shares, in which event the holding
period for Class B or Class C shares of that fund will be aggregated with
previous holding periods for purposes of reducing the CDSC. Thus, for example,
an investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Fund Class B
shares for two and a half years and three years later decide to redeem the
shares of Institutional Fund for cash. At the time of this redemption, the 2%
CDSC that would have been due had the Class B shares of the Fund been redeemed
for cash rather than exchanged for shares of Institutional Fund will be payable.
If instead of such redemption the shareholder exchanged such shares for Class B
shares of a fund which the shareholder continued to hold for an additional two
and a half years, any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM-advised mutual
funds with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange privilege. Certain funds may suspend the continuous
offering of their shares 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.
26
<PAGE> 97
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute substantially all
of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, 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 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, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that 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 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
27
<PAGE> 98
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 among the Class A, Class B, Class C and Class D shareholders according to
a method (which it believes is consistent with the Commission rule permitting
the issuance and sale of multiple classes of stock) that is based on the gross
income allocable to Class A, Class B, Class C and Class D shareholders during
the taxable year, or such other method as the Internal Revenue Service may
prescribe.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The 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 minimize 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 and distribute 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
28
<PAGE> 99
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.
The Fund may also invest in asset-backed securities, mortgaged-backed
securities and derivative mortgage-backed securities. Because such obligations
could have original issue discount, accrue negative amortization or be
subordinated in the mortgage-backed securities structure, these investments
could cause the Fund to accrue and distribute income before or, possibly,
without a corresponding receipt of cash.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, 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 forward foreign exchange contract, or is a non-equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders. 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 sales of securities and transactions in options, futures
and forward foreign exchange contracts and its short sales of securities. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain sales of securities and certain closing
transactions in options, futures and forward foreign exchange contracts and its
short sales of securities.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting certain short sales and closing transactions within
three months after entering into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options,
29
<PAGE> 100
foreign currency futures and forward foreign exchange contracts will be valued
for purposes of the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a 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
income dividend distributions, and all or a portion of 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 and resulting in a capital gain for any shareholder
who received a distribution greater than such shareholder's basis in Fund shares
(assuming the shares were held as a capital asset). 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.
The Treasury Department has authority to issue regulations concerning the
recharacterization of principal and interest payments with respect to debt
obligations issued in hyperinflationary currencies, which may include the
currencies of certain South American countries in which the Fund intends to
invest. No such regulations have been issued.
------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
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.
30
<PAGE> 101
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 and yield figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, 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.
Yield quotations for each class will be computed based on a 30-day period
by dividing (a) net income based on the yield of each security earned during the
period by (b) the average daily number of shares outstanding during that period
that were entitled to receive dividends multiplied by the maximum offering price
per share on the last day of the period. The yield for the 30-day period ended
December 31, 1996 was 7.99% for Class A shares, 7.53% for Class B shares, 7.46%
for Class C shares and 7.75% for Class D shares.
31
<PAGE> 102
Set forth below is total return information for the Class A, Class B, Class
C and Class D shares of the Fund for the periods indicated. As a result of the
implementation of the Merrill Lynch Select Pricing(SM) System, Class A shares of
the Fund outstanding prior to October 21, 1994, were redesignated Class D
shares, and historical performance data pertaining to such shares is provided
below under the caption "Class D."
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------- ----------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF THE $1,000 OF THE
PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
- ------------------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<CAPTION>
<S> <C> <C> <C> <C>
Year Ended December 31, 1996.................... 28.29% $ 1,282.90 28.75% $ 1,287.50
Inception (October 21, 1994) to December 31,
1996.......................................... 22.47% $ 1,560.10 -- --
Inception (August 27, 1993) to December 31,
1996.......................................... -- -- 14.48% $ 1,582.10
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended December 31, 1996.................... 33.64% $ 1,336.40 32.75% $ 1,327.50
Year Ended December 31, 1995.................... 27.27% $ 1,272.70 26.10% $ 1,261.00
Year Ended December 31, 1994.................... -- -- (15.08)% $ 849.20
Inception (October 21, 1994) to December 31,
1994.......................................... (4.45)% $ 955.50 -- --
Inception (August 27, 1993) to December 31,
1993.......................................... -- -- 11.30% $ 1,113.00
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994) to December 31,1996... 56.01% $ 1,560.10 -- --
Inception (August 27, 1993) to December 31,
1996.......................................... -- -- 58.21% $ 1,582.10
</TABLE>
<TABLE>
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 Days Ended December 31, 1996................. 7.99% 7.53%
</TABLE>
32
<PAGE> 103
<TABLE>
<CAPTION>
CLASS C CLASS D
---------------------------- ----------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF THE $1,000 OF THE
PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
- ------------------------------------------------ ------------ ------------ ------------ ------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended December 31, 1996.................... 31.66% $ 1,316.60 28.10% $ 1,281.00
Inception (October 21, 1994) to December 31,
1996.......................................... 23.50% $ 1,589.30 -- --
Inception (August 27, 1993) to December 31,
1996.......................................... -- -- 13.89% $ 1,545.10
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended December 31, 1996.................... 32.66% $ 1,326.60 33.44% $ 1,334.40
Year Ended December 31, 1995.................... 26.18% $ 1,261.80 26.75% $ 1,267.50
Year Ended December 31, 1994.................... -- -- (14.65)% $ 853.50
Inception (October 21, 1994) to December 31,
1994.......................................... (5.06)% $ 949.40 -- --
Inception (August 27, 1993) to December 31, 1993... -- -- 11.49% $ 1,114.90
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994) to December 31,
1996.......................................... 58.93% $ 1,589.30 -- --
Inception (August 27, 1993) to December 31,
1996.......................................... -- -- 54.51% $ 1,545.10
</TABLE>
<TABLE>
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 Days Ended December 31, 1996................. 7.46% 7.75%
</TABLE>
In order to reflect the reduced sales charges, in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares, applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares," respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account reduced,
and not the maximum, sales charge, or may not take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of CDSCs, a lower amount of expenses may be deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on June 10, 1993. As of the
date of this Statement of Additional Information, the Fund has an authorized
capital of 400,000,000 shares of common stock, par value $0.10 per share,
divided into four classes, designated Class A, Class B, Class C and Class D
Common Stock, each of which consists of 100,000,000 shares. Each share of Class
A, Class B, Class C and Class D Common Stock represents an interest in the same
assets of the Fund and is identical in all respects except that the Class B,
Class C and Class D shares bear certain expenses related to the account
maintenance and/or distribution of such shares, and have exclusive voting rights
with respect to matters relating to such account maintenance and/or distribution
expenditures. The Board of Directors of the Fund may classify and reclassify the
shares of the Fund into additional classes of Common Stock at a future date.
