<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 14, 1994
SECURITIES ACT FILE NO. 33-49787
INVESTMENT COMPANY ACT FILE NO. 811-7071
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 2 /x/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 4 /x/
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH UTILITY INCOME FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
P.O. BOX 9011
PRINCETON, NEW JERSEY
(ADDRESS OF PRINCIPAL EXECUTIVE 08543-9011
OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH UTILITY INCOME FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
JOEL H. GOLDBERG, ESQ. THOMAS D. JONES, III, ESQ.
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN MERRILL LYNCH ASSET MANAGEMENT
919 THIRD AVENUE P.O. BOX 9011
NEW YORK, NEW YORK 10022 PRINCETON, NEW JERSEY 08543-9011
</TABLE>
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
/ / Immediately upon filing pursuant to paragraph (b), or
/ / 60 days after filing pursuant to paragraph (a)(i), or
/x/ on October 21, 1994 pursuant to paragraph (b), or
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of rule 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment
------------------------
THE REGISTRANT HAS PREVIOUSLY ELECTED, PURSUANT TO RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940, TO REGISTER AN INDEFINITE NUMBER OF SHARES OF
ITS COMMON STOCK, PAR VALUE $.10 PER SHARE. THE REGISTRANT FILED A RULE
24F-2 NOTICE FOR THE FISCAL YEAR ENDED AUGUST 31, 1994 ON OR ABOUT SEPTEMBER 29,
1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH UTILITY INCOME FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(A))
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- ------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................... Cover Page
Item 2. Synopsis...................... Fee Table
Item 3. Condensed Financial
Information................. Financial Highlights
Item 4. General Description of
Registrant.................. Cover Page; Investment
Objective and Policies;
Additional Information
Item 5. Management of the Fund........ Fee Table; Management of the
Fund; Inside Back Cover Page
Item 5A. Management's Discussion of
Fund Performance............ Not Applicable
Item 6. Capital Stock and Other
Securities.................. Cover Page; Merrill Lynch
Select Pricing(Service Mark)
System; Purchase of Shares;
Additional Information
Item 7. Purchase of Securities Being
Offered..................... Fee Table; Merrill Lynch
Select Pricing(Service Mark)
System; Purchase of Shares;
Shareholder Services;
Additional Information;
Inside Back Cover Page
Item 8. Redemption or Repurchase...... Fee Table; 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....... Not Applicable
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--Description of
Shares
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered..................... Determination of Net Asset
Value; Purchase of Shares;
Redemption of Shares;
Shareholder Services
Item 20. Tax Status.................... Dividends, Distributions and
Taxes
Item 21. Underwriters.................. Purchase of Shares
Item 22. Calculations of Performance
Data........................ Performance Data
Item 23. Financial Statements.......... Financial Statements
PART C
</TABLE>
Information required to be included is set forth under the appropriate
Item, so numbered, in Part C to this Post-Effective Amendment to the
Registration Statement.
<PAGE>
PROSPECTUS
OCTOBER 21, 1994
MERRILL LYNCH UTILITY INCOME FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Utility Income Fund, Inc. (the 'Fund') is a diversified
mutual fund seeking high current income through investment of at least 65% of
its total assets in equity and debt securities issued by companies which are, in
the opinion of Merrill Lynch Asset Management, L.P. (the 'Manager' or 'MLAM'),
primarily engaged in the ownership or operation of facilities used to generate,
transmit or distribute electricity, telecommunications, gas or water. There can
be no assurance that the Fund's investment objective will be achieved. The Fund
may employ a variety of instruments and techniques to enhance income and hedge
against market and currency risk.
------------------------
Pursuant to the Merrill Lynch Select Pricing(Service Mark) System, the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing(Service Mark) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares, and
other relevant circumstances. See 'Merrill Lynch Select Pricing(Service Mark)
System' on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the 'Distributor'), P.O. Box 9011, Princeton, New Jersey 08543-9011, (609)
282-2800, and other securities dealers which have entered into selected dealers
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ('Merrill Lynch'). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100 and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
Transfer Agent are not subject to the processing fee. See 'Purchase of Shares'
and 'Redemption of Shares.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated October 21, 1994 (the 'Statement of Additional
Information'), has been filed with the Securities and Exchange Commission and is
available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(A) CLASS B(B) CLASS C(C) CLASS D(C)
------------------ -------------------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge Imposed
on Purchases (as a
percentage of offering
price).................... 4.00%(d) None None 4.00%(d)
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(e) 4.0% during the first year, 1% for one year None(e)
decreasing 1.0% annually
thereafter to 0.0% after the
fourth year
Exchange Fee................ None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)(F)..............
Investment Advisory
Fees(g)................... 0.55% 0.55% 0.55% 0.55%
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.......... 0.02% 0.02% 0.02% 0.02%
Shareholder Servicing
Costs(i).............. 0.08% 0.10% 0.10% 0.08%
Other................... 0.93% 0.93% 0.93% 0.93%
Total Other
Expenses............ 1.03% 1.05% 1.05% 1.03%
TOTAL FUND OPERATING
EXPENSES................ 1.58% 2.35% 2.40% 1.83%
</TABLE>
- ------------------
<TABLE>
<S> <C>
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs. See
'Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares'--page 22.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See 'Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares'--page 23.
(c) Prior to the date of this Prospectus, the Fund has not offered its Class C
and Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
'Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares'--page 22.
(e) Class A and Class D shares are not subject to a contingent deferred sales
charge ('CDSC'), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge will instead be subject to a CDSC of
1.0% of amounts redeemed within the first year of purchase.
(f) Information for Class A and Class B shares is stated for the period ended
August 31, 1994. Information under 'Other Expenses' for Class C and Class D
shares is estimated for the fiscal year ending August 31, 1995.
(g) See 'Management of the Fund--Management and Advisory Arrangements'--page
18.
(h) See 'Purchase of Shares--Distribution Plans'--page 27.
(i) See 'Management of the Fund--Transfer Agency Services'--page 19.
</TABLE>
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE
PERIOD OF:
----------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment
including the maximum $40.00 initial
sales charge (Class A and Class D
shares only) and assuming (1) the
Total Fund Operating Expenses for each
class set forth above; (2) a 5% annual
return throughout the periods and (3)
redemption at the end of the period:
Class A............................ $ 55 $ 88 $ 123 $ 220
Class B............................ $ 64 $ 93 $ 126 $ 269
Class C............................ $ 34 $ 75 $ 128 $ 274
Class D............................ $ 58 $ 95 $ 135 $ 246
An investor would pay the following
expenses on the same $1,000 investment
assuming no redemption at the end of
the period:
Class A............................ $ 55 $ 88 $ 123 $ 220
Class B............................ $ 24 $ 73 $ 126 $ 269
Class C............................ $ 24 $ 75 $ 128 $ 274
Class D............................ $ 58 $ 95 $ 135 $ 246
</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. As of August 31, 1994, the Manager was voluntarily waiving all of
its management fee and voluntarily reimbursing the Fund for a portion of other
expenses (excluding 12b-1 fees). The Fee Table has been restated to assume the
absence of any waiver or reimbursement because the Manager may discontinue or
reduce such waiver and assumption of expenses at any time without notice. During
the fiscal year ended August 31, 1994, the Manager waived management fees and
reimbursed expenses totaling 1.14% for Class A shares and 1.14% for Class B
shares after which the Fund's total expense ratio was 0.44% for Class A shares
and 1.21% for Class B shares. Class C and Class D shares were not offered during
that year. The expenses set forth under 'Other Expenses' are based on estimated
amounts through the end of the Fund's first full fiscal year on an annualized
basis.
The Example set forth above assumes reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by Securities
and Exchange Commission (the '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
own 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
charge permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the 'NASD'). Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Fund's Transfer Agent are not
subject to the processing fee. See 'Purchase of Shares' and 'Redemption of
Shares.'
3
<PAGE>
MERRILL LYNCH SELECT PRICING(Service Mark) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) 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(Service
Mark) System is used by more than 50 mutual funds advised by Merrill Lynch Asset
Management, L.P., doing business as Merrill Lynch Asset Management ('MLAM') or
an affiliate of MLAM, Fund Asset Management, L.P. ('FAM'). Funds advised by MLAM
or FAM are referred to herein as 'MLAM-advised mutual funds.'
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
the Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ only to
the extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See 'Shareholder
Services--Exchange Privilege.'
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
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
4
<PAGE>
Select Pricing(Service Mark) System that the investor believes is the most
beneficial under his particular circumstances. More detailed information as to
each class of shares is set forth under 'Purchase of Shares.'
[CAPTION]
<TABLE>
<C> <S> <C> <C> <C>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<C> <S> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(2)(3)
B CDSC for a period of 4 0.25 % 0.50 % B shares
years, at a rate of convert to D
4.0% during the first shares
year, decreasing 1.0% automatically
annually to 0.0% after
approximately
ten years(4)
C 1.0% CDSC for one year 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. Contingent deferred sales charges ('CDSCs') are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors.'
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year. See 'Class
A' and 'Class D' below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an eight
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares in a shareholder account
are entitled to purchase additional Class A shares in that account.
Other eligible investors include certain retirement plans and
participants in certain investment programs. In addition, Class A
shares will be offered to directors and employees of Merrill Lynch &
Co., Inc. and its subsidiaries (the term 'subsidiaries', when used
herein with respect to Merrill Lynch & Co., Inc. ('ML & Co.'), includes
MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by Merrill Lynch & Co., Inc.), and to
members of the Boards of MLAM-advised mutual funds. The maximum initial
sales charge is 4.00%, which is reduced for purchases of $25,000 and
over. Purchases of $1,000,000 or more may not be subject to an initial
sales charge but if the initial sales charge is waived such purchases
will be subject to a CDSC of 1.0% if the shares are redeemed within one
year after purchase. Sales charges also are reduced under a right of
accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See 'Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares.'
5
<PAGE>
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25%, an
ongoing distribution fee of 0.50% of the Fund's average net assets
attributable to the Class B shares, and a CDSC if they are redeemed
within four years of purchase. Approximately ten years after issuance,
Class B shares will convert automatically into Class D shares of the
Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares
automatically after approximately 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 a month on the basis of the relative net asset
values of the shares of the two classes on the conversion date, without
the imposition of any sales load, fee or other charge. Conversion of
Class B shares to Class D shares will not be deemed a purchase or sale
of the shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares and for certain retirement plans is modified as
described under 'Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares.'
Class C: Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.55% of the Fund's average net assets
attributable to the Class C shares. Class C shares are also subject to
a CDSC if they are redeemed within one year of purchase. Although Class
C shares are subject to a 1.0% CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject
to distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board of
Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to the Class D shares. Class D
shares are not subject to an ongoing distribution fee. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but if
the initial sales charge is waived such purchases will be subject to a
CDSC of 1.0% if the shares are redeemed within one year after purchase.
The schedule of initial sales charges and reductions for Class D shares
is the same as the schedule for Class A shares. Class D shares also
will be issued upon conversion of Class B shares as described above
under 'Class B.' See 'Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares.'
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(Service Mark) System that the investor believes is most beneficial under
his particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee imposed
on Class D shares. Investors qualifying for significantly reduced
6
<PAGE>
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that previously
purchased Class A shares may no longer be eligible to purchase Class A shares of
other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation which may qualify the investor for reduced initial sales
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>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audit of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditiors. Financial statements for the per-
iod October 29, 1993 (commencement of operations) to August 31, 1994 and the
independent auditors' report thereon are included in the Statement of Additional
Information. Financial information is not presented for Class C or Class D
shares since no shares of those classes are publicly issued as of the date of
this Prospectus. Further information about the performance of the Fund is
contained in the Fund's most recent annual report to shareholders which may be
obtained, without charge, by calling or by writing the Fund at the telephone
number or address on the front cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ ------------
FOR THE FOR THE
PERIOD PERIOD
INCREASE (DECREASE) OCTOBER 29, OCTOBER 29,
IN NET ASSET VALUE: 1993+ TO 1993+ TO
PER SHARE OPERATING AUGUST 31, AUGUST 31,
PERFORMANCE: 1994 1994
------------ ------------
<S> <C> Net asset value,
beginning of
period............ $ 10.00 $ 10.00
------------ ------------
Investment
income--net..... .40 .35
Realized and
unrealized loss
on investments
--net........... (1.57 ) (1.57 )
------------ ------------
Total from
investment
operations........ (1.17 ) (1.22 )
------------ ------------
Less dividends:
Investment
income--net..... (.39 ) (.34 )
------------ ------------
Net asset value, end
of period......... $ 8.44 $ 8.44
------------ ------------
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per
share........... (11.84 )%++ (12.34 )%++
------------ ------------
------------ ------------
RATIOS TO AVERAGE
NET ASSETS:
Expenses, excluding
distribution fee
and net of
reimbursement..... 0.44 %* .46 %*
------------ ------------
------------ ------------
Expenses, net of
reimbursement..... 0.44 %* 1.21 %*
------------ ------------
------------ ------------
Expenses............ 1.58 %* 2.35 %*
------------ ------------
------------ ------------
Investment
income--net....... 5.92 %* 5.22 %*
------------ ------------
------------ ------------
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands)........ $ 4,238 $ 27,395
------------ ------------
------------ ------------
Portfolio
turnover.......... 8.50 % 8.50 %
------------ ------------
------------ ------------
</TABLE>
- ------------------------
+ Commencement of Operations.