33
<PAGE> 104
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 shareholders 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 rights. Redemption and conversion rights
are discussed elsewhere herein and in the Prospectus. Each share is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund upon liquidation or dissolution after satisfaction of
outstanding liabilities, except that expenses related to the distribution of the
shares of 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 were paid by the Fund and are being amortized over a period
not exceeding five years. The proceeds realized by the Investment Adviser (or
any subsequent holder) upon redemption of any of the shares initially purchased
by it will be reduced by the proportional amount of the unamortized
organizational expenses which the number of such initial shares being 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, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets on December 31, 1996, and its shares outstanding on that date is as
follows.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets............................... $28,136,646 $160,204,058 $11,435,835 $18,401,923
========== =========== ========== ==========
Number of Shares Outstanding............. 2,476,832 14,162,649 1,011,067 1,627,563
========== =========== ========== ==========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)........................... $ 11.36 $ 11.31 $ 11.31 $ 11.31
Sales Charge (for Class A and Class D
shares: 4.00% of offering price (4.17%
of net asset value per share))*........ .47 ** ** .47
----------- ------------ ----------- -----------
Offering Price........................... $ 11.83 $ 11.31 $ 11.31 $ 11.78
========== =========== ========== ==========
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemptions of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares"
in the Prospectus and "Redemption of Shares -- Deferred Sales
Charges -- Class B and Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the
34
<PAGE> 105
independent Directors 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
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. See "Management of the Fund -- Transfer Agency Services"
in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, 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 Commission, Washington,
D.C., under the Securities Act and the Investment Company Act, to which
reference is hereby made.
Under a separate agreement, ML&Co. 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 April 1, 1997.
35
<PAGE> 106
INDEPENDENT AUDITORS' REPORT
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, 1996, the related statements of operations and cash flows for the
year then ended, changes in net assets for each of the years in the two-year
period then ended and the financial highlights for each of the years in the
three-year period then ended and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1996, by correspondence with the custodian and broker. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Americas Income Fund, Inc. as of December 31, 1996, the results of its
operations, the changes in its net assets, its cash flows and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 12, 1997
36
<PAGE> 107
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Interest Maturity Value Percent of
COUNTRY Industry Face Amount Bonds Rate Date (Note 1a) Net Assets
<S> <S> <C> <S> <C> <S> <C> <C>
Argentina Banking US$ 8,000,000 Banco de Credito Argentina 8.50 % 12/18/1998 $ 8,000,000 3.7%
4,000,000 Banco de Galicia y Buenos
Aires S.A.--Yankee 9.00 11/01/2003 3,950,000 1.8
------------ ------
11,950,000 5.5
Communications 3,000,000 Telefonica de Argentina S.A. 11.875 11/01/2004 3,315,000 1.5
Total Bonds in Argentina
(Cost--$15,316,875) 15,265,000 7.0
Brazil Communications 8,000,000 ++Comtel Brasileira Ltd. 10.75 9/26/2004 8,220,000 3.8
Utilities-- 4,000,000 Centrais Electricas
Electric Brasileiras S.A.--Eletrobras 10.00 7/06/2004 4,070,000 1.9
Total Bonds in Brazil
(Cost--$12,008,000) 12,290,000 5.7
Hong Kong Utilities 1,000,000 AES China Generating Co. Ltd. 10.125 12/15/2006 1,035,000 0.5
Total Bonds in Hong Kong
(Cost--$999,040) 1,035,000 0.5
Mexico Banking 1,500,000 Banamex S.A. 11.00 7/15/2003 1,526,250 0.7
Broadcasting & 5,000,000 Grupo Televisa S.A. 11.375 5/15/2003 5,337,500 2.4
Publishing 3,000,000 Grupo Televisa S.A. (a) 11.976 5/15/2008 1,987,500 0.9
------------ ------
7,325,000 3.3
Industrials 5,000,000 Cemex S.A. 12.75 7/15/2006 5,550,000 2.5
Paper 7,000,000 Grupo Industrial Durango, S.A.
de C.V. 12.625 8/01/2003 7,612,500 3.5
Transportation 6,000,000 Transportacion Maritima
Mexicana, S.A. de C.V. 10.00 11/15/2006 6,022,500 2.8
Total Bonds in Mexico
(Cost--$26,946,307) 28,036,250 12.8
United US Government 20,000,000 United States Treasury Bond,
States Obligations 6.50% due 11/15/2026 6.50 11/15/2026 19,628,200 9.0
Total Bonds in the United
States (Cost--$19,818,750) 19,628,200 9.0
Total Investments in Bonds
(Cost--$75,088,972) 76,254,450 35.0
Brady Bonds***
Argentina Sovereign 37,500,000 Republic of Argentina,
Government Global Bonds 11.00 10/09/2006 39,375,000 18.0
Obligations
Total Brady Bonds in
Argentina (Cost--$38,081,250) 39,375,000 18.0
Brazil Sovereign 14,868,495 Republic of Brazil, Floating
Government Rate 'C' Bond 8.00 4/15/2014 11,002,686 5.0
Obligations
</TABLE>
37
<PAGE> 108
<TABLE>
<S> <S> <C> <S> <C> <S> <C> <C>
Total Brady Bonds in Brazil
(Cost--$10,663,138) 11,002,686 5.0
Bulgaria Sovereign 5,000,000 Republic of Bulgaria,
Government Discount 'A' Bonds 6.687 7/28/2024 2,812,500 1.3
Obligations
Total Brady Bonds in
Bulgaria (Cost--$2,837,500) 2,812,500 1.3
Ecuador Sovereign 36,797,172 Republic of Ecuador, PDI
Government (Registered) 6.50 2/27/2015 22,538,268 10.3
Obligations 5,286,950 Republic of Ecuador, PDI
(Bearer) 6.50 2/27/2015 3,244,866 1.5
Total Brady Bonds in Ecuador
(Cost--$21,504,514) 25,783,134 11.8
Mexico Sovereign 10,076,000 United Mexican States, Global
Government Bonds 11.50 5/15/2026 10,630,180 4.9
Obligations 1,000 United Mexican States, Value
Recovery Rights (b) 0.00 0 0.0
Total Brady Bonds in Mexico
(Cost--$10,146,846) 10,630,180 4.9
Panama Sovereign 10,000,000 Republic of Panama, PDI 6.5625 7/17/2016 7,800,000 3.6
Government
Obligations
Total Brady Bonds in Panama
(Cost--$6,787,500) 7,800,000 3.6
Philippines Sovereign 3,000,000 ++Republic of the Philippines
Government (Registered) 8.75 10/07/2016 3,105,000 1.4
Obligations
Total Brady Bonds in the
Philippines( Cost--$3,036,750) 3,105,000 1.4
Venezuela Sovereign 13,250,000 Republic of Venezuela, DCB 6.50 12/18/2007 11,676,562 5.4
Government 36,500,000 Republic of Venezuela,
Obligations Floating Rate 'A' Bond* 6.625 3/31/2007 32,530,625 14.9
5,500,000 Republic of Venezuela,
Floating Rate 'B' Bond 6.4375 3/31/2007 4,901,875 2.2
Total Brady Bonds in Venezuela
(Cost--$41,582,117) 49,109,062 22.5
Total Investments in Brady Bonds
(Cost--$134,639,615) 149,617,562 68.5
Loan Agreements
Russia Sovereign 15,000,000 Vneshenconombank
Government Participation Agreements (c) 0.00 12/30/2004 11,906,250 5.5
Obligations
Total Investments in Loan
Agreements (Cost--$11,478,750) 11,906,250 5.5
</TABLE>
38
<PAGE> 109
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Interest Maturity Value Percent of
Face Amount Short-Term Securities Rate Date (Note 1a) Net Assets
<S> <C> <S> <C> <S> <C> <C>
Commercial US$ 3,298,000 General Motors Acceptance Corp. 7.50 % 1/02/1997 $ 3,298,000 1.5%
Paper**
Total Investments in Short-Term
Securities (Cost--$3,298,000) 3,298,000 1.5
Total Investments (Cost--$224,505,337) 241,076,262 110.5
Liabilities in Excess of Other Assets (22,897,800) (10.5)
------------ ------
Net Assets $218,178,462 100.0%
============ ======
<FN>
(a)Represents a step bond; the interest rate shown is the effective
yield at the time of purchase.