++ Aggregate total investment returns.
* Annualized.
** Total investment returns exclude the effects of sales loads.
8
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a diversified, open-end management investment company. The
Fund's investment objective is to seek high current income through investment of
at least 65% of its total assets in equity and debt securities issued by
companies which are, in the opinion of the Manager, primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water. This objective is a fundamental
policy which the Fund may not change without a vote of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the 'Investment Company Act'). There can be no assurance that the
Fund's investment objective will be achieved. The Fund may employ a variety of
instruments and techniques to enhance income and to hedge against market and
currency risk, as described below under 'Other Investment Policies and
Practices--Portfolio Strategies Involving Options and Futures.'
The Fund at all times, except during temporary defensive periods, will
maintain at least 65% of its total assets invested in equity and debt securities
issued by companies in the utilities industries. The Fund is permitted to invest
up to 35% of its assets in the securities of issuers that are outside the
utility industries. The Fund reserves the right to hold, as a temporary
defensive measure or as a reserve for redemptions, short-term U.S. Government
securities, money market securities, including repurchase agreements, or cash in
such proportions as, in the opinion of the Manager, prevailing market or
economic conditions warrant. Except during temporary defensive periods, such
securities or cash will not exceed 20% of its total assets.
The Fund will invest in common stocks (including preferred or debt
securities convertible into common stocks), preferred stocks and debt
securities. The relative weightings among common stocks, debt securities and
preferred stocks will vary from time to time based upon the Manager's judgment
of the extent to which investments in each category will contribute to meeting
the Fund's investment objective. Fixed income securities in which the Fund will
invest generally will be limited to those rated investment grade, that is, rated
in one of the four highest rating categories by Standard & Poor's Corporation
('S&P') or Moody's Investors Service, Inc. ('Moody's'), or deemed to be of
equivalent quality (i.e., securities rated at least BBB by S&P or Baa by
Moody's) in the judgment of the Manager. Securities rated Baa by Moody's are
described by it as having speculative characteristics and, according to S&P,
fixed income securities rated BBB normally exhibit adequate protection
parameters, although adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal.
The Fund's commercial paper investments at the time of purchase will be rated
'A-1' or 'A-2' by S&P or 'Prime-1' or 'Prime-2' by Moody's or, if not rated,
will be of comparable quality as determined by the Manager. The Fund may also
invest up to 5% of its total assets at the time of purchase in fixed income
securities having a minimum rating no lower than Caa by Moody's or CCC by S&P.
The Fund may, but need not, dispose of any security if it is subsequently
downgraded. For a description of ratings of debt securities, see the Appendix to
the Statement of Additional Information.
The Fund may invest up to 20% of its total assets in securities of foreign
issuers. (Purchases of American Depository Receipts ('ADRs'), however, will not
be subject to this restriction.) Investments in securities of foreign entities
and securities denominated in foreign currencies involve risks not typically
involved in domestic investment, including fluctuations in foreign exchange
rates, future foreign political and economic developments, and the possible
imposition of exchange controls or other foreign or United States government
laws or restrictions applicable to such investments. With respect to certain
foreign countries, there is the possibility of expropriation of assets,
confiscatory taxation, political or social instability or diplomatic
developments which
9
<PAGE>
could affect investment in those countries. Foreign entities may not be subject
to accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. Certain foreign investments may
be subject to foreign withholding taxes. Foreign financial markets, while
growing in volume, have, for the most part, substantially less volume than
United States 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,
sometimes resulting in delays in settlement which could have an adverse effect
on the Fund, including on its performance. Costs associated with transactions in
foreign securities are generally higher than costs associated with transactions
in United States 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.
The Fund may invest in the securities of foreign issuers in the form of
ADRs, European Depository Receipts ('EDRs') or other securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by an American bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Generally, ADRs, which are issued in registered form, are
designed for use in the United States securities markets, and EDRs, which are
issued in bearer form, are designed for use in European securities markets. The
Fund may invest in ADRs and EDRs through both sponsored and unsponsored
arrangements. In a sponsored ADR or EDR arrangement, the foreign issuer assumes
the obligation to pay some or all of the depository's transaction fees, whereas
in an unsponsored arrangement the foreign issuer assumes no obligations and the
depository's transaction fees are paid by the ADR or EDR holders. Foreign
issuers in respect of whose securities unsponsored ADRs or EDRs have been issued
are not necessarily obligated to disclose material information in the markets in
which the unsponsored ADRs or EDRs are traded and, therefore, there may not be a
correlation between such information and the market value of such securities.
A change in prevailing interest rates is likely to affect the Fund's net
asset value because prices of debt and equity securities of utility companies
tend to increase when interest rates decline and decrease when interest rates
rise.
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in the securities markets and exchange rates between
currencies by the use of options, futures and options thereon. Utilization of
options and futures transactions involves the risk of imperfect correlation in
movements in the price of options and futures and movements in the price of the
securities or currencies which are the subject of the hedge. There can be no
assurance that a liquid secondary market for options and futures contracts will
exist at any specific time. See 'Other Investment Policies and
Practices--Portfolio Strategies Involving Options and Futures.'
Because of its emphasis on securities of companies in the utilities
industries, the Fund should be considered a vehicle for diversification and not
as a balanced investment program.
UTILITY INDUSTRIES--DESCRIPTION AND RISKS
Under normal circumstances, the Fund will invest at least 65% of its total
assets in common stocks (including preferred or debt securities convertible into
common stocks), debt securities and preferred stocks of companies in the utility
industries. To meet its objective of high current income, the Fund may invest in
utility
10
<PAGE>
companies that pay higher than average dividends, but have a lesser potential
for capital appreciation. The average dividend yields of common stocks issued by
domestic utility companies historically have significantly exceeded those of
industrial companies' common stocks, while the prices of domestic utility stocks
have tended to be less volatile than stocks of industrial companies. For certain
periods, the total return of utility companies' securities has underperformed
that of industrial companies' securities. There can be no assurance that
positive relative returns on utility securities will occur in the future.
The utility companies in which the Fund will invest include companies which
are, in the opinion of the Manager, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute electricity,
telecommunications, gas or water.
Risks that are intrinsic to the utility industries include difficulty in
obtaining an adequate return on invested capital, difficulty in financing large
construction programs during an inflationary period, restrictions on operations
and increased cost and delays attributable to environmental considerations and
regulation, difficulty in raising capital in adequate amounts on reasonable
terms in periods of high inflation and unsettled capital markets, technological
innovations which may render existing plants, equipment or products obsolete,
the potential impact of natural or man-made disasters, increased costs and
reduced availability of certain types of fuel, occasionally reduced availability
and high costs of natural gas for resale, the effects of energy conservation,
the effects of a national energy policy and lengthy delays and greatly increased
costs and other problems associated with the design, construction, licensing,
regulation and operation of nuclear facilities for electric generation,
including, among other considerations, the problems associated with the use of
radioactive materials and the disposal of radioactive wastes. There are
substantial differences between the regulatory practices and policies of various
jurisdictions, and any given regulatory agency may make major shifts in policy
from time to time. There is no assurance that regulatory authorities will, in
the future, grant rate increases or that such increases will be adequate to
permit the payment of dividends on common stocks. Additionally, existing and
possible future regulatory legislation may make it even more difficult for these
utilities to obtain adequate relief. Certain of the issuers of securities of the
portfolio may own or operate nuclear generating facilities. Governmental
authorities may from time to time review existing policies, and impose
additional requirements governing the licensing, construction and operation of
nuclear power plants. Prolonged changes in climatic conditions can also have a
significant impact on both the revenues of an electric and gas utility as well
as the expenses of a utility, particularly a hydro-based electric utility.
Utility companies are generally subject to regulation. Most utility
companies are regulated by state and/or federal authorities. Such regulation is
intended to ensure appropriate standards of service and adequate capacity to
meet public demand. Generally, prices are also regulated with the intention of
protecting the public while ensuring that the rate of return earned by utility
companies is sufficient to allow them to attract capital in order to grow and
continue to provide appropriate services. There can be no assurance that such
pricing policies or rates of return will continue in the future.
The nature of regulation of the utility industries is evolving. In recent
years, changes in regulation increasingly have allowed utility companies to
provide services and products outside their traditional geographic areas and
lines of business, creating new areas of competition within the industries. In
some instances, utility companies are operating on an unregulated basis. Because
of trends toward deregulation and the evolution of independent power producers
as well as new entrants to the field of telecommunications, non-regulated
providers of utility services have become a significant part of their respective
industries. The Manager believes that the emergence of competition and
deregulation will result in certain utility companies being able to earn more
than
11
<PAGE>
their traditional regulated rates of return, while others may be forced to
defend their core business from increased competition and may be less
profitable. The Manager seeks to take advantage of favorable investment
opportunities that may arise from these structural changes. Of course, there can
be no assurance that favorable developments will occur in the future.
The revenues of utility companies generally reflect the economic growth and
development in the geographic areas in which they do business. The Manager will
take into account anticipated economic growth rates and other economic
developments when selecting securities of utility companies.
Electric. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. In recent years,
electric utility companies, in general, have been favorably affected by lower
fuel and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies have
historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowings needed for capital
construction programs, costs associated with compliance with environmental and
safety regulations and changes in the regulatory climate. As interest rates have
declined, many utilities have refinanced high cost debt and in doing so have
improved their fixed charges coverage. Regulators, however, have lowered allowed
rates of return as interest rates have declined and thereby caused the benefits
of the rate declines to be shared wholly or in part with customers.
The construction and operation of nuclear power facilities is subject to
increased scrutiny by, and evolving regulations of, the Nuclear Regulatory
Commission and state agencies having comparable jurisdiction. Increased scrutiny
might result in higher operating costs and higher capital expenditures, with the
risk that the regulators may disallow inclusion of these costs in rate
authorizations or the risk that a company may not be permitted to operate or
complete construction of a facility. In addition, operators of nuclear power
plants may be subject to significant costs for disposal of nuclear fuel and for
decommissioning of such plants.
In October 1993, S&P stiffened its debt-ratings formula for the electric
utility industry, stating that the industry is in long-term decline. In
addition, Moody's stated that it expected a drop in the next three years in its
average credit ratings for the industry. Reasons set forth for these outlooks
included slowing demand and increasing cost pressures as a result of competition
from rival providers.
Telecommunications. The telephone industry is large and highly
concentrated. Companies that distribute telephone services and provide access to
the telephone networks comprise the greatest portion of this segment. Since the
mid-1980's, companies engaged in telephone communication services have expanded
their non-regulated activities into other businesses, including cellular
telephone services, data processing, equipment retailing, computer software and
hardware services, and financial services. This expansion has provided
significant opportunities for certain telephone companies to increase their
earnings and dividends at faster rates than had been allowed in traditional
regulated businesses. Increasing competition, technological innovations and
other structural changes, however, could adversely affect the profitability of
such utilities. Technological breakthroughs and the merger of telecommunications
with video and entertainment is now associated with the expansion of the role of
cable companies as providers of utility services in the telecommunications
industry and the competitive response of traditional telephone companies. Given
mergers and certain marketing tests currently
12
<PAGE>
underway, it is likely that both traditional telephone companies and cable
companies will soon provide a greatly expanded range of utility services,
including two-way video and informational services.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. Interstate transmission companies are regulated
by the Federal Energy Regulatory Commission, which is reducing its regulation of
the industry. Many companies have diversified into oil and gas exploration and
development, making returns more sensitive to energy prices. In the recent
decade, gas utility companies have been adversely affected by disruptions in the
oil industry and have also been affected by increased concentration and
competition. In the opinion of the Manager, however, environmental
considerations could improve the gas industry outlook in the future. For
example, natural gas is the cleanest of the hydrocarbon fuels, and this may
result in incremental shifts in fuel consumption toward natural gas and away
from oil and coal.
Water. Water supply utilities are companies that collect, purify,
distribute and sell water. The industry is highly fragmented because most of the
supplies are owned by local authorities. Companies in this industry are
generally mature and are experiencing little or no per capita volume growth. In
the opinion of the Manager, there may be opportunities for certain companies to
acquire other water utility companies and for foreign acquisition of domestic
companies. The Manager believes that favorable investment opportunities may
result from consolidation of this segment.
There can be no assurance that the positive developments noted above will
occur or that risk factors other than those noted above will not develop in the
future.
INVESTMENT OUTSIDE THE UTILITY INDUSTRIES
As noted above, the Fund is permitted to invest up to 35% of its assets in
securities of issuers that are outside the utility industries. Such investments
may include common stocks, debt securities or preferred stocks and will be
selected to meet the Fund's investment objective of high current income. Some of
these issuers may be in industries related to utility industries and, therefore,
may be subject to similar risks. Securities that are issued by foreign companies
or are denominated in foreign currencies are subject to the risks outlined
above.