(b)The rights may be exercised until 2/31/2019.
(c)Non-income producing security.
*Security represents collateral in connection with reverse
repurchase agreements.
**Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the Fund.
***Brady Bonds are securities which have been issued to refinance
commercial bank loans and other debt. The risk associated with these
instruments is the amount of any uncollateralized principal or
interest payments since there is a high default rate of commercial
bank loans by countries issuing these securities.
++Restricted security as to resale. The value of the Fund's
investment in restricted securities was $11,325,000, representing
5.2% of net assets.
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <S> <C> <C>
Comtel Brasileira Ltd.,
10.75% due 9/26/2004 9/18/1996 $ 8,000,000 $ 8,220,000
Republic of the Philippines
(Registered) 11/14/1996 3,036,750 3,105,000
Total $11,036,750 $11,325,000
=========== ===========
</TABLE>
39
<PAGE> 110
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
As of December 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$224,505,337) (Note 1a) $241,076,262
Receivables:
Interest $ 5,007,647
Capital shares sold 1,080,035 6,087,682
------------
Deferred organization expenses (Note 1f) 34,369
Prepaid registration fees and other assets (Note 1f) 59,704
------------
Total assets 247,258,017
------------
Liabilities: Payables:
Reverse repurchase agreements (Note 5) 22,350,300
Distributions to shareholders (Note 1g) 4,222,841
Captial shares redeemed 2,028,973
Investment adviser (Note 2) 123,328
Distributor (Note 2) 112,594
Interest expense (Note 5) 12,106 28,850,142
------------
Accrued expenses and other liabilities 229,413
------------
Total liabilities 29,079,555
------------
Net Assets: Net assets $218,178,462
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $ 247,683
Consist of: Class B Common Stock, $0.10 par value, 100,000,000 shares authorized 1,416,265
Class C Common Stock, $0.10 par value, 100,000,000 shares authorized 101,107
Class D Common Stock, $0.10 par value, 100,000,000 shares authorized 162,756
Paid-in capital in excess of par 198,500,226
Undistributed realized capital gains on investments and foreign
currency transations--net 1,179,500
Unrealized appreciation on investments and foreign currency
transactions--net 16,570,925
------------
Net assets $218,178,462
============
Net Asset Class A--Based on net assets of $28,136,646 and 2,476,832
Value: shares outstanding $ 11.36
============
Class B--Based on net assets of $160,204,058 and 14,162,649
shares outstanding $ 11.31
============
Class C--Based on net assets of $11,435,835 and 1,011,067
shares outstanding $ 11.31
============
Class D--Based on net assets of $18,401,923 and 1,627,563
shares outstanding $ 11.31
============
See Notes to Financial Statements.
</TABLE>
40
<PAGE> 111
<TABLE>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 18,995,532
(Note 1e):
Expenses: Investment advisory fees (Note 2) $ 1,139,364
Account maintenance and distribution fees--Class B (Note 2) 1,048,581
Interest expense (Note 5) 491,343
Transfer agent fees--Class B (Note 2) 261,751
Registration fees (Note 1f) 114,429
Printing and shareholder reports 106,905
Custodian fees 72,879
Professional fees 68,805
Account maintenance and distribution fees--Class C (Note 2) 59,213
Accounting services (Note 2) 57,697
Account maintenance fees--Class D (Note 2) 41,769
Trustees' fees and expenses 37,600
Transfer agent fees--Class A (Note 2) 27,993
Transfer agent fees--Class D (Note 2) 27,061
Amortization of organization expenses (Note 1f) 20,908
Transfer agent fees--Class C (Note 2) 15,485
Pricing fees 807
Other 6,589
------------
Total expenses 3,599,179
------------
Investment income--net 15,396,353
------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 22,386,062
(Loss) on Foreign currency transactions--net (303,309) 22,082,753
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 14,949,752
(Notes 1b, 1c, Foreign currency transactions--net 9,630 14,959,382
1e & 3): ------------ ------------
Net realized and unrealized gain on investments and foreign
currency transactions 37,042,135
------------
Net Increase in Net Assets Resulting from Operations $ 52,438,488
============
See Notes to Financial Statements.
</TABLE>
41
<PAGE> 112
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the
Year Ended
December 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 15,396,353 $ 11,613,604
Realized gain (loss) on investments and foreign currency
transactions--net 22,082,753 (4,707,448)
Change in unrealized appreciation on investments and foreign
currency transactions--net 14,959,382 18,061,845
------------ ------------
Net increase in net assets resulting from operations 52,438,488 24,968,001
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (1,756,766) (119,581)
Shareholders Class B (12,358,235) (9,482,996)
(Note 1g): Class C (678,129) (58,666)
Class D (1,554,156) (1,952,361)
In excess of investment income--net:
Class A (236,371) --
Class B (1,662,785) --
Class C (91,241) --
Class D (209,110) --
Realized gain on investments--net:
Class A (801,439) --
Class B (4,369,170) --
Class C (310,794) --
Class D (512,917) --
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (24,541,113) (11,613,604)
------------ ------------
Capital Share Net increase (decrease) in net assets derived from capital
Transactions share transactions 70,086,193 (10,358,969)
(Note 4): ------------ ------------
Net Assets: Total increase in net assets 97,983,568 2,995,428
Beginning of year 120,194,894 117,199,466
------------ ------------
End of year* $218,178,462 $120,194,894
============ ============
<FN>
*Undistributed investment income--net (Note 1h) -- $ 950,933
============ ============
See Notes to Financial Statements.
</TABLE>
42
<PAGE> 113
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended December 31, 1996
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 52,438,488
Operating Adjustments to reconcile net increase in net assets resulting
Activities: from operations to net cash provided by operating activities:
Increase in receivables (2,304,703)
Decrease in other assets 26,222
Increase in other liabilities 179,370
Realized and unrealized gain on investments and foreign currency
transactions--net (37,042,135)
Amortization of discount (1,938,673)
--------------
Net cash provided by operating activities 11,358,569
--------------
Cash Used for Proceeds from sales of long-term securities 736,654,155
Investing Purchases of long-term securities (813,780,381)
Activities: Purchases of short-term investments (2,401,715,817)
Proceeds from sales and maturities of short-term investments 2,404,095,905
--------------
Net cash used for investing activities (74,746,138)
--------------
Cash Provided by Cash receipts from issuance of common stock 155,351,787
Financing Cash receipts from borrowings 998,214,202
Activities: Cash payments on borrowings (984,593,969)
Cash payments on shares of beneficial interest redeemed (98,109,176)
Dividends paid to shareholders (7,475,275)
--------------
Net cash provided by financing activities 63,387,569
--------------
Cash: Net increase in cash --
Cash at beginning of year --
--------------
Cash at end of year $ --
==============
Cash Flow Cash paid for interest $ 486,865
Information: ==============
Non-Cash Capital shares issued on reinvestment of dividends paid to shareholders $ 13,781,236
Financing ==============
Activities:
See Notes to Financial Statements.