The Fund is also permitted to invest in securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities ('U.S. Government
Securities'). Such investments may be backed by the 'full faith and credit' of
the United States, including U.S. Treasury bills, notes and bonds as well as
certain agency securities and mortgage-backed securities issued by the
Government National Mortgage Association (GNMA). The guarantees on these
securities do not extend to the securities' yield or value or to the yield or
value of the Fund's shares. Other investments in agency securities are not
necessarily backed by the 'full faith and credit' of the United States, such as
certain securities issued by the Federal National Mortgage Association (FNMA),
the Federal Home Loan Mortgage Corporation, the Student Loan Marketing
Association and the Farm Credit Bank.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Strategies Involving Options and Futures. As noted above, 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 adverse movements in the equity, debt and currency markets. The Fund has
authority to write (i.e., sell) covered put and call options on its portfolio
securities, purchase put and call options on securities and engage in
transactions in stock index options, stock index futures and financial futures,
and related options on such futures. The Fund may also deal in forward foreign
exchange transactions and foreign currency options and
13
<PAGE>
futures, and related options on such futures. Each of these portfolio strategies
is described in more detail in the Appendix attached to this Prospectus.
Although certain risks are involved in options and futures transactions (as
discussed in 'Risk Factors in Options and Futures Transactions' in the Appendix
to this Prospectus), the Manager believes that, because the Fund will (i) write
only covered options on portfolio securities, and (ii) engage in other options
and futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of Fund shares, the Fund's net asset value
will fluctuate.
THERE CAN BE NO ASSURANCE THAT THE FUND'S HEDGING TRANSACTIONS WILL BE
EFFECTIVE. FURTHERMORE, THE FUND MAY ONLY ENGAGE IN HEDGING ACTIVITIES FROM TIME
TO TIME AND MAY NOT NECESSARILY BE ENGAGING IN HEDGING ACTIVITIES WHEN MOVEMENTS
IN THE EQUITY, DEBT AND CURRENCY MARKETS OCCUR. Reference is made to the
Statement of Additional Information for further information concerning these
strategies.
Portfolio Transactions. In executing portfolio transactions, the Fund
seeks to obtain the best net results, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of order,
difficulty of execution, operational facilities of the firm involved and the
firm's risk in positioning a block of securities. While the Fund generally seeks
reasonably competitive commission rates, the Fund does not necessarily pay the
lowest commission or spread available. The Fund contemplates that, consistent
with its policy of obtaining the best net results, it will place orders for
transactions with a number of brokers and dealers, including Merrill Lynch, an
affiliate of the Manager. Subject to obtaining the best price and execution,
brokers who provide supplemental investment research to the Fund 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 Manager and
the expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information. If in the judgment of the Manager the
Fund will be benefitted by supplemental research services, the Manager is
authorized to pay brokerage commissions to a broker furnishing such services
which are in excess of commissions which another broker may have charged for
effecting the same transactions. See 'Management of the Fund--Management and
Advisory Arrangements.' In addition, consistent with the Rules of Fair Practice
of the NASD, the Manager may consider sales of shares of the Fund as a factor in
the selection of brokers or dealers to execute portfolio transactions for the
Fund. It is expected that the majority of the shares of the Fund will be sold by
Merrill Lynch.
Portfolio Turnover. While the Fund generally does not expect to engage in
trading for short-term gains, the Manager will effect portfolio transactions
without regard to a holding period, if, in its judgment, such transactions are
advisable in light of a change in circumstance in general market, economic or
financial conditions. As a result of its investment policies, the Fund may
engage in a substantial number of portfolio transactions. Accordingly, while the
Fund anticipates that its annual turnover rate should not exceed 100% under
normal conditions, it is impossible to predict portfolio turnover rates. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year or
less) by the monthly average value of the securities in the portfolio during the
year. High portfolio turnover involves correspondingly greater transaction costs
in the form of dealer spreads and brokerage commissions, which are borne
directly by the Fund. For the fiscal period ended August 31, 1994, the portfolio
turnover of the Fund was 8.50%.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities
14
<PAGE>
are purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government Securities or
other high grade liquid debt or equity securities denominated in U.S. dollars or
non-U.S. currencies in an aggregate amount equal to the amount of its commitment
in connection with such purchase transactions.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid securities, although it will limit such investments to 10% of its net
assets to the extent required by state law. Pursuant to that restriction the
Fund may not invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed, put to the issuer or a third party, or which do not mature within
seven days, or which the Board of Directors has not determined to be liquid, if,
regarding all such securities, more than 15% of its net assets, taken at market
value, would be invested in such securities. Although not a fundamental policy,
the Fund will include options in the over-the-counter markets ('OTC options')
and the securities underlying such options (to the extent provided under
'Portfolio Strategies Involving Options and Futures--Restrictions on OTC
Options' in the Appendix herein) in calculating the amount of its total assets
subject to the limitation on illiquid securities. The Fund will not change or
modify this policy prior to the change or modification by the Commission staff
of its position regarding OTC options.
The Fund may purchase, without regard to the above limitation, securities
that are not registered under Securities Act of 1933 (the 'Securities Act') but
that can be offered and sold to 'qualified institutional buyers' under Rule 144A
under the Securities Act, provided that the Fund's Board of Directors, or the
Manager pursuant to guidelines adopted by the Board, continuously determines,
based on the trading markets for the specific Rule 144A security, that it is
liquid. The Board of Directors, however, will retain 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.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which may
be issued and sold to the Fund at the option of the issuer. The price and coupon
of the security is fixed at the time of the commitment. At the time of entering
into the agreement the Fund is paid a commitment fee, regardless of whether or
not the security is ultimately issued, which is typically approximately 0.5% of
the aggregate purchase price of the security which the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and price which
is considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale, will not exceed 15% of its
net assets taken at the time of acquisition of such commitment or security. The
Fund will at all times maintain a segregated account with its custodian of cash,
cash equivalents, U.S. Government Securities or other high grade liquid debt or
equity securities denominated in U.S.
15
<PAGE>
dollars or non-U.S. currencies in an aggregate amount equal to the purchase
price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer in U.S. Government
Securities or an affiliate thereof. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price in a specified
currency, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during such
period although it may be affected by currency fluctuations. In the case of
repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligation. Such agreements usually
cover short periods, such as under one week. Repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with disposition of the collateral. In the event of a
default under such a repurchase agreement, instead of the contractual fixed
rate, the rate of return to the Fund shall be dependent upon intervening
fluctuations of the market value of such security and the accrued interest on
the security. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform. Repurchase agreements maturing
in more than seven days are deemed illiquid by the Commission and are therefore
subject to the Fund's investment restriction limiting investments in securities
that are not readily marketable to 15% of the Fund's net assets.
Lending of Portfolio Securities. To the extent permitted by law, the Fund
may from time to time lend securities from its portfolio to banks, brokers and
other financial institutions and receive collateral in cash or securities issued
or guaranteed by the United States Government. Such collateral will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. The Fund's policy concerning lending is
fundamental and it 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. During the period of such a loan, the Fund receives the
income on the loaned securities and either receives the income on the collateral
or other compensation, i.e.,negotiated loan premium or fee, for entering into
the loan and thereby increases its yield.
16
<PAGE>
In the event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of the collateral falls below the market value of the
borrowed securities. Presently, the Fund does not intend to lend portfolio
securities representing in excess of 33 1/3% of its total assets.
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 (a) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among the Fund's more significant investment policies, with
respect to 75% of its assets, the Fund may not invest in the securities of any
one issuer if, immediately after and as a result of such investment, the value
of the holdings of the Fund in the securities of such issuer exceeds 5% of the
Fund's total assets, taken at market value, or the Fund owns more than 10% of
the outstanding voting securities of such issuer, except that such restriction
shall not apply to U.S. Government Securities. The Fund will concentrate in
equity and debt securities issued by companies in the utilities industries.
Other fundamental policies include policies which (i) limit investments in
securities which cannot be readily resold because of legal or contractual
restrictions or which cannot otherwise be marketed, redeemed, put to the issuer
or a third party, or which do not mature within seven days, or which the Board
of Directors of the Fund has not determined to be liquid, if, regarding all such
securities, more than 15% of its net assets would be invested in such
securities, (ii) prohibit investments in securities of other open-end or
closed-end investment companies, except to the extent such purchases are
permitted by applicable law, and (iii) restrict the issuance of senior
securities and limit bank borrowings except that the Fund may borrow amounts of
up to 10% of its assets for extraordinary or emergency purposes or to meet
redemptions. The Fund will not purchase securities while borrowings exceed 5% of
its total assets. The Fund has no present intention to borrow money in amounts
exceeding 5% of its total assets. Moreover, the Fund does not presently intend
to make any investment that would result in the Fund becoming subject to the
provisions of the Public Utility Holding Company Act of 1935 ('PUCA'). Although
not a fundamental policy, the Fund will include OTC options and the securities
underlying such options in calculating the amount of its total assets subject to
the limitation set forth in clause (i) above. However, as discussed above, the
Fund may treat the securities it uses as cover for written OTC options as
liquid, and therefore, such securities will be excluded from this restriction,
provided the Fund follows a specified procedure. The Fund will not change or
modify this policy prior to the change or modification by the Commission staff
of its position regarding OTC options, as discussed above.
The Board of Directors of the Fund, at a meeting held on August 4, 1994,
approved certain changes to the fundamental and non-fundamental investment
restrictions of the Fund. These changes were proposed in connection with the
creation of a set of standard fundamental and non-fundamental investment
restrictions that would be adopted, subject to shareholder approval, by
substantially all of the non-money market mutual funds advised by MLAM or FAM.
The proposed uniform investment restrictions are designed to provide each of
these funds, including the Fund, with as much investment flexibility as possible
under the Investment Company Act and applicable state securities regulations,
help promote operational efficiencies and facilitate monitoring of compliance.
The investment objectives and policies of the Fund will be unaffected by the
adoption of the proposed investment restrictions.
17
<PAGE>
The full text of the proposed investment restrictions is set forth under
'Investment Objective and Policies-- Proposed Uniform Investment Restrictions'
in the Statement of Additional Information. Shareholders of the Fund are
currently considering whether to approve the proposed revised investment
restrictions. If such shareholder approval is obtained, the Fund's current
investment restrictions will be replaced by the proposed restrictions, and the
Fund's Prospectus and Statement of Additional Information will be supplemented
to reflect such change.
MANAGEMENT OF THE FUND
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, Director and Chief Investment Officer of the
Manager and FAM, President and Director of Princeton Services, Inc.; Executive
Vice President of Merrill Lynch & Co., Inc. ('ML & Co.'); and Executive Vice
President of Merrill Lynch; Director of Merrill Lynch Funds Distributor, Inc.
RONALD W. FORBES--Professor of Finance, School of Business, State
University of New York at Albany.
CYNTHIA A. MONTGOMERY--Professor, Harvard Business School since 1989.
CHARLES C. REILLY--Adjunct Professor, Columbia University Graduate School
of Business. Former President and Chief Investment Officer of Verus Capital,
Inc. Former Senior Vice President of Arnhold and S. Bleichroeder, Inc.
KEVIN A. RYAN--Professor of Education at Boston University since 1982.
Founder and current Director of The Boston University Center for the Advancement
of Ethics and Character.
RICHARD R. WEST--Professor of Finance, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration.
- ------------------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey
(mailing address: P.O. Box 9011, Princeton, New Jersey 08543-9011) acts as
manager for the Fund and provides the Fund with management and investment
advisory services. The Manager is owned and controlled by ML & Co., a financial
services holding company and the parent of Merrill Lynch. The Manager or its
affiliate, FAM, acts as the manager for more than 100 other registered
investment companies. The Manager also offers portfolio management and portfolio
analysis services to individuals and institutions. As of August 31, 1994, the
Manager and FAM had a total of approximately $165.7 billion in investment
company and other portfolio assets under management, including accounts of
certain affiliates of the Manager.
18
<PAGE>
The management agreement with the Manager (the 'Management Agreement')
provides that, subject to the direction of the Board of Directors of the Fund,
the Manager is responsible for the actual management of the Fund's portfolio.
The responsibility for making decisions to buy, sell or hold a particular
security rests with the Manager, subject to review by the Board of Directors.
Walter D. Rogers is the portfolio manager of the Fund. Mr. Rogers has
served as a Vice President of the Manager and has been employed by the Manager
in this capacity since 1987. For the past five years, Mr. Rogers has acted as
portfolio manager of one or more other registered investment companies sponsored
by the Manager, including Merrill Lynch Global Utility Fund, Inc., and continues
to act in such capacity with respect to certain of these companies.
The Manager 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 Management Agreement.
The Fund pays the Manager a monthly fee at the annual rate of 0.55% of the
average daily net assets of the Fund. In addition, the Management Agreement
obligates the Fund to pay certain expenses incurred in its operations including,
among other things, the investment advisory fee, legal and audit fees,
registration fees, unaffiliated Directors' fees and expenses, custodian and
transfer agency fees, accounting costs, the costs of issuing and redeeming
shares and certain of the costs of printing proxies, shareholder reports,
prospectuses and statements of additional information. For the fiscal period
ended August 31, 1994, the Manager earned fees of $138,575 (based upon average
net assets of approximately $30.0 million), all of which was voluntarily waived.