</TABLE>
43
<PAGE> 114
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A Class B
---------------------------- ----------------------------------------
The following per share data
and ratios have been derived For the For the
from information provided in Period Period
the financial statements. For the Oct. 21, For the Aug. 27,
Year Ended 1994++ to Year Ended 1993++ to
Increase (Decrease) in December 31, Dec. 31, December 31, Dec. 31,
Net Asset Value: 1996+++++ 1995 1994 1996+++++ 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 9.70 $ 8.51 $ 9.08 $ 9.65 $ 8.48 $ 10.84 $ 10.00
Performance: ------- ------- ------- ------- ------- ------- -------
Investment income--net .97 .94 .17 .88 .88 .75 .24
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net 2.14 1.19 (.57) 2.15 1.17 (2.36) .88
------- ------- ------- ------- ------- ------- -------
Total from investment
operations 3.11 2.13 (.40) 3.03 2.05 (1.61) 1.12
------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net (1.00) (.94) (.14) (.93) (.88) (.64) (.24)
In excess of investment
income--net (.13) -- -- (.12) -- -- --
Realized gain on
investments--net (.32) -- (.03) (.32) -- (.11) (.04)
------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions (1.45) (.94) (.17) (1.37) (.88) (.75) (.28)
------- ------- ------- ------- ------- ------- -------
Net asset value, end
of period $ 11.36 $ 9.70 $ 8.51 $ 11.31 $ 9.65 $ 8.48 $ 10.84
======= ======= ======= ======= ======= ======= =======
Total Investment Based on net asset
Return:** value per share 33.64% 27.27% (4.45%)+++ 32.75% 26.10% (15.08%) 11.30%+++
======= ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, excluding
Net Assets: interest expense
and net of
reimbursement 1.05% 1.20% 1.22%* 1.83% 1.97% 1.79% 1.03%*
======= ======= ======= ======= ======= ======= =======
Expenses, excluding
interest expense 1.05% 1.20% 1.22%* 1.83% 1.97% 2.00% 2.45%*
======= ======= ======= ======= ======= ======= =======
Expenses 1.32% 1.36% 1.91%* 2.10% 2.13% 2.70% 2.53%*
======= ======= ======= ======= ======= ======= =======
Investment income--net 8.97% 11.25% 8.63%* 8.36% 10.40% 8.14% 6.76%*
======= ======= ======= ======= ======= ======= =======
Supplemental Net assets, end of
Data: period (in thousands) $ 28,136 $ 1,165 $ 253 $160,204 $103,465 $101,933 $ 98,848
======== ======== ======= ======== ======== ======== ========
Portfolio turnover 420.35% 127.17% 353.33% 420.35% 127.17% 353.33% 75.18%
======== ======== ======= ======== ======== ======== ========
Leverage: Amount of reverse
repurchase agreements
outstanding, end of
period (in thousands) $ 22,350 $ 10,265 $17,058 $ 22,350 $ 10,265 $ 17,058 $ 21,546
======== ======== ======= ======== ======== ======== ========
Average amount of reverse
repurchase agreements
outstanding during the
period (in thousands) $ 8,277 $ 2,640 $17,315 $ 8,277 $ 2,640 $ 17,315 $ 18,977
======== ======== ======= ======== ======== ======== ========
Average amount of reverse
repurchase agreements
per share during
the period $ .48 $ .20 $ 1.19 $ .48 $ .20 $ 1.19 $ 1.81
======== ======== ======= ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
+++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
44
<PAGE> 115
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class C Class D
--------------------------- -----------------------------------------
The following per share data
and ratios have been derived For the For the
from information provided in Period Period
the financial statements. For the Oct. 21, For the Aug. 27,
Year Ended 1994++ to Year Ended 1993++ to
Increase (Decrease) in December 31, Dec. 31, December 31, Dec. 31,
Net Asset Value: 1996+++++ 1995 1994 1996+++++ 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 9.65 $ 8.47 $ 9.08 $ 9.65 $ 8.48 $ 10.84 $ 10.00
Performance: ------- ------- ------- ------- ------- ------- -------
Investment income--net .87 .87 .15 .95 .92 .80 .26
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net 2.15 1.18 (.61) 2.13 1.17 (2.36) .88
------- ------- ------- ------- ------- ------- -------
Total from investment
operations 3.02 2.05 (.46) 3.08 2.09 (1.56) 1.14
------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net (.92) (.87) (.13) (.97) (.92) (.68) (.26)
In excess of investment
income--net (.12) -- -- (.13) -- -- --
Realized gain on
investments--net (.32) -- (.02) (.32) -- (.12) (.04)
------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions (1.36) (.87) (.15) (1.42) (.92) (.80) (.30)
------- ------- ------- ------- ------- ------- -------
Net asset value, end
of period $ 11.31 $ 9.65 $ 8.47 $ 11.31 $ 9.65 $ 8.48 $ 10.84
======= ======= ======= ======= ======= ======= =======
Total Investment Based on net asset
Return:** value per share 32.66% 26.18% (5.06%)+++ 33.44% 26.75% (14.65%) 11.49%+++
======= ======= ======= ======= ======= ======= =======
Ratios to Average Expenses, excluding
Net Assets: interest expense and net
of reimbursement 1.90% 2.05% 2.24%* 1.31% 1.44% 1.28% .50%*
======= ======= ======= ======= ======= ======= =======
Expenses, excluding
interest expense 1.90% 2.05% 2.24%* 1.31% 1.44% 1.48% 1.93%*
======= ======= ======= ======= ======= ======= =======
Expenses 2.17% 2.19% 3.05%* 1.58% 1.60% 2.17% 2.03%*
======= ======= ======= ======= ======= ======= =======
Investment income--net 8.17% 10.23% 8.87%* 8.92% 10.85% 8.65% 7.14%*
======= ======= ======= ======= ======= ======= =======
Supplemental Net assets, end of
Data: period (in thousands) $11,436 $ 1,396 $ 75 $18,402 $14,169 $14,938 $15,076
======= ======= ======= ======= ======= ======= =======
Portfolio turnover 420.35% 127.17% 353.33% 420.35% 127.17% 353.33% 75.18%
======= ======= ======= ======= ======= ======= =======
Leverage: Amount of reverse
repurchase agreements
outstanding, end of
period (in thousands) $22,350 $10,265 $17,058 $22,350 $10,265 $17,058 $21,546
======= ======= ======= ======= ======= ======= =======
Average amount of reverse
repurchase agreements
outstanding during the
period (in thousands) $ 8,277 $ 2,640 $17,315 $ 8,277 $ 2,640 $17,315 $18,977
======= ======= ======= ======= ======= ======= =======
Average amount of reverse
repurchase agreements per
share during the period $ .48 $ .20 $ 1.19 $ .48 $ .20 $ 1.19 $ 1.81
======= ======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
+++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
45
<PAGE> 116
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. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of securities--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded or, in the case of options traded in the
over-the-counter market, the last bid price. Short-term securities
are valued at amortized cost, which approximates market value. Other
investments, including futures contracts and related options, are
stated at market value. Securities and assets for which market value
quotations are not available are valued at their fair value as
determined in good faith by or under the direction of the Fund's
Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Fund may purchase or sell
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 unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
46
<PAGE> 117
NOTES TO FINANCIAL STATEMENTS (continued)
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(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 are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(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 date.