For the fiscal period ended August 31, 1994, the ratio of total expenses net of
reimbursement to average net assets was .44% for Class A shares and 1.21% for
Class B shares; no Class C or Class D shares had been issued during that year.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the 'Transfer Agent'), which is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc., acts as the Fund's
Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the 'Transfer Agency Agreement').
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives a fee of $11.00 per Class A and Class D shareholder account and
$14.00 per Class B and Class C shareholder account and is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. For the fiscal period ended August 31, 1994, the total fee
paid by the Fund to the Transfer Agent was $24,969. At August 31, 1994, the Fund
had 348 Class A shareholder accounts, 2,638 Class B shareholder accounts, no
Class C shareholder accounts and no Class D shareholder accounts. At this level
of accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $40,760 plus out-of-pocket expenses.
REIMBURSEMENT FOR PORTFOLIO ACCOUNTING SERVICES
Accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services on a
semi-annual basis. For the fiscal period ended August 31, 1994, the amount of
such reimbursement was $32,035.
19
<PAGE>
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the 'Distributor'), an affiliate of
both the Manager 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 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(Service Mark) System as described below. The applicable offering price
for purchase orders is based upon the net asset value of the Fund next
determined after receipt of the purchase orders by the Distributor. As to
purchase orders received by securities dealers prior to 4:15 P.M., New York
time, which includes orders received after the determination of net asset value
on the previous day, the applicable offering price will be based on the net
asset value as of 4:15 P.M., New York time, on the day the orders are placed
with the Distributor, provided the orders are received by the Distributor prior
to 4:30 P.M., New York time, on that day. If the purchase orders are not
received prior to 4:30 P.M., New York time, such orders shall be deemed received
on the next business day. The Fund or the Distributor may suspend the continuous
offering of the Fund's shares of any class at any time in response to conditions
in the securities markets or otherwise and may thereafter resume such offering
from time to time. Any order may be rejected by the Distributor or the Fund.
Neither the Distributor nor the dealers are permitted to withhold placing orders
to benefit themselves by a price change. Merrill Lynch may charge its customers
a processing fee (presently $4.85) to confirm a sale of shares to such
customers. Purchases directly through the Fund's transfer agent are not subject
to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System, whch 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(Service Mark) System is
set forth under 'Merrill Lynch Select Pricing(Service Mark) System' on page 4.
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
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D 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
20
<PAGE>
paid by the Fund for each class of shares will be calculated in the same manner
at the same time and will differ only to the extent that account maintenance and
distribution fees and any incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Class B, Class C and Class
D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid. See 'Distribution Plans' below.
Each class has different exchange privileges. See 'Shareholder
Services--Exchange Privilege.'
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System.
<TABLE>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 4.00% No No No
initial sales
charge(2)(3)
B CDSC for a period of 0.25 % 0.50 % B shares convert to
4 years, at a rate D shares
of 4.0% during the automatically
first year, after
decreasing 1.0% approximately
annually to 0.0% ten years(4)
C 1.0% CDSC for one 0.25 % 0.55 % No
year
D Maximum 4.0% 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 may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See 'Initial Sales Charge
Alternative--Class A and Class D Shares--Eligible Class A Investors.'
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an eight
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
21
<PAGE>
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.
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
SELECTED
SALES LOAD SALES LOAD DEALERS
AS AS AS
PERCENTAGE* PERCENTAGE* PERCENTAGE
OF OF THE NET OF THE
OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Less than $25,000....................... 4.00 4.17 3.75
$25,000 but less than $50,000........... 3.75 3.90 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. If the sales charge is
waived, such purchases may be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Class A purchases made prior to
October 21, 1994 may be subject to a CDSC, in lieu of an initial sales
charge, if the shares are redeemed within one year of purchase at the
following rates: 0.75% on purchases of $1,000,000 to $2,500,000; 0.40% on
purchases of $2,500,001 to $3,500,000; 0.25% on purchases of $3,500,001 to
$5,000,000; and 0.20% on purchases of more than $5,000,000 in lieu of paying
an initial sales charge. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed. A sales charge of 0.75% will be charged on purchases of $1 million
or more of Class A or Class D shares by certain 401(k) plans.
The Distributor may reallow discounts to such dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. During
the fiscal period ended August 31, 1994, the Fund sold 896,487 Class A shares
for aggregate net proceeds of $8,334,878. The gross sales charges for the sale
of Class A shares of the Fund for that period were $252,797, of which $1,787 and
$251,010 were received by the Distributor and Merrill Lynch, respectively. No
CDSCs were received with respect to Class A shares for which the initial sales
charge was waived during the fiscal period ended August 31, 1994.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares in a
shareholder account, including participants in the Merrill Lynch
Blueprint(Service Mark) Program, are entitled to purchase additional Class A
shares in that account. Certain employer sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares at net asset value
provided such plans meet the required minimum number of eligible employees or
required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment programs including
TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services and certain
22
<PAGE>
purchases made in connection with the Merrill Lynch Mutual Fund Adviser program.
In addition, Class A shares will be offered at net asset value to Merrill Lynch
& Co., Inc. and its subsidiaries and their directors and employees and to
members of the Boards of MLAM-advised investment companies, including the Fund.
Certain persons who acquired shares of certain MLAM-advised closed-end funds who
wish to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund also may purchase Class A and Class D shares
of the Fund if certain conditions set forth in the Statement of Additional
Information are met. For example, Class A shares of the Fund and certain other
MLAM-advised mutual funds are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock of Merrill Lynch
Senior Floating Rate Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges may
also be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are also offered at net asset value to certain eligible
Class A investors as set forth above under 'Eligible Class A Investors.'
Class D shares are offered at net asset value to an investor who has a
business relationship with a financial consultant who joined Merrill Lynch from
another investment firm within six months prior to the date of purchase if
certain conditions set forth in the Statement of Additional Information are met.
Class D shares may be offered at net asset value in connection with the
acquisition of assets of other investment companies. Class D shares are also
offered at net asset value without sales charge, to an investor who has a
business relationship with a Merrill Lynch financial consultant and who has (i)
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, or (ii)
invested in a mutual fund sponsored by a non-Merrill Lynch company for which
Merrill Lynch has not served as a selected dealer, if certain conditions set
forth in the Statement of Additional Information are met.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(Service Mark) Program.
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored Retirement or
Saving Plans, is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately ten years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are
23
<PAGE>
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 as discussed below under 'Distribution
Plans.' In addition, Class B and Class C shares are subject to distribution fees
of 0.50% and 0.55%, respectively.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See 'Distribution
Plans' below.
Proceeds from the CDSC and the ongoing distribution fees 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 Deferred Sales Charges' below. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities.
Class B shareholders of the Fund exercising the exchange privilege
described under 'Shareholder Services--Exchange Privilege' will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
24
<PAGE>
The following table sets forth the rates of the Class B CDSC
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A
PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
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>
For the fiscal period ended August 31, 1994, the Distributor received
$73,597 in CDSCs with respect to redemptions of Class B shares.
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 the shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the 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).
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 or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans and in connection with certain group plans placing
orders through the Merrill Lynch Blueprint(Service Mark) Program. The CDSC also
is waived for any Class B shares which are purchased by eligible 401(k) or
eligible 401(a) plans which are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. 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.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which 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
25
<PAGE>
purchase price. In addition, no Class C CDSC will be assessed on shares derived
from reinvestment of dividends or capial gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the 'Conversion Period'), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
'Conversion Date') on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates have been 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 per
share.
26
<PAGE>
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 rate of 0.50% and
0.55%, respectively, of the average daily net assets of the Fund attributable to
the shares of the relevant class in order to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) for providing shareholder and
distribution services, and bearing certain distribution-related expenses of the
Fund, including payments to financial consultants for selling Class B and Class
C shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. 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 period ended August 31, 1994, the Fund paid the Distributor
account maintenance fees of $54,593 and distribution fees of $109,185 under the
Class B Distribution Plan. The Fund did not begin to offer shares of Class C or
Class D publicly until the date of this Prospectus. Accordingly, no payments
have been made pursuant to the Class C or Class D Distribution Plans prior to
the date of this Prospectus.
The payments under the Distribution Plans are based upon a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a 'fully allocated accrual' basis and quarterly on a 'direct expense and
revenue/cash' basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, the distribution fees, CDSC and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, the distribution fees and
CDSCs and the expenses consist of financial consultant compensation. As of
December 31, 1993, direct cash expenses for the period since October 29, 1993
(commencement of operations) exceeded direct cash revenues by $345,661 (1.24% of
Class B net assets at that date).
27
<PAGE>
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 Board of Directors of the Fund will approve the continuance of the
Distribution Plans from year to year. However, the Distributor intends to seek
annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each class of shares separately. The initial sales charges, the account
maintenance fee, the distribution fee and/or the CDSCs received with respect to
one class will not be used to subsidize the sale of shares of another class.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares into Class D shares as set forth under
'Deferred Sales Charge Alternatives--Class B and Class C Shares--Conversion of
Class B Shares to Class D Shares.'
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the 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 contingent deferred sales charges
payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares and
Class C shares computed separately (defined to exclude shares issued pursuant to
dividend reinvestments and exchanges), plus (2) interest on the unpaid balance
for the respective class, computed separately, at the prime rate plus 1% (the
unpaid balance being the maximum amount payable minus amounts received from the
payment of the distribution fee and the contingent deferred sales charge). In
connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the 'voluntary maximum') in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving 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 contingent deferred
sales charges will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable to Class B shares, there
will be no charge for redemption if the redemption request is sent directly to
the Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value of
shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
28
<PAGE>
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Fund's Transfer Agent, Financial Data
Services, Inc., Transfer Agency Mutual Fund Operations, P.O. Box 45289,
Jacksonville, Florida 32232-5289. Redemption requests delivered other than by
mail should be delivered to Financial Data Services, Inc., Transfer Agency
Mutual Fund Operations, 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Redemption requests should not be sent to the Fund. Proper notice of
redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. The notice in either event requires the signatures of
all persons in whose names the shares are registered, signed exactly as their
names appear on the Transfer Agent's register or on the certificate, as the case
may be. The signature(s) on the notice must be guaranteed by an 'eligible
guarantor institution' as such term is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
'Eligible guarantor institution(s)' include Merrill Lynch branches and certain
banks, brokers, dealers, credit unions, securities exchanges and associations,
clearing agencies and savings associations. 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 it has assured itself that good
payment (e.g., cash or certified check drawn on a United States bank) has been
collected for the purchase of such shares. Normally, this delay will not exceed
10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the New
York Stock Exchange on the day received, and such request is received by the
Fund from such dealer not later than 4:30 P.M., New York time, on the same day.
Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 4:30 P.M., New York time, in order to obtain that day's
closing price. 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) to confirm a repurchase of shares
to such customers. Redemptions directly through the Fund's transfer agent are
not subject to the processing fee. The Fund reserves the right to reject any
order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. A shareholder
whose order for repurchase is rejected by the Fund, however, may redeem shares
as set forth above.
29
<PAGE>
For a shareholder redeeming through his listed securities dealer other than
Merrill Lynch, payment for fractional shares will be made by the Transfer Agent
directly to the shareholder and payment for full shares will be made by the
securities dealer. A shareholder redeeming through Merrill Lynch will receive
payment for both full and fractional shares through Merrill Lynch. Redemption
payments will be made within seven days of the proper tender of the
certificates, if any, and stock power or letter requesting redemption, in each
instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares, 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. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege and
may be exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in 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 plans and services, or
to change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page hereof or from the Distributor or Merrill
Lynch. Included in such services are the following:
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive, at least quarterly,
statements 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 gains
distributions. A shareholder may make additions to his 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
30
<PAGE>
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the transfer agent.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. There is currently no limitation
on the number of times a shareholder may exercise the exchange privilege. The
exchange privilege may be modified or terminated at any time in accordance with
the rules of the Commission.
Under the Merrill Lynch Select Pricing(Service Mark) System, Class A
shareholders may exchange Class A shares of the Fund for Class A shares of a
second MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in his account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second fund.
If the Class A shareholder wants to exchange Class A shares for shares of a
second MLAM-advised mutual fund, and the shareholder does not hold Class A
shares of the second fund in his account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the shareholder
holds Class A shares of the second fund in the account in which the exchange is
made or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares will be exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is 'tacked' to the holding period of the newly acquired shares of the
other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction
31
<PAGE>
of any CDSC imposed on such shares, if any, and, with respect to Class B shares,
toward satisfaction of the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Funds CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see 'Shareholder Services--Exchange
Privilege' in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser ('MFA')
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D shares
of a MLAM-advised mutualfund for Class A or Class D shares of the Fund will be
made solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund at the net asset value per share next
determined on the ex-dividend date of such dividend or distribution. A
shareholder whose account is maintained through the transfer agent may at any
time, by written notification or by telephone 1-800-MER-FUND to 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 monthly. A shareholder whose account is maintained through Merrill Lynch
may, at any time, by written notification to Merrill Lynch, elect to have both
dividends and capital gains distributions paid in cash, rather than reinvested.