(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$2,199,507 have been reclassified between undistributed net realized
capital gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset values
per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc., ("ML & Co."), which
is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operation of the Fund. For such
services, the Fund pays a monthly fee of 0.60%, on an annual basis,
of the average daily value of the Fund's net assets plus the
principal amount of borrowings incurred by the Fund for leverage
purposes.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended December 31, 1996, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D Shares
as follows:
MLFD MLPF&S
Class A $ 135 $ 1,237
Class D $3,912 $41,977
For the year ended December 31, 1996, MLPF&S received contingent
deferred sales charges of $405,525 and $4,459 relating to
transactions in Class B and Class C Shares, respectively.
47
<PAGE> 118
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLPF&S, MLFD, MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1996 were $813,780,381 and
$723,055,200, respectively.
Realized and unrealized gains (losses) as of December 31, 1996 were
as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $ 22,448,405 $ 16,570,925
Short-term investments (304,018) --
Options written 148,000 --
Financial futures contracts 93,675 --
Foreign currency transactions (303,309) --
------------- -------------
Total $ 22,082,753 $ 16,570,925
============= =============
Transactions in options written for the year ended December 31, 1996
were as follows:
Nominal Value
Covered by Premiums
Call Options Written Written Options Received
Outstanding call options written,
beginning of year -- --
Options written 20,000,000 $ 247,000
Options exercised (16,000,000) (162,000)
Options expired (4,000,000) (85,000)
------------ -------------
Outstanding call options written,
end of year -- $ --
============ =============
Nominal Value
Covered by Premiums
Put Options Written Written Options Received
Outstanding put options written,
beginning of year -- --
Options written 6,000,000 $ 63,000
Options expired (6,000,000) (63,000)
------------ -------------
Outstanding put options written,
end of year -- $ --
============ =============
As of December 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $14,845,086, of which $16,603,802
related to appreciated securities and $1,758,716 related to
depreciated securities. At December 31, 1996, the aggregate cost of
investments for Federal income tax purposes was $226,231,176.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions was $70,086,193 and $(10,358,969) for the years ended
December 31, 1996 and December 31, 1995, respectively.
Transactions in shares of capital were as follows:
Class A Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 3,188,362 $ 33,640,007
Shares issued to shareholders
in reinvestment of dividends
and distributions 223,634 2,467,894
------------ ------------
Total issued 3,411,996 36,107,901
Shares redeemed (1,055,288) (11,591,124)
------------ ------------
Net increase 2,356,708 $ 24,516,777
============ ============
Class A Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 424,389 $ 3,709,129
Shares issued to shareholders
in reinvestment of dividends 31,496 58,341
------------ ------------
Total issued 455,885 3,767,470
Shares redeemed (365,478) (3,126,616)
------------ ------------
Net increase 90,407 $ 640,854
============ ============
Class B Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 9,423,373 $ 97,739,290
Shares issued to shareholders
in reinvestment of dividends
and distributions 874,443 9,531,248
------------ ------------
Total issued 10,297,816 107,270,538
Automatic conversion of shares (481,977) (1,098,316)
Shares redeemed (6,374,330) (71,172,295)
------------ ------------
Net increase 3,441,509 $ 34,999,927
============ ============
48
<PAGE> 119
NOTES TO FINANCIAL STATEMENTS (concluded)
Class B Shares for the
Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 2,917,112 $ 25,020,930
Shares issued to shareholders
in reinvestment of dividends 466,431 3,936,697
------------ ------------
Total issued 3,383,543 28,957,627
Shares redeemed (4,688,387) (38,740,392)
------------ ------------
Net decrease (1,304,844) $ (9,782,765)
============ ============
Class C Shares for the
Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 1,097,995 $ 11,420,812
Shares issued to shareholders
in reinvestment of dividends
and distributions 67,079 736,136
------------ ------------
Total issued 1,165,074 12,156,948
Shares redeemed (298,711) (3,200,889)
------------ ------------
Net increase 866,363 $ 8,956,059
============ ============
Class C Shares for the
Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 201,258 $ 1,740,118
Shares issued to shareholders
in reinvestment of dividends 3,112 27,775
------------ ------------
Total issued 204,370 1,767,893
Shares redeemed (68,570) (583,898)
------------ ------------
Net increase 135,800 $ 1,183,995
============ ============
Class D Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 1,242,352 $ 12,804,879
Shares issued to shareholders
in reinvestment of dividends
and distributions 95,879 1,045,958
Automatic conversion of shares 104,699 1,098,316
------------ ------------
Total issued 1,442,930 14,949,153
Shares redeemed (1,284,258) (13,335,723)
------------ ------------
Net increase 158,672 $ 1,613,430
============ ============
Class D Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 2,439,964 $ 21,030,210
Shares issued to shareholders
in reinvestment of dividends 108,946 935,152
------------ ------------
Total issued 2,548,910 21,965,362
Shares redeemed (2,842,527) (24,366,415)
------------ ------------
Net decrease (293,617) $ (2,401,053)
============ ============
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 agreement, 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, 1996, the Fund had entered into reverse
repurchase agreements in the amount of $22,350,300. For the year
ended December 31, 1996, the maximum amount entered into was
$43,760,579, the average amount outstanding was approximately
$8,277,000, and the daily weighted average interest rate was 5.94%.
49
<PAGE> 120
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 121
- ------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
Compensation of Directors............. 10
Advisory and Management
Arrangements........................ 11
Purchase of Shares...................... 12
Initial Sales Charge Alternatives --
Class A and Class D Shares.......... 13
Reduced Initial Sales Charges......... 15
Employer-Sponsored Retirement or
Savings Plans and Certain Other
Arrangements........................ 17
Distribution Plans.................... 17
Limitations on the Payment of Deferred
Sales Charges....................... 18
Redemption of Shares.................... 19
Deferred Sales Charges --
Class B and Class C Shares.......... 20
Portfolio Transactions and Brokerage.... 20
Determination of Net Asset Value........ 21
Shareholder Services.................... 22
Investment Account.................... 22
Automatic Investment Plans............ 23
Automatic Reinvestment of Dividends
and Capital Gains Distributions..... 23
Systematic Withdrawal Plans --
Class A and Class D Shares.......... 24
Exchange Privilege.................... 25
Taxes................................... 27
Tax Treatment of Options, Futures and
Forward Foreign Exchange
Transactions........................ 29
Special Rules for Certain Foreign
Currency Transactions................. 29
Performance Data........................ 31
General Information..................... 33
Description of Shares................. 33
Computation of Offering Price Per
Share............................... 34
Independent Auditors.................. 34
Custodian............................. 35
Transfer Agent........................ 35
Legal Counsel......................... 35
Reports to Shareholders............... 35
Additional Information................ 35
Independent Auditors' Report............ 36
Financial Statements.................... 37
Code # 16800-0497
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
AMERICAS INCOME
FUND, INC.
STATEMENT OF [MLYNCH COMPASS]
ADDITIONAL
INFORMATION
April 29, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 122
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
</TABLE>
<PAGE> 123
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
Contained in Part A:
Financial Highlights for each of the years in the three-year period
ended December 31, 1996, and for the period August 27, 1993
(commencement of operations) to December 31, 1993.
Contained in Part B:
Schedule of Investments as of December 31, 1996.
Statement of Assets and Liabilities as of December 31, 1996.
Statement of Operations for the year ended December 31, 1996.
Statements of Changes in Net Assets for each of the years in the
two-year period ended December 31, 1996.
Statement of Cash Flows for the year ended December 31, 1996.
Financial Highlights for each of the years in the three-year period
ended December 31, 1996, and for the period August 27, 1993
(commencement of operations) to December 31, 1993.
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------------------
<C> <S> <C>
1(a) -- Amended and Restated Articles of Incorporation of the Registrant.(a)
(b) -- Articles of Amendment to the Articles of Incorporation of the Registrant.(b)
(c) -- Articles Supplementary to the Articles of Incorporation of the Registrant.(b)
2 -- By-Laws of the Registrant.(c)
3 -- None.
4 -- Copies of instruments defining the rights of shareholders, including the relevant
portions of the Articles of Incorporation, as amended, and By-Laws of the
Registrant.(d)
5(a) -- Investment Advisory Agreement between the Registrant and Merrill Lynch Asset
Management, L.P.(e)
(b) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P. and
Merrill Lynch Asset Management U.K. Limited.
(c) -- Supplement to Investment Advisory Agreement between the Registrant and Merrill
Lynch Asset Management, L.P., dated January 3, 1994.(f)
6(a) -- Class A Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(f)
(b) -- Class B Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(e)
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc.
with respect to the Merrill Lynch Mutual Fund Adviser Program.(e)
(d) -- Class C Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(f)
(e) -- Class D Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(f)
7 -- None.
8 -- Custodian Agreement between the Registrant and Brown Brothers Harriman & Co.(e)
9(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between the Registrant and Merrill Lynch Financial Data Services,
Inc.(e)
(b) -- License Agreement relating to the use of name between the Registrant and Merrill
Lynch & Co., Inc.(e)
10 -- None.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Asset Management, L.P.(a)
14 -- None.
</TABLE>
C-1
<PAGE> 124
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------------------
<C> <S> <C>
15(a) -- Class B Shares Distribution Plan and Class B Shares Distribution Plan
Sub-Agreement of the Registrant.(e)
(b) -- Class C Shares Distribution Plan and Class C Shares Distribution Plan
Sub-Agreement of the Registrant.(f)
(c) -- Class D Shares Distribution Plan and Class D Shares Distribution Plan
Sub-Agreement of the Registrant.(f)
16(a) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class A shares.(b)
(b) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class B shares.(e)
(c) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class C shares.(b)
(d) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class D shares.(e)
17(a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
18 -- Merrill Lynch Select Pricing(SM) System Plan pursuant to Rule 18f-3.(g)
</TABLE>
- ---------------
(a) Filed on August 20, 1993, as an Exhibit to Pre-Effective Amendment No. 3 to
the Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended (File No. 33-64398) (the "Registration Statement").
(b) Filed on April 28, 1995 as an Exhibit to Post-Effective Amendment No. 3 to
the Registration Statement.
(c) Filed on April 29, 1996, as an Exhibit to Post-Effective Amendment No. 4 to
the Registration Statement.
(d) Reference is made to Article III (Sections 2, 3, 4 and 5), Article IV,
Article V (Sections 2, 3, 4, 5, 6 and 7), Article VI, Article VII, Article
IX of the Registrant's Amended and Restated Articles of Incorporation filed
as Exhibit 1(a) to the Registration Statement; Articles of Amendment to the
Articles of Incorporation filed as Exhibit 1(b) to the Registration
Statement; Articles Supplementary to the Articles of Incorporation filed as
Exhibit 1(c) to the Registration Statement; and Article II, Article III
(Sections 1, 2, 3, 5, 6 and 17), Article VI, Article VII, Article XII,
Article XIII and Article XIV of the Registrant's By-Laws filed as Exhibit 2
to the Registration Statement.
(e) Filed on February 18, 1994, as an Exhibit to Post-Effective Amendment No. 1
to the Registration Statement.
(f) Filed on October 17, 1994, as an Exhibit to Post-Effective Amendment No. 2
to the Registration Statement.
(g) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on January 25, 1996, relating to shares of Merrill Lynch
New York Municipal Bond Fund series of Merrill Lynch Multi-State Municipal
Series Trust (File No. 2-99473).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
C-2
<PAGE> 125
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS MARCH 31, 1997
- ------------------------------------------------------------------------------- --------------
<S> <C>
Class A Common Stock, par value $.10 per share................................. 5,391
Class B Common Stock, par value $.10 per share................................. 11,683
Class C Common Stock, par value $.10 per share................................. 1,379
Class D Common Stock, par value $.10 per share................................. 979
</TABLE>
- ---------------
*Note: The number of holders shown above includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended, may be concerned,
Article VI of the Registrant's By-Laws provides that such payments will be made
only on the following conditions: (i) the advances must be limited to amounts
used, or to be used, for the preparation or presentation of a defense to the
action, including costs connected with the preparation of a settlement; (ii)
advances may be made only on receipt of a written promise by, or on behalf of,
the recipient to repay that amount of the advance which exceeds the amount which
it is ultimately determined he or she is entitled to receive from the Registrant
by reason of indemnification; and (iii) (a) such promise must be secured by a
surety bond, other suitable insurance or an equivalent form of security which
assures that any repayments may be obtained by the Registrant without delay or
litigation, which bond, insurance or other form of security must be provided by
the recipient of the advance, or (b) a majority of a quorum of the Registrant's
disinterested, non-party Directors, or an independent legal counsel in a written
opinion, shall determine, based upon a review of readily available facts, that
the recipient of the advance ultimately will be found entitled to
indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, as amended (the
"1933 Act"), against certain types of civil liabilities arising in connection
with the Registration Statement or the Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Merrill Lynch Asset Management, L.P. ("MLAM"or the "Investment
Adviser"), acts as investment adviser for the following open-end investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Asset Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill
Lynch Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc.,
C-3
<PAGE> 126
Merrill Lynch Global Bond Fund For Investment and Retirement, Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc., and for the following closed-end investment companies:
Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc.
and Merrill Lynch Senior Floating Rate Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Investment
Adviser, acts as the investment adviser for the following open-end investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series Trust,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers
Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal
Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund
Accumulation Program, Inc.; and for the following closed-end investment
companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and
Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of MLAM, FAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML&Co.") is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281. The address of Merrill
Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since January 1, 1995 for his or her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Richard is Treasurer and Mr. Glenn is Executive Vice President of substantially
all of the investment companies described in the preceding paragraph of this
C-4
<PAGE> 127
Item 28, and Messrs. Giordano, Harvey, Kirstein and Monagle are directors,
trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------ ------------------------- --------------------------------------
<S> <C> <C>
ML&Co......................... Limited Partner Financial Services Holding Company,
Limited Partner of FAM
Princeton Services............ General Partner General Partner of FAM
Arthur Zeikel................. President President of FAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML&Co.