Cash payments can also be directly deposited to the shareholder's bank account.
No CDSC will be imposed upon redemption of shares issued as a result of the
automatic reinvestment of dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his Investment Account in the form of payments by check or through
automatic payment by direct deposit to his bank account on either a monthly or
quarterly basis. A Class A or Class D shareholder whose shares are held within a
CMA(Registered), CBA(Registered) or Retirement Account may elect to have shares
redeemed on a monthly, bi-monthly, quarterly, semiannual or annual basis through
the Systematic Redemption Program, subject to certain conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be
made to an investor's Investment Account by prearranged charges of $50 or more
to such investor's regular bank account. Investors who maintain CMA(Registered)
accounts may arrange to have periodic investments made in the Fund in their
CMA(Registered) account or in certain related accounts in amounts of $100 or
more through the CMA(Registered) Automated Investment Program.
32
<PAGE>
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and in certain of the other mutual funds sponsored by Merrill Lynch as well
as in other securities. Merrill Lynch charges an initial establishment fee and
an annual custodial fee for each account. In addition, eligible shareholders of
the Fund may participate in a variety of qualified employee benefit plans which
are available from the Distributor. The minimum initial purchase to establish
any such plan is $100 and the minimum subsequent purchase is $1.
Shareholders considering transferring a tax-deferred retirement account
such as an individual retirement account from Merrill Lynch to another brokerage
firm or financial institution should be aware that if the firm to which the
retirement account is being transferred will not take delivery of shares of the
Fund, the shareholder must either redeem the shares (paying any applicable CDSC)
so that the cash proceeds can be transferred to the account at the new firm, or
continue to maintain a retirement account at Merrill Lynch for those shares.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed separately for Class A, Class B, Class C and Class D
shares in accordance with formulas specified by the 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 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 and the maximum sales charge in the case of Class A and Class D
shares. Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
fees and distribution charges and any incremental transfer agency costs relating
to each class of shares will be borne exclusively by that class. The Fund will
include performance data for all classes of shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return generally will be lower than average annual total return data since
the average annual rates of return reflect compounding; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time. In
advertisements 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
33
<PAGE>
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 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.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The value
of an investment in the Fund will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Value Line Composite Index or the Dow Jones
Industrial Average, or to data contained in publications such as Lipper
Analytical Services, Inc., or performance data published by Morningstar
Publications, Inc., Money Magazine, U.S. News and World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine and Fortune Magazine. From time
to time, the Fund may include the Fund's Morningstar risk-adjusted performance
ratings in advertisements or supplemental sales literature. As with other
performance data, performance comparisons should not be considered
representative of the Fund's relative performance for any future period.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ('RICs') under the Internal Revenue Code
of 1986, as amended (the 'Code'). If it so qualifies, in any taxable year in
which it distributes at least 90% of its taxable net income, the Fund (but not
its shareholders) will not be subject to Federal income tax to the extent that
it distributes its net investment income and realized capital gains. The Fund
intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as 'ordinary income dividends') are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options) are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
In the event that the amount of distributions paid or deemed paid for the
Fund's fiscal year exceeds its investment company taxable income plus realized
net capital gains for such year, the amount of such excess may be treated as a
return of capital to all those shareholders who held shares of the Fund during
the year, thereby decreasing a shareholder's capital investment in the Fund. In
such case, each distribution paid or deemed paid for
34
<PAGE>
that year would be treated as a return of capital to all those shareholders who
held shares of the Fund during the year. In such case, each distribution paid or
deemed paid for that year would be treated, in the same proportion, in part as a
distribution of taxable income and in part as a return of capital. Shareholders
would incur no current federal income tax on the portion of such distributions
that are treated as a return of capital, but each shareholder's basis in its
Fund shares would be reduced by that amount. This reduction of basis would
operate to increase the shareholder's capital gain (or decrease its capital
loss) upon redemption of its shares. Moreover, to the extent that a distribution
exceeds both his proportionate share of earnings and profits of the Fund plus
his tax basis in the shares, the shareholder would recognize capital gain equal
to such excess.
If a shareholder buys shares near or on the record date for any upcoming
distribution, the shareholder will receive, in the form of a taxable
distribution, a portion of the money the shareholder just invested.
Dividends and distributions 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 amount of any dividends or capital gains
distributions. The portion of the Fund's ordinary income dividends which is
attributable to dividends received by the Fund from U.S. corporations may be
eligible for the dividends received deduction allowed to corporations under the
Code, if certain requirements are met. Not later than 60 days after the close of
its taxable year, the Fund will provide its shareholders with a notice
designating the amount of any distribution eligible for the dividends received
deduction. If the Fund pays a dividend in January which was declared in the
previous October, November or December to shareholders of record on a date in
such month, then such dividend or distribution will be treated for tax purposes
as being paid by the RIC and received by its shareholders on December 31 of the
year in which the dividend was declared.
Redemptions and exchanges of Fund shares are taxable events, and,
accordingly, shareholders may realize gains or losses on such transactions.
Under the Code, if a shareholder exercises his exchange privilege within 90 days
of acquiring Class A shares of the Fund to acquire shares in a second fund ('New
Fund'), then the loss he can recognize on the exchange will be reduced (or the
gain increased) to the extent the charge paid to the Fund reduces any charge he
would have owed upon purchase of the New Fund shares in the absence of the
exchange privilege. Instead, such charges will be treated as an amount paid for
the New Fund shares and will be included in the basis of such shares. See
'Shareholder Services--Exchange Privilege.'
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States withholding tax under existing provisions of the Code applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
Pursuant to the investment objectives of the Fund, the Fund may invest in
foreign securities. Foreign taxes may be paid by the Fund as a result of tax
laws of countries in which the Fund may invest. Because the Fund limits its
investments in foreign securities, shareholders will not be entitled to claim
foreign tax credits with respect to their share of foreign taxes paid by the
Fund on income from investments in foreign securities held by the Fund.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains distributions
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
35
<PAGE>
establishing an account, an investor must certify under penalty of perjury that
such number is correct and that he is not otherwise subject to backup
withholding.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through 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.
If a shareholder exercises an exchange privilege within 90 days of
acquiring such shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new shares.
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 these Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes.
Shareholders are urged to consult their advisers as to specific questions
concerning Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
All or a portion of the Fund's net investment income will be declared and
paid as dividends monthly. The Fund may at times pay out less than the entire
amount of net investment income earned in any particular period and may at times
pay out such accumulated undistributed income in addition to net investment
income earned in any particular period in order to permit the Fund to maintain a
more stable level of distributions. As a result, the distribution paid by the
Fund for any particular period may be more or less than the amount of net
investment income earned by the Fund during such period. However, it is the
Fund's intention to distribute during any fiscal year all its net investment
income. Shares will accrue dividends as long as they are issued and outstanding.
Shares are issued and outstanding as of the settlement date of a purchase order
to the settlement date of a redemption order. All net realized long-term and
short-term capital gains, if any, will be distributed to the Fund's
shareholders at least annually. 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.' Dividends and distributions may
be reinvested automatically in shares of the Fund, at net asset value without
sales charge. Shareholders may elect in writing to
36
<PAGE>
receive any such dividends or distributions or both, in cash. Dividends and
distributions are taxable to shareholders as described above whether they are
reinvested in shares of the Fund or received in cash. From time to time, the
Fund may declare a special distribution at or about the end of the calendar year
in order to comply with a Federal income tax requirement that certain
percentages of its ordinary income and capital gains be distributed during the
calendar year.
Certain gains or losses attributable to foreign currency related gains or
losses from certain of the Fund's investments may increase or decrease the
amount of the Fund's income available for distribution to shareholders. If such
losses exceed other income during a taxable year, (a) the Fund would not be able
to make any ordinary dividend distributions, and (b) distributions made before
the losses were realized would be recharacterized as a return of capital to
shareholders, rather than as an ordinary dividend, reducing each shareholder's
tax basis in his Fund shares for Federal income tax purposes. For a detailed
discussion of the Federal tax considerations relevant to foreign currency
transactions, see 'Dividends, Distributions and Taxes' in the Statement of
Additional Information. If in any fiscal year the Fund has net income from
certain foreign currency transactions, such income will be distributed at least
annually.
All net realized long-or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders annually after the close of the Fund's
fiscal year. Capital gains distributions will be automatically reinvested in
shares unless the shareholder elects to receive such distributions in cash.
See 'Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gains Distributions' for information as to how to elect either dividend
reinvestment or cash payments. Dividends and distributions are taxable to
shareholders as described below whether they are reinvested in shares of any
portfolio or received in cash.
DETERMINATION OF NET ASSET VALUE
Net asset value per share of all classes of shares of the Fund is
determined once daily as of 4:15 P.M., New York time, on each day during which
the New York Stock Exchange 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 fees payable to the Manager
and the Distributor, are accrued daily. The Fund employs Merrill Lynch
Securities Pricing Service ('MLSPS'), an affiliate of the Manager, to provide
certain securities prices for the Fund. During the fiscal period ended August
31, 1994, the Fund paid $42.00 to MLSPS for such service.
The per share net asset value of the Class A shares generally will be
higher than the per share net asset value of shares of the other classes,
reflecting the daily expense accruals of the account maintenance, distribution,
and higher transfer agency fees applicable with respect to the Class B and Class
C shares and the daily expense accruals of the account maintenance fees
applicable with respect to Class D shares; moreover, the per share net asset
value of Class D shares generally will be higher than the per share net asset
value of Class B and Class C shares, reflecting the daily expense accruals of
the distribution and higher transfer agency fees applicable with respect to
Class B and Class C shares. It is expected, however, that the per share net
asset value of the classes will tend to converge immediately after the payment
of dividends or distributions, which will differ by approximately the amount of
the expense accrual differential among the classes.
37
<PAGE>
Portfolio securities which are traded on stock exchanges are valued at the
last sale price 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 quoted bid prices
at the close of trading on the New York Stock Exchange on each day by brokers
that make markets in the securities. Portfolio 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. 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 market value, as determined in good faith by or under the direction of the
Board of Directors of the Fund, including valuations furnished by a pricing
service retained by the Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on July 14, 1993. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent interests in the same assets of the
Fund and are identical in all respects except that Class B, Class C and Class D
shares bear certain expenses related to the account maintenance associated with
such shares, and Class B and Class C shares bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to account maintenance and distribution expenditures, as
applicable. See 'Purchase of Shares.' The Fund has received an order from the
Securities and Exchange Commission permitting the issuance and sale of multiple
classes of Common Stock. The Board of Directors of the Fund may classify and
reclassify the shares of the Fund into additional classes of Common Stock at a
future date.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Directors (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. All shares of the Fund have equal voting rights, except, as noted
above, a class of shares will have exclusive voting rights with respect to
matters relating to distribution expenses and any account maintenance fee being
borne solely by such class. There normally will be no meeting of shareholders
for the purpose of electing Directors unless and until such time as less than a
majority of the Directors holding office have been elected by the shareholders,
at which time the Directors then in office will call a shareholders' meeting for
the election of Directors. Shareholders may, in accordance with the terms of the
Articles of Incorporation, cause a meeting of shareholders to be held for the
purpose of voting on the removal of Directors. Also, the Fund will be required
to call a special meeting of shareholders in accordance with the requirements of
the Investment Company Act to seek approval of new management and advisory
arrangements, of a material increase in distribution or account maintenance fees
or of a change in fundamental policies, objectives or restrictions. Except as
set forth above, the Directors shall continue to hold office and appoint
successor Directors. Each issued and outstanding share is entitled to
participate equally in dividends and distributions declared and in net assets
upon liquidation or dissolution remaining after satisfaction of outstanding
liabilities except that, as noted above, the Class B, Class C and Class D shares
bear certain additional expenses. Shares issued are fully-paid and
non-assessable and have no pre-emptive rights. Voting rights for Directors are
not cumulative. Shares have the conversion rights described in this Prospectus.
38
<PAGE>
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
Shareholder Reports. Only one copy of each shareholder report and certain
shareholder communications will be mailed to each identified shareholder
regardless of the number of accounts such shareholder has. If a shareholder
wishes to receive separate copies of each report and communication for each of
the shareholder's related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
financial consultant or Financial Data Services, Inc. at 800-637-3863.
39
<PAGE>
[This page intentionally left blank.]
40
<PAGE>
MERRILL LYNCH UTILITY INCOME FUND, INC.--AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
Note: This form may not be used for purchases through the Merrill Lynch
Blueprint(ServiceMark) Program. You may request a Merril Lynch
Blueprint(ServiceMark) Program application by calling (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares
/ / Class C shares / / Class D shares
of Merrill Lynch Utility 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 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.)
<TABLE>
<S> <C>
1....................................................... 4.......................................................
2....................................................... 5.......................................................
3....................................................... 6.......................................................
(Please Print)
</TABLE>
<TABLE>
<S> <C>
Name ............................................................................................................
First Name Initial Last Name
Name of Co-Owner (if any) .......................................................................................
First Name Initial Last Name
Address .........................................................................................................
............................................................................................ Date ............
(Zip Code)
</TABLE>
<TABLE>
<S> <C>
Occupation .......................................... Name and Address of Employer ........................
...................................................... ......................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwide specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Long-Term Capital Gains
Dividends
Select / / Reinvest Select / / Reinvest
One: / / Cash One: / / Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU:
/ / Check or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Utility 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 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.
41
<PAGE>
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER INDENTIFICATION 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 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)
Dear Sir/Madam: .............................. , 19 ......
Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Utility 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 Fund's Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Utility 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 Utility Income Fund, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
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 made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the Shareholder's signature.
...............................................................................
Dealer Name and Address
By..............................................................................
Authorized Signature of Dealer
/ / / / / / / / / .....................
Branch-Code F/C No. F/C Last Name
/ / / / / / / / /
Dealer's Customer Account No.
42
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH UTILITY 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
Name of Owner .......................................
Name of Co-Owner (if any) ...........................
/ / / / / / / / / /
Social Security No.
or Taxpayer Identification No.
Address .............................................
......................................................
Account Number ......................................
(if existing account)
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND CLASS D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Utility
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 ............. (month), or as soon as possible
thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK
ONE): / / $ ......... or / / ......... % of the current value of
/ / Class A or / / Class D shares in the account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of .............................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print) ..........................................
Address ..........................................................
..............................................................
Signature of Owner ............................ Date ............
Signature of Co-Owner (if any) ....................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO 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 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 SHALL ACCOMPANY THIS APPLICATION.
43
<PAGE>
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ('ACH') debit on my checking account as described below each
month to purchase: (choose one)
/ / Class A shares / / Class B shares
/ / Class C shares / / Class D shares
of Merrill Lynch Utility 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.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Utility Income Fund, Inc. as indicated below:
Amount of each ACH debit $ .................................................
Account No. ................................................................
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 drawing 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, 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 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 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 Number Signature of Depositor
(If joint account, both must
sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
'VOID' SHOULD ACCOMPANY THIS APPLICATION.
44
<PAGE>
APPENDIX
The Fund may employ a variety of instruments and techniques to enhance
income and to hedge against market and currency risk. These strategies are
described in more detail below:
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund in return for a premium gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase of
an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
Securities or other high grade liquid debt or equity securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository 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. The
Fund will not write put options if the aggregate value of the obligations
underlying all outstanding puts shall exceed 50% of the Fund's net assets.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
that 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 that any person may trade on a particular trading day. The Manager
does not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio. The Fund
will not write covered put options or covered call options on any stock index if
the cash, cash equivalents, liquid debt securities, or other assets used as
cover for such options have an aggregate value of greater than 50% of the Fund's
net assets.
Purchasing Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its securities. By buying a put
option the Fund has a right to sell the underlying security at the exercise
price, thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a
A-1
<PAGE>
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. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities which it intends to purchase. The Fund may also
purchase put options on U.S. Treasury securities for the purpose of hedging its
portfolio of interest rate sensitive equity securities against the adverse
effects of anticipated movements in interest rates. The Fund will not purchase
options on securities (including stock index options discussed below) 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.
Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures, and related options on such futures. The Fund may purchase or
write put and call options on stock indices to hedge against the risks of
market-wide stock price movements in the securities in which the Fund invests.
The effectiveness of the hedge will depend on the degree of diversification of
the Fund's portfolio and the sensitivity of the securities comprising the
portfolio to factors influencing the market as a whole. Because the value of an
index option depends upon movements in the level of the index rather than on the
price of a particular stock, whether the Fund will realize a gain or loss on the
purchase or sale of an option on an index depends upon movements in the level of
prices in the stock market generally or in an industry or market segment rather
than movements in the price of a particular stock. Options on indices are
similar to options on securities except that on exercise or assignment, the
parties to the contract pay or receive an amount of cash equal to the difference
between the closing value of the index and the exercise price of the option
times a specified multiple. The Fund may invest in stock index options based on
a broad market index, e.g., the S&P 500 Index, or on a narrow index representing
an industry or market segment, e.g., the AMEX Oil & Gas Index.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ('futures contracts') as a hedge against adverse
changes in the market value of its portfolio securities and interest rates as
described below. 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. Unlike
most other futures contracts, a stock index futures contract does not require
actual delivery of securities, but results in cash settlement based upon the
difference in value of the index between the time the contract was entered into
and the time of its settlement. Transactions by the Fund in stock index futures
and financial futures are subject to limitations as described below under
'Restrictions on the Use of Futures Transactions.'
The Fund may sell 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 also will 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
generally are 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 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
A-2
<PAGE>
anticipated that, in a substantial majority of these transactions, the Fund will
purchase securities upon termination of the futures contract.
The Fund may also sell futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market advance,
it may purchase futures in order to gain rapid market exposure that may in part
or entirely offset increases in the cost of securities that the Fund intends to
purchase. As such purchases are made, an equivalent amount of futures contracts
will be terminated by offsetting sales. The Fund does not consider purchases of
futures contracts to be a speculative practice under these circumstances. It is
anticipated that, in a substantial majority of these transactions, the Fund will
purchase such securities upon termination of the long futures position, whether
the long position is the purchase of a futures contract or the purchase of a
call option or the writing of a put option on a future, but under unusual
circumstances (e.g., the Fund experiences a significant amount of redemptions),
a long futures position may be terminated without the corresponding purchase of
securities.
The Fund also has authority to purchase and write call and put options on
futures contracts and stock indices 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 and stock indices rather than selling
the underlying futures contract in anticipation of a decrease in the market
value of its securities. Similarly, the Fund may purchase call options, or write
put options on futures contracts and stock indices, as a substitute for the
purchase of such futures to hedge against the increased cost resulting from an
increase in the market value of securities which the Fund intends to purchase.
The Fund may also purchase put options on futures contracts for U.S. Treasury
securities for the purpose of hedging its portfolio of interest rate sensitive
equity securities against the adverse effects of anticipated movements in
interest rates.
The Fund may engage in options and futures transactions on U.S. and foreign
exchanges and in OTC options. In general, exchange-traded contracts are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options transactions are two-party contracts
with price and terms negotiated by the buyer and seller. See 'Restrictions on
OTC Options' below for information as to restrictions on the use of OTC options.
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 purchase or sale of one forward foreign currency for
another currency with respect to portfolio security positions denominated or
quoted in such foreign currency to offset the effect of an anticipated
substantial appreciation or depreciation, respectively, in the value of such
currency relative to the U.S. dollar. 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,
A-3
<PAGE>
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 over-the-counter
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 yen denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of yen for dollars at a specified price
by a future date. To the extent the hedge is successful, a loss in the value of
the yen relative to the dollar will tend to be offset by an increase in the
value of the put option. To offset, in whole or in 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 yen for dollars at a specified price
by a future date (a technique called '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 yen to the dollar. The Manager
believes that 'straddles' of the type which may be utilized by the Fund
constitute hedging transactions and are consistent with the policies described
above.
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 currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on 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. Further, the Fund will segregate at its custodian U.S.
Government Securities or other high quality securities having a market value
substantially representing any subsequent net decrease in the market value of
such hedged positions, including net positions with respect to cross-currency
hedges. The Fund may not incur potential net liabilities with respect to
currency and securities positions, including net liabilities with respect to
cross-currency hedges, of more than 20% of its total assets from foreign
currency options, futures or related options and forward currency transactions.
Restrictions on the Use of Futures Transactions. Under regulations of the
Commodity Futures Trading Commission ('CFTC'), the futures trading activities
described herein will not result in the Fund being deemed to be a 'commodity
pool operator,' as defined under such regulations, provided that the Fund
adheres to certain restrictions. In particular, the Fund may (i) purchase and
sell futures contracts and options thereon for bona fide hedging purposes, as
defined under CFTC regulations, without regard to the percentage of the Fund's
assets committed to margin and option premiums, and (ii) the Fund may enter into
non-hedging transactions, provided that the Fund not enter into such non-hedging
transactions if, immediately thereafter, the sum of the amount of
A-4
<PAGE>
the initial margin deposits on the Fund's existing futures positions and option
premiums would exceed 5% of the market value of the Fund's liquidating value,
after taking into account unrealized profits and unrealized losses on any such
transactions. However, the Fund intends to engage in futures transactions and
options thereon only for hedging purposes. Margin deposits may consist of cash
or securities acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
insuring that the use of such futures is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options,
including over-the-counter stock index options, over-the-counter foreign
currency options and options on foreign currency futures, only with member banks
of the Federal Reserve System and primary dealers in U.S. Government Securities
or with affiliates of such banks or dealers which have capital of at least $50
million or whose obligations are guaranteed by an entity having capital of at
least $50 million. The Fund will acquire only those OTC options for which the
Manager believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option).
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 (including OTC options on futures
contracts) if, as a result of such transaction, the sum of the market value of
OTC options currently outstanding which are held by the Fund, the market value
of the underlying securities covered by OTC call options currently outstanding
which were sold by the Fund and margin deposits on the Fund's existing OTC
options on futures contracts exceed 15% of the net assets of the Fund, taken at
market value, together with all other assets of the Fund which are illiquid or
are not otherwise readily marketable. 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 as to
OTC options is not a fundamental policy of the Fund and may be amended by the
Directors of the Fund without the approval of the Fund's shareholders. However,
the Fund will not change or modify this policy prior to the change or
modification by the Securities and Exchange Commission staff of its position.
Risk Factors in Options, Futures and Currency Transactions. 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 price of the securities 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 hedged securities or currencies, 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 applies particularly to the Fund's use of
cross-hedging, which means that the security which is the subject of the hedged
transaction is different from the security being hedged. The successful use of
options and futures also depends on the Manager's ability to correctly predict
price movements in the market involved in a particular options or futures
transaction. To compensate for imperfect correlations, the Fund may purchase or
A-5
<PAGE>
sell stock index options or futures contracts in a greater dollar amount than
the hedged securities if the volatility of the hedged securities is historically
greater than the volatility of the stock index options or futures contracts.
Conversely, the Fund may purchase or sell fewer stock index options or futures
contracts if the volatility of the price of the hedged securities is
historically less than that of the stock index options or futures contracts. The
risk of imperfect correlation generally tends to diminish as the maturity date
of the stock index option or futures contract approaches.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Manager believes the Fund can receive on each business day at least two
independent bids or offers. 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 related
option.
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 or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). 'Trading limits' are imposed on the maximum number of
contracts which any person may trade on a particular trading day. The Manager
does not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio.
A-6
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive P2N
North Quincy, Massachusetts 02171
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, New York 10022
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE STATEMENT
OF ADDITIONAL INFORMATION, 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 MANAGER, 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(Service Mark)
System.......................................... 4
Financial Highlights.............................. 8
Investment Objective and Policies................. 9
Management of the Fund............................ 18
Purchase of Shares................................ 20
Initial Sales Charge Alternatives--
Class A and Class D Shares................... 22
Deferred Sales Charge Alternatives--
Class B and Class C Shares................... 23
Limitations on the Payment of Deferred Sales
Charges...................................... 28
Redemption of Shares.............................. 28
Redemption...................................... 29
Repurchase...................................... 29
Reinstatement Privilege--Class A and Class D
Shares....................................... 30
Shareholder Services.............................. 30
Performance Data.................................. 33
Taxes............................................. 34
Additional Information............................ 36
Dividends and Distributions..................... 36
Determination of Net Asset Value................ 37
Organization of the Fund........................ 38
Shareholder Inquiries........................... 39
Authorization Form................................ 41
Appendix.......................................... A-1
</TABLE>
Code # 16855-1094
Prospectus
[INSERT ART HERE]
- ------------------------------------------------------
MERRILL LYNCH
UTILITY INCOME
FUND, INC.
October 21, 1994
Distributor:
Merrill Lynch Funds
Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH UTILITY INCOME FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
----------------------
Merrill Lynch Utility Income Fund, Inc. (the 'Fund') is a diversified
mutual fund seeking high current income through investment of at least 65% of
its total assets in equity and debt securities issued by companies which are, in
the opinion of Merrill Lynch Asset Management, L.P. (the 'Manager' or 'MLAM'),
primarily engaged in the ownership or operation of facilities used to generate,
transmit or distribute electricity, telecommunications, gas or water. There can
be no assurance that the Fund's investment objective will be achieved. The Fund
may employ a variety of instruments and techniques to enhance income and to
hedge against market and currency risk.
Pursuant to Merrill Lynch Select Pricing(Service Mark) System, the Fund
offers four classes of shares each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing(Service Mark) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances.