Terry K. Glenn................ Executive Vice President Executive Vice President of FAM;
Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of MLFDS; President of
Princeton Administrators, L.P.
Vincent R. Giordano........... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Elizabeth Griffin............. Senior Vice President Senior Vice President of FAM
Norman R. Harvey.............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Philip L. Kirstein............ Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of FAM; Senior Vice
Secretary President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss............... Senior Vice President and Senior Vice President and Controller
Controller of FAM; Senior Vice President and
Controller of Princeton Services
Stephen M.M. Miller........... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr. ....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael L. Quinn.............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch from 1989
to 1995
Richard L. Reller............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Gerald M. Richard............. Senior Vice President and Senior Vice President and Treasurer of
Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of MLFD
Ronald L. Welburn............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Anthony Wiseman............... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc.,
C-5
<PAGE> 128
Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value Fund, Inc.,
Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults International
Portfolio, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Developing
Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging
Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund
Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation
Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings,
Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund,
Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund,
Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill
Lynch Phoenix Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds,
Inc., Merrill Lynch World Income Fund, Inc. and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011, Princeton,
New Jersey 08543-9011. The address of MLAM U.K. is Milton Gate, 1 Moor Lane,
London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since January 1,
1995, for his own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Harvey, Richard
and Yardley are officers of one or more of the registered investment companies
listed in the first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------ ---------------------- --------------------------------------
<S> <C> <C>
Arthur Zeikel................. Director and Chairman President of the Investment Adviser
and FAM; President and Director of
Princeton Services; Director of
MLFD; Executive Vice President of
ML&Co.
Alan J. Albert................ Senior Managing Vice President of the Investment
Director Adviser
Terry K. Glenn................ Director Executive Vice President of the
Investment Adviser and FAM; Executive
Vice President and Director of
Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton
Administrators, L.P.
Adrian Holmes................. Managing Director Director of Merrill Lynch Global Asset
Management
Andrew John Bascand........... Director Director of Merrill Lynch Global Asset
Management
Edward Gobora................. Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride.............. Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan................ Director Vice President, Institutional
Marketing, Debt and Equity Group,
Merrill Lynch Capital Markets from
1989 to 1994
Gerald M. Richard............. Senior Vice President Senior Vice President and Treasurer of
the Investment Adviser and FAM; Senior
Vice President and Treasurer of
Princeton Services; Vice President
and Treasurer of MLFD
Stephen J. Yardley............ Director Director of Merrill Lynch Global Asset
Management
Carol Ann Langham............. Company Secretary None
Debra Anne Searle............. Assistant Company None
Secretary
</TABLE>
C-6
<PAGE> 129
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., and The Municipal Fund
Accumulation Program, Inc., and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill-Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
--------------------------------- ----------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn................... President and Director Executive Vice President
Arthur Zeikel.................... Director President and Director
Philip L. Kirstein............... Director None
William E. Aldrich............... Senior Vice President None
Robert W. Crook.................. Senior Vice President None
Kevin P. Boman................... Vice President None
Michael J. Brady................. Vice President None
William M. Breen................. Vice President None
Michael G. Clark................. Vice President None
Mark A. DeSario.................. Vice President None
James T. Fatseas................. Vice President None
Debra W. Landsman-Yaros.......... Vice President None
Michelle T. Lau.................. Vice President None
Gerald M. Richard................ Vice President and Treasurer Treasurer
Salvatore Venezia................ Vice President None
William Wasel.................... Vice President None
Robert Harris.................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, (800 Scudders Mill
Road, Plainsboro, New Jersey 08536), and its transfer agent, Merrill Lynch
Financial Data Services, Inc., (4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484).
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Fund -- Advisory and Management Arrangements" in the Prospectus constituting
Part A of the Registration Statement and under "Management of the
Fund -- Advisory and Management Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, the Registrant is
not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of the Registrant's latest annual report to shareholders, upon
request and without charge.
C-7
<PAGE> 130
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF
THE REQUIREMENTS FOR EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT TO ITS
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933
AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO ITS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
TOWNSHIP OF PLAINSBORO, AND THE STATE OF NEW JERSEY, ON THE 28TH DAY OF APRIL
1997.
Merrill Lynch Americas Income Fund,
Inc.
(Registrant)
By /s/ GERALD M. RICHARD
---------------------------------
(Gerald M. Richard, Treasurer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE(S) INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- ---------------
<S> <C> <C>
ARTHUR ZEIKEL* President and Director
- ------------------------------------------ (Principal Executive Officer)
(Arthur Zeikel)
GERALD M. RICHARD* Treasurer (Principal Financial
- ------------------------------------------ and Accounting Officer)
(Gerald M. Richard)
DONALD CECIL* Director
- ------------------------------------------
(Donald Cecil)
EDWARD H. MEYER* Director
- ------------------------------------------
(Edward H. Meyer)
CHARLES C. REILLY* Director
- ------------------------------------------
(Charles C. Reilly)
RICHARD R. WEST* Director
- ------------------------------------------
(Richard R. West)
EDWARD D. ZINBARG* Director
- ------------------------------------------
(Edward D. Zinbarg)
*By /s/ GERALD M. RICHARD April 28, 1997
- ------------------------------------------
(Gerald M. Richard, Attorney-in-Fact)
</TABLE>
C-8
<PAGE> 131
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<C> <C> <S>
5(b) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P. and
Merrill Lynch Asset Management U.K. Limited
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant
17(a) -- Financial Data Schedule for Class A shares
(b) -- Financial Data Schedule for Class B shares
(c) -- Financial Data Schedule for Class C shares
(d) -- Financial Data Schedule for Class D shares
</TABLE>
<PAGE> 1
Exhibit 5(b)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the _____ day of __________, 199_, by and between
MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership
(hereinafter referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K.
LIMITED, a corporation organized under the laws of England and Wales
(hereinafter referred to as "MLAM U.K.").
W I T N E S S E T H:
WHEREAS, MERRILL LYNCH AMERICAS INCOME FUND, INC. (the "Fund") is a
Maryland corporation engaged in business as a non-diversified, open-end
investment company registered under the Investment Company Act of 1940, as
amended (hereinafter referred to as the "Investment Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering
investment advisory services and are registered as investment advisers under the
Investment Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is a member of the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
WHEREAS, MLAM has entered into an investment advisory agreement (the
"Investment Advisory Agreement") dated July 20, 1993, pursuant to which MLAM
provides management and investment and advisory services to the Fund; and
<PAGE> 2
WHEREAS, MLAM U.K. is willing to provide investment advisory services
to MLAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
Duties of MLAM U.K.