----------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated October
21, 1994 (the 'Prospectus'), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
----------------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
----------------------
The date of this Statement of Additional Information is October 21, 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a diversified, open-end management investment company. The
Fund's investment objective is to seek high current income through investment of
at least 65% of its total assets in equity and debt securities issued by
companies which are, in the opinion of the Manager, primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water. This objective is a fundamental
policy which the Fund may not change without a vote of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the 'Investment Company Act'). There can be no assurance that the
Fund's investment objective will be achieved. The Fund may employ a variety of
instruments and techniques to enhance income and to hedge against market and
currency risk, as described under 'Portfolio Strategies Involving Options and
Futures' below.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption 'Investment Objective
and Policies--Other Investment Policies and Practices--Portfolio Strategies
Involving Options and Futures' in the Prospectus (including the Appendix
thereto) for information with respect to various portfolio strategies involving
options and futures. The Fund may seek to increase its return through the use of
options on portfolio securities and to hedge its portfolio against movements in
the equity, debt and currency markets. The Fund has authority to write (i.e.,
sell) covered put and call options on its portfolio securities, purchase put and
call options on securities and engage in transactions in stock index options,
stock index futures, stock futures and financial futures, and related options on
such futures. The Fund may also deal in forward foreign transactions and foreign
currency options and futures, and related options on such futures. Each of such
portfolio strategies is described in the Prospectus. Although certain risks are
involved in options and futures transactions (as discussed in the Prospectus and
below), the Manager believes that, because the Fund will (i) write only covered
call options on portfolio securities, and (ii) engage in other options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of Fund shares, the Fund's net asset value
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. The following is further information relating to portfolio
strategies involving options and futures the Fund may utilize.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase of
an identical option prior to the expiration of the option it has written.
Covered call options serve as a particular hedge against the price of the
underlying security declining.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may
2
<PAGE>
be offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer realizes a gain or loss
from the sale of the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt or equity securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository 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.
Options referred to herein and in the Fund's Prospectus may be options
issued by The Options Clearing Corporation (the 'Clearing Corporation') which
are currently traded on the Chicago Board Options Exchange, American Stock
Exchange, New York Stock Exchange, Philadelphia Stock Exchange, Pacific Stock
Exchange and Midwest Stock Exchange. Options referred to herein and in the
Fund's Prospectus may also be options traded on foreign securities exchanges
such as the London Stock Exchange and the Amsterdam Stock Exchange. An option
position may be closed out only on an exchange which provides a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing transactions in particular options, with the
result, in the case of a covered call option, that the Fund will not be able to
sell the underlying security until the option expires or it delivers the
underlying security upon exercise. Reasons for the absence of a liquid secondary
market on an exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be imposed by an
exchange on opening transactions or closing transactions or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Clearing Corporation may not at all times
be adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that class
or series of options) would cease to exist, although outstanding options on that
exchange that had been issued by the Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
The Fund may also enter into over-the-counter option transactions ('OTC
options'), which are two-party contracts with price and terms negotiated between
the buyer and seller. The Fund will only enter into over-the-counter option
transactions with respect to portfolio securities for which management believes
the Fund can receive on each business day at least two independent bids or
offers (one of which will be from an entity other than a party to the option).
The staff of the Securities and Exchange Commission has taken the position that
OTC options and the assets used as cover for written OTC options are illiquid
securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put option expires. The amount of any appreciation in the value of the
underlying security will be offset partially by the amount of the premium paid
for the put option and any related transaction costs. Prior to its expiration, a
put option may be sold in a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction cost. A closing sale
transaction
3
<PAGE>
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. In certain circumstances, the Fund may purchase call options on
securities held in its portfolio on which it has written call options or on
securities which it intends to purchase. The Fund may purchase either exchange
traded options or OTC options. The Fund may also purchase put options on U.S.
Treasury securities for the purpose of hedging its portfolio of interest rate
sensitive equity securities against the adverse effects of anticipated movements
in interest rates. The Fund will not purchase options on securities (including
stock index options discussed below) 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.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction. Futures contracts have been
designed by boards of trade which have been designated as 'contracts markets' by
the Commodities Futures Trading Commission ('CFTC').
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as 'initial margin' and
represents a 'good faith' deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called 'variation margin,' are required to be made on a daily basis as
the price of the futures contract fluctuates, making the long and short
positions in the futures contract 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.
An order has been obtained from the Securities and Exchange Commission
exempting the Fund from the provisions of Section 17(f) and Section 18(f) of the
Investment Company Act in connection with its strategy of investing in futures
contracts. Section 17(f) relates to the custody of securities and other assets
of an investment company and may be deemed to prohibit certain arrangements
between the Fund and commodities brokers with respect to initial and variation
margin. Section 18(f) of the Investment Company Act prohibits an open-end
investment company such as the Fund from issuing a 'senior security' other than
a borrowing from a bank. The staff of the Securities and Exchange Commission has
in the past indicated that a futures contract may be a 'senior security' under
the Investment Company Act.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund permit the Fund's futures and options on futures
transactions to include (i) bona fide hedging transactions without regard to the
percentage of the Fund's assets committed to margin and option premiums, and
(ii) non-hedging transactions, provided that the Fund not enter into such
non-hedging transactions if, immediately thereafter, the sum of the amount of
initial margin deposits on the Fund's existing futures positions and option
premiums would exceed 5%
4
<PAGE>
of the market value of the Fund's liquidating value after taking into account
unrealized profits and unrealized losses on any such transactions. However, the
Fund intends to engage in futures transactions and options thereon only for
hedging purposes.
When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or short-term, high-grade, fixed income securities will be deposited
in a segregated account with the Fund's custodian so that the amount so
segregated, plus the amount of initial and variation margin held in the account
of its broker, equals the market value of the futures contract, thereby ensuring
that the use of such futures is unleveraged.
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 of
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate in
an amount generally less than one tenth of one percent due to the costs of
converting from one currency to another. However, the Fund has authority to deal
in forward foreign exchange among currencies of the different countries in which
it will invest as a hedge against possible variations in the foreign exchange
rate among these currencies. This is accomplished through contractual agreements
to purchase or sell a specified currency at a specified future date and price
set at the time of the contract. The Fund's dealings in forward foreign exchange
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities, the sale
and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Fund will not speculate in forward foreign exchange.
The Fund may not position hedge with respect to the currency of a particular
country to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or quoted
in that particular foreign currency. If the Fund enters into a position hedging
transaction, its custodian bank will place cash or liquid equity or debt
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 Manager. The Fund will not enter into a forward
contract with a term of more than one year.
The Fund is also authorized to purchase or sell listed or over-the-counter
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 United States dollars of an investment in a yen denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of Japanese yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the 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 yen for 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
5
<PAGE>
increases in the relative value of the yen to the dollar. The Manager 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, Futures and Currency Transactions. Utilization of
futures transactions involves the risk of imperfect correlation in movements in
the price of options and futures and movements in the price of the securities or
currencies which is the subject of the hedge. If the price of the options and
futures moves more or less than the price of the hedged securities or currency,
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 cross-hedging, which means that the security which
is the subject of the hedged transaction is different from the security being
hedged. The successful use of options and futures also depends on the Manager's
ability to correctly predict price movements in the market involved in a
particular options or futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into an option or futures
transaction on an exchange only if there appears to be a liquid secondary market
for such options or futures. However, there can be no assurance that a liquid
secondary market will exist for any particular call or put option or futures
contract at any specific time. Thus, it may not be possible to close an option
or futures position. The Fund will acquire only over-the-counter options for
which management believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option). In the case of a futures position or an option on a
futures position written by the Fund in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the security 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 its portfolio effectively. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option.
The 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 or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). 'Trading limits' are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions.
6
<PAGE>
The Manager does not believe that these trading and position limits will have
any adverse impact on the portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt or equity securities denominated in U.S. dollars or
non-U.S. currencies in an aggregate amount equal to the amount of its commitment
in connection with such purchase transactions.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid securities, although it will limit such investments to 10% of its net
assets to the extent required by state law. However, the Fund may purchase,
without regard to that limitation, securities that are not registered under the
Securities Act of 1933, as amended (the 'Securities Act'), but that can be
offered and sold to 'qualified institutional buyers' under Rule 144A under the
Securities Act ('Rule 144A Securities'), provided that the Fund's Board of
Directors, or the Manager pursuant to guidelines adopted by the Board,
continuously determines, based on the trading markets for the specific Rule 144A
Security, that it is liquid. The Board of Directors, however, will retain
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 decreasing the
level of liquidity in the Fund to the extent that the qualified institutional
buyers become for a time uninterested in purchasing these securities.
The staff of the Securities and Exchange Commission has taken the position
that purchased over-the-counter options ('OTC options') and the assets used as
cover for written OTC options are illiquid securities. Therefore, the Fund has
adopted an investment policy pursuant to which it will not purchase or sell OTC
options if, as a result of such transaction, the sum of the market value of OTC
options currently outstanding which are held by the Fund, the market value of
the underlying securities covered by OTC call options currently outstanding
which were sold by the Fund and margin deposits on the Fund's existing OTC
options on futures contracts exceed 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 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 as to OTC options is not a fundamental policy of the Fund and may be
amended by the Directors of the Fund without the approval of the Fund's
shareholders. However, the Fund will not change or
7
<PAGE>
modify this policy prior to the change or modification by the Securities and
Exchange Commission staff of its position.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which may
be issued and sold to the Fund at the option of the issuer. The price and coupon
of the security is fixed at the time of the commitment. At the time of entering
into the agreement the Fund is paid a commitment fee, regardless of whether or
not the security is ultimately issued, which is typically approximately 0.5% of
the aggregate purchase price of the security which the Fund has committed to
purchase. The Fund will enter into such agreement only for the purpose of
investing in the security underlying the commitment at a yield and price which
is considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale, will not exceed 15% of its
assets taken at the time of acquisition of such commitment or security. The Fund
will at all times maintain a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer (or an affiliate
thereof) in U.S. Government securities (or an affiliate thereof). Under such
agreements, the bank or primary dealer agrees, upon entering into the contract,
to repurchase the security at a mutually agreed upon time and price in a
specified currency, thereby determining the yield during the term of the
agreement. This results in a fixed rate of return insulated from market
fluctuations during such period although it may be affected by currency
fluctuations. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect the accrued interest on the underlying
obligations. Such agreements usually cover short periods, often under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, as a purchaser, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but constitute only collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur costs
or possible losses in connection with the disposition of the collateral. In the
event of a default under such a repurchase agreement, instead of the contractual
fixed rate of return, the rate of
8
<PAGE>
return to the Fund will depend on intervening fluctuations of the market value
of such security and the accrued interest on the security. In such event, the
Fund would have rights against the seller for breach of contract with respect to
any losses arising from market fluctuations following the failure of the seller
to perform. The Fund may not invest more than 15% of its net assets in
repurchase agreements maturing in more than seven days.
Lending of Portfolio Securities. Subject to investment restriction (6)
below, the Fund may lend securities from its portfolio to approved borrowers and
receive therefor collateral in cash or securities issued or guaranteed by the
United States Government which are maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities. The purpose
of such loans is to permit the borrower to use such securities for delivery to
purchasers when such borrower has sold short. If cash collateral is received by
the Fund, it is invested in short-term money market securities, and a portion of
the yield received in respect of such investment is retained by the Fund.
Alternatively, if securities are delivered to the Fund as collateral, the Fund
and the borrower negotiate a rate for the loan premium to be received by the
Fund for lending its portfolio securities. In either event, the total yield on
the Fund's portfolio is increased by loans of its portfolio securities. The Fund
will have the right to regain record ownership of loaned securities to exercise
beneficial rights such as voting rights, subscription rights and rights to
dividends, interest or other distributions. Such loans are terminable at any
time. The Fund may pay reasonable finder's, administrative and custodial fees in
connection with such loans. With respect to the lending of portfolio securities,
there is the risk of failure by the borrower to return the securities involved
in such transactions.
High Yield-High Risk Bonds. Fixed income securities in which the Fund will
invest generally will be limited to those rated investment grade; that is, rated
in one of the four highest rating categories by Standard & Poor's Ratings Group
('S&P') or Moody's Investors Service, Inc. ('Moody's'), or deemed to be of
equivalent quality (i.e., securities rated at least BBB by S&P or Baa by
Moody's) in the judgment of the Manager. The Fund is authorized to invest up to
5% of its total assets at the time of purchase in fixed income securities having
a minimum rating no lower than Caa by Moody's or CCC by S&P ('high yield-high
risk bonds'). Investment in high yield-high risk bonds involves substantial
risk. Investments in high yield-high risk bonds will be made only when, in the
judgment of the Manager, such securities provide attractive total return
potential, relative to the risk of such securities, as compared to higher
quality debt securities. Securities rated BB or lower by S&P or Ba or lower by
Moody's are considered by those rating agencies to have varying degrees of
speculative characteristics. Consequently, although high yield-high risk bonds
can be expected to provide higher yields, such securities may be subject to
greater market price fluctuations and risk of loss of principal than lower
yielding, higher rated fixed income securities. The Fund will not invest in debt
securities in the lowest rating categories (CC or lower for S&P or Ca or lower
for Moody's) unless the Manager believes that the financial condition of the
issuer or the protection afforded the particular securities is stronger than
would otherwise be indicated by such low ratings.