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and
to furnish, or arrange for affiliates to furnish, the investment advisory
services described below, subject to the broad supervision of MLAM and the Fund,
for the period and on the terms and conditions set forth in this Agreement. MLAM
U.K. hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. MLAM
and its affiliates shall for all purposes herein be deemed a Professional
Investor as defined under the rules promulgated by IMRO (hereinafter referred to
as the "IMRO Rules"). MLAM U.K. and its affiliates shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Fund in
any way or otherwise be deemed an agent of the Fund.
MLAM U.K. shall have the right to make unsolicited calls on MLAM and
shall provide MLAM with such investment research, advice
2
<PAGE> 3
and supervision as the latter may from time to time consider necessary for the
proper supervision of the assets of the Fund; shall furnish continuously an
investment program for the Fund and shall make recommendations from time to time
as to which securities shall be purchased, sold or exchanged and what portion of
the assets of the Fund shall be held in the various securities in which the Fund
invests, options, futures, options on futures or cash; all of the foregoing
subject always to the restrictions of the Articles of Incorporation and By-Laws
of the Fund, as they may be amended and/or restated from time to time, the
provisions of the Investment Company Act and the statements relating to the
Fund's investment objective, investment policies and investment restrictions as
the same are set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under the Securities
Act of 1933, as amended (the "Prospectus" and "Statement of Additional
Information", respectively). MLAM U.K. shall make recommendations and effect
transactions with respect to foreign currency matters, including foreign
exchange contracts, foreign currency options, foreign currency futures and
related options on foreign currency futures and forward foreign currency
transactions. MLAM U.K. shall also make recommendations or take action as to the
manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the portfolio securities of the Fund shall be
exercised.
3
<PAGE> 4
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will
MLAM U.K. be the registered holder of the registered investments of MLAM or the
Fund or be the custodian of documents or other evidence of title.
ARTICLE II
Allocation of Charges and Expenses
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof and shall pay all compensation of officers of
the Fund and all Directors of the Fund who are affiliated persons of MLAM U.K.
ARTICLE III
Compensation of MLAM U.K.
For the services rendered, the facilities furnished and expenses
assumed by MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be
determined from time to time by MLAM and MLAM U.K. but in no event in excess of
the amount that MLAM actually receives for providing services to the Fund
pursuant to the Investment Advisory Agreement.
ARTICLE IV
Limitation of Liability of MLAM U.K.
MLAM U.K. shall not be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or omission in
the performance of sub-advisory
4
<PAGE> 5
services rendered with respect to the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, MLAM U.K. shall include any affiliates of MLAM U.K. performing
services for MLAM contemplated hereby and directors, officers and employees of
MLAM U.K. and such affiliates.
ARTICLE V
Activities of MLAM U.K.
The services of MLAM U.K. to the Fund are not to be deemed to be
exclusive, MLAM U.K. and any person controlled by or under common control with
MLAM U.K. (for purposes of this Article V referred to as "affiliates") being
free to render services to others. It is understood that Directors, officers,
employees and shareholders of the Fund are or may become interested in MLAM U.K.
and its affiliates, as directors, officers, employees and shareholders or
otherwise and that directors, officers, employees and shareholders of MLAM U.K.
and its affiliates are or may become similarly interested in the Fund, and that
MLAM U.K. and directors, officers, employees, partners and shareholders of its
affiliates may become interested in the Fund as shareholders or otherwise.
ARTICLE VI
MLAM U.K. Statements Pursuant to IMRO Rules
Any complaints concerning MLAM U.K. should be in writing addressed to
the attention of the Managing Director of MLAM U.K.
5
<PAGE> 6
MLAM has the right to obtain from MLAM U.K. a copy of the IMRO complaints
procedure and to approach IMRO directly.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding Investments Not Readily
Realisable (as that term is used in the IMRO Rules) or investments denominated
in a currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding options, futures or
contracts for differences. Markets can be highly volatile and such investments
carry a high degree of risk of loss exceeding the original investment and any
margin on deposit.
ARTICLE VII
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above
written and shall remain in force until the date of termination of the
Investment Advisory Agreement (but not later than two years after the date
hereof) and thereafter, but only so long as such continuance is specifically
approved at least annually by (i) the Directors of the Fund or by the vote of a
6
<PAGE> 7
majority of the outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by MLAM or by vote of a majority of the outstanding voting
securities of the Fund, or by MLAM U.K., on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Investment Advisory
Agreement. Any termination shall be without prejudice to the completion of
transactions already initiated.
ARTICLE VIII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
ARTICLE IX
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective
7
<PAGE> 8
meanings specified in the Investment Company Act and the rules and regulations
thereunder, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
ARTICLE X
Governing Law
This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By _________________________________________
Title:
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By _________________________________________
Title:
9
<PAGE> 1
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Americas Income Fund, Inc.
We consent to the use in Post-Effective Amendment No. 5 to Registration
Statement No. 33-64398 of our report dated February 12, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
April 25, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000906956
<NAME> MERRILL LYNCH AMERICAS INCOME FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 224505337
<INVESTMENTS-AT-VALUE> 241076262
<RECEIVABLES> 6087682
<ASSETS-OTHER> 94073
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 247258017
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 29079555
<TOTAL-LIABILITIES> 29079555
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 200428037
<SHARES-COMMON-STOCK> 2476832
<SHARES-COMMON-PRIOR> 120124
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1179500
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16570925
<NET-ASSETS> 28136646
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 18995532
<OTHER-INCOME> 0
<EXPENSES-NET> (3599179)
<NET-INVESTMENT-INCOME> 15396353
<REALIZED-GAINS-CURRENT> 22082753
<APPREC-INCREASE-CURRENT> 14959382
<NET-CHANGE-FROM-OPS> 52438488
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1993137)
<DISTRIBUTIONS-OF-GAINS> (801439)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3188362
<NUMBER-OF-SHARES-REDEEMED> (1055288)
<SHARES-REINVESTED> 223634
<NET-CHANGE-IN-ASSETS> 97983568
<ACCUMULATED-NII-PRIOR> 950933
<ACCUMULATED-GAINS-PRIOR> (12709426)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1139364
<INTEREST-EXPENSE> 491343
<GROSS-EXPENSE> 3599179
<AVERAGE-NET-ASSETS> 17484781
<PER-SHARE-NAV-BEGIN> 9.70
<PER-SHARE-NII> .97
<PER-SHARE-GAIN-APPREC> 2.14
<PER-SHARE-DIVIDEND> (1.13)
<PER-SHARE-DISTRIBUTIONS> (.32)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.36
<EXPENSE-RATIO> 1.32
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000906956
<NAME> MERRILL LYNCH AMERICAS INCOME FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 224505337
<INVESTMENTS-AT-VALUE> 241076262
<RECEIVABLES> 6087682
<ASSETS-OTHER> 94073
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 247258017
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 29079555
<TOTAL-LIABILITIES> 29079555
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 200428037
<SHARES-COMMON-STOCK> 14162649
<SHARES-COMMON-PRIOR> 10721140
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1179500
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16570925
<NET-ASSETS> 160204058
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 18995532
<OTHER-INCOME> 0
<EXPENSES-NET> (3599179)
<NET-INVESTMENT-INCOME> 15396353
<REALIZED-GAINS-CURRENT> 22082753
<APPREC-INCREASE-CURRENT> 14959382
<NET-CHANGE-FROM-OPS> 52438488
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14021020)
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