High yield-high risk bonds may be issued by less creditworthy companies or
by larger, highly leveraged companies, and are frequently issued in corporate
restructurings such as mergers and leveraged buy-outs. Such securities are
particularly vulnerable to adverse changes in the issuer's industry and in
general economic conditions. High yield-high risk bonds frequently are junior
obligations of their issuers, so that in the event of the issuer's bankruptcy,
claims of the holders of high yield-high risk bonds will be satisfied only after
satisfaction of the claims of senior securityholders. While the high yield-high
risk bonds in which the Fund may invest normally do not include securities
which, at the time of investment, are in default or the issuers of which are in
bankruptcy, there can be no assurance that such events will not occur after the
Fund purchases a particular security, in which case the Fund may experience
losses and incur costs. The terms 'high yield-high risk bonds' and 'below
investment grade bonds' are commonly known as 'junk bonds.'
9
<PAGE>
CURRENT INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to
the investment of its assets and its activities, which are fundamental policies
and may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). The Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase securities of other investment companies except to the
extent that such purchases are permitted by applicable law.
3. Purchase or sell real estate or real estate mortgage loans, except
that 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 short sales of securities or maintain a short position except
to the extent permitted by applicable law.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, short-term commercial paper, certificates of deposit, bankers'
acceptances, repurchase agreements and similar instruments shall not be
deemed to be the making of a loan, and except further that the Fund may
lend its portfolio securities as set forth in restriction (6) below.
6. Lend its portfolio securities, provided that such loans may be
made only in accordance with applicable law and the guidelines set forth in
the Fund's Prospectus and this Statement of Additional Information.
7. Issue senior securities to the extent such issuance would violate
applicable law.
8. Borrow money or pledge its assets, except that the Fund (a) may
borrow from a bank as a temporary measure for extraordinary or emergency
purposes or to meet redemptions in amounts not exceeding 10% (taken at
market value) of its total assets and pledge its assets to secure such
borrowings, (b) may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of portfolio securities and (c) may
purchase securities on margin to the extent permitted by applicable law.
The Fund will not purchase securities while borrowings exceed 5% (taken at
market value) of its total assets.
9. Invest in securities which cannot be readily resold because of
legal or contractual restrictions, or which cannot otherwise be marketed,
redeemed, put to the issuer or to a third party, or which do not mature
within seven days, or which the Board of Directors of the Fund have not
determined to be liquid pursuant to applicable law, if at the time of
acquisition more than 15% of its net assets would be invested in such
securities.
10. Underwrite securities of other issuers, except insofar as the
Fund technically may be deemed an underwriter under the Securities Act in
selling portfolio securities.
10
<PAGE>
11. Purchase or sell interests in oil, gas or other mineral
exploration or development programs, except that the Fund may invest in
securities issued by companies that engage in oil, gas or other mineral
exploration or development activities.
12. Purchase or sell commodities or contracts on commodities, except
to the extent the Fund may do so in accordance with applicable law and the
Fund's Prospectus and Statement of Additional Information, and without
registering as a commodity pool operator under the Commodity Exchange Act.
Additional investment restrictions adopted by the Fund, which may be
changed by the Directors, provide that the Fund may not:
a. Invest in warrants if at the time of acquisition its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange or American Stock Exchange or a major foreign
exchange. For purposes of this restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
b. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of its total assets would be invested in such securities. This
restriction shall not apply to mortgage-backed securities, asset-backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
c. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the Manager or any
subsidiary thereof each owning more than one-half of one percent of the
securities of such issuer own in the aggregate more than 5% of the
securities of such issuer.
d. Invest in real estate limited partnership interests or in oil, gas
or mineral leases.
e. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and this Statement of Additional Information, as amended from
time to time.
Proposed Uniform Investment Restrictions. As discussed in the Prospectus
under 'Investment Objective and Policies--Investment Restrictions,' the Board of
Directors of the Fund has approved the replacement of the Fund's existing
investment restrictions with the fundamental and non-fundamental investment
restrictions set forth below. These uniform investment restrictions have been
proposed for adoption by all of the non-money market mutual funds advised by the
Manager or its affiliate, Fund Asset Management, L.P. ('FAM'). The investment
objective and policies of the Fund will be unaffected by the adoption of the
proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve the
proposed revised investment restrictions. If such shareholder approval is
obtained, the Fund's current investment restrictions will be replaced by the
proposed restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
11
<PAGE>
Under the proposed fundamental investment restrictions, the Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities) except that, under
normal circumstances, the Fund will invest more than 25% of its total
assets in the securities of issuers in the utilities industry.
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by law, the Fund may invest in securities directly or indirectly secured by
real estate or interests therein or issued by companies which invest in
real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similiar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act, as
amended (the 'Securities Act') in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except
to the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the proposed non-fundamental investment restrictions, each 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.
12
<PAGE>
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). Securities purchased in accordance with Rule 144A under the Securities
Act (a 'Rule 144A security') and determined to be liquid by the Fund's
Board of Directors are not subject to the limitations set forth in this
investment restriction (c). Notwithstanding the fact that the Board may
determine that a Rule 144A security is liquid and not subject to
limitations set forth in this investment restriction (c), the State of Ohio
does not recognize Rule 144A securities as securities that are free of
restrictions as to resale. To the extent required by Ohio law, the Fund
will not invest more than 5% of its total assets in securities of issuers
that are restricted as to disposition, including Rule 144A securities.
d. Invest warrants if, at the time of acquistion, its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Manager, the directors of such general partner or the
officers and directors of any subsidiary thereof each owning beneficially
more than one-half of one percent of the securities of such issuer own in
the aggregate more that 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests
in oil, gas or other mineral leases, or exploration or development
programs, except that the Fund may invest in securities issued by companies
that engage in oil, gas or other mineral exploration or development
activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental restriction (7) above, borrow amounts
in excess of 10% of its total assets, taken at market value (including the
amount borrowed), and then only from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares.
In addition, the Fund will not purchase securities while borrowings exceed
5% of its total assets.
Notwithstanding the provisions of current Investment Restriction (4) and
proposed Investment Restriction (b) above, the Fund does not currently intend to
engage in short sales.
13
<PAGE>
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving the Manager's
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ('Merrill Lynch'),
or its affiliates except for brokerage transactions permitted under the
Investment Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
See 'Portfolio Transactions and Brokerage.' Without such an exemptive order, the
Fund is prohibited from engaging in portfolio transactions with Merrill Lynch or
its affiliates acting as principal 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.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is P.O. Box
9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL--President and Director(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977 and
Director and Chief Investment Officer since 1976; President, Director and Chief
Investment Officer of FAM (which term as used herein includes its corporate
predecessors) since 1977; President and Director of Princeton Services, Inc.
('Princeton Services'); Executive Vice President of Merrill Lynch since 1990 and
Senior Vice President thereof from 1985 to 1990; Executive Vice President of
Merrill Lynch & Co., Inc. since 1990; Director of the Distributor.
RONALD W. FORBES--Director(2)--School of Business, BA 309, SUNY Albany,
1400 Washington Avenue, Albany, New York 12222. Professor of Finance, School of
Business, State University of New York at Albany, since 1989.
CYNTHIA A. MONTGOMERY--Director(2)--Harvard Business School, Soldiers Field
Road, Boston, Massachusetts 02163. Professor, Harvard Business School since
1989; Associate Professor, J.L.--Kellogg Graduate School of Management,
Northwestern University, 1985-1989; Assistant Professor, Graduate School of
Business Administration, the University of Michigan, 1979-1985; Director, UNUM
Corporation.
CHARLES C. REILLY--Director(2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. President and Chief Investment Officer of Verus Capital, Inc. from
1979-1990; Senior Vice President of Arnhold and S. Bleichroeder, Inc. from
1973-1990; Adjunct Professor, Columbia University Graduate School of Business
since 1990; Adjunct Professor, Wharton School, University of Pennsylvania, 1990.
KEVIN A. RYAN--Director(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Professor of Education at Boston University since 1982;
Founder and current Director of The Boston University Center for the Advancement
of Ethics and Character; Formerly taught on the faculties of the University of
Chicago, Stanford University and The Ohio State University.
RICHARD R. WEST--Director(2)--482 Tepi Drive, Southbury, Connecticut,
06488. Professor of Finance, and Dean from 1984 to 1993, New York University
Leonard N. Stern School of Business Administration since 1984; Professor of
Finance at the Amos Tuck School of Business Administration, Dartmouth College
from 1976 to
14
<PAGE>
1984 and Dean from 1976 to 1983; Director of Vornado, Inc. (real estate holding
corporation), Re Capital Corp. (reinsurance holding corporation), Smith Corona
Corporation (manufacturer of typewriters and word processors), Alexander's Inc.
(department store) and Bowne & Co., Inc. (financial printer).
TERRY K. GLENN--Executive Vice President(1)(2)--Executive Vice President of
the Manager and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of the Distributor since 1986 and
Director thereof since 1991.
NORMAN R. HARVEY--Senior Vice President(1)(2)--Senior Vice President of the
Manager and FAM since 1982.
WALTER D. ROGERS--Vice President(1)(2)--Vice President of the Manager since
1987; Vice President of Continental Insurance Asset Management from 1984 to
1987.
DONALD C. BURKE--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager since 1990; Employee with Deloitte & Touche LLP from
1982 until 1990.
GERALD M. RICHARD--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Manager and FAM since 1984; Senior Vice President and Treasurer of Princeton
Services since 1993; Vice President of the Distributor since 1981, and Treasurer
since 1984.
THOMAS D. JONES, III--Secretary(1)--Attorney with the Manager since 1992;
Lawyer in private practice from 1990-1992; Student prior thereto.
- ------------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of other
investment companies for which the Manager or FAM acts as investment
adviser.
As of September 30, 1994, the officers and Directors of the Fund as a group
(12 persons) owned an aggregate of less than 1/4 of 1% of the outstanding shares
of Common Stock of ML & Co., and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
Pursuant to the terms of the management agreement with the Fund, the
Manager pays all compensation of officers of the Fund as well as the fees of all
Directors who are affiliated persons of the Manager. The Fund pays each Director
not affiliated with the Manager a fee of $2,000 per year plus $400 per meeting
attended, together with such Director's out-of-pocket expenses relating to
attendance at meetings. The Fund also compensates members of its Audit and
Nominating Committee, which consists of all of the Directors of the Fund who are
not interested persons of the Fund, with a fee of $1,000 per year; the Chairman
of the Audit and Nominating Committee receives an additional annual fee of
$1,000 per year. For the fiscal period ended August 31, 1994, fees and expenses
paid to the unaffiliated Directors aggregated $26,974.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager is owned and controlled by ML & Co., a financial services
holding company and the parent of Merrill Lynch. Reference is made to
'Management of the Fund--Management and Advisory Arrangements' in the Prospectus
for certain information concerning the management and advisory arrangements of
the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different
15
<PAGE>
objectives or other factors, a particular security may be bought for one or more
clients when one or more clients are selling the same security. If purchases or
sales of securities by the Manager for the Fund or other funds for which it acts
as investment adviser or for its advisory clients arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold there may be
an adverse effect on price.
The Fund has entered into a management agreement with the Manager (the
'Management Agreement'). As discussed in the Prospectus, the Manager receives
for its services to the Fund monthly compensation at the annual rate of 0.55% of
the average daily net assets of the Fund. For the fiscal period ended August 31,
1994, the total management fee earned by the Manager aggregated $138,575, all of
which was voluntarily waived.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Manager reimburse the Fund in an amount necessary
to prevent the ordinary operating expenses of the Fund (excluding interest,
taxes, distribution fees, brokerage fees and commissions, litigation claims for
recovery by the Fund, litigation costs incurred by the Fund in defending against
liability provided that where conduct of the Fund's adviser is at issue the
adviser acted in good faith, indemnification paid by the Fund covering officers,
directors and the Fund's adviser, annual distribution plan expenses under
certain circumstances, and excess custodian costs attributable to investments in
foreign securities) from exceeding 2.5% of the Fund's first $30 million of
average daily net assets, 2.0% of the next $70 million of average daily net
assets and 1.5% of the remaining average daily net assets. The Manager's
obligation to reimburse the Fund is limited to the amount of the management fee.
No fee payment will be made to the Manager during any fiscal year which will
cause such expenses to exceed the most restrictive expense limitation applicable
at the time of such payment. From the commencement of operations of the Fund
through August 31, 1994, no reimbursement of expenses has been required pursuant
to the applicable expense limitation provisions discussed above.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of the Manager or any of
their affiliates. The Fund pays all other expenses incurred in the operation of
the Fund, including, among other things, taxes; expenses for legal and auditing
services; costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent paid
by the Distributor); charges of the Custodian, any Sub-custodian and Transfer
Agent; expenses of redemption of shares; Securities and Exchange Commission
fees; expenses of registering the shares under Federal, state or foreign laws;
fees and expenses of unaffiliated Directors; accounting and pricing costs
(including the daily calculation of net asset value); insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
and other expenses properly payable by the Fund. Accounting services are
provided to the Fund by the Manager and the Fund reimburses the Manager for its
costs in connection with such services on a semi-annual basis. As required by
the Distribution Agreements, the Distributor will pay certain of the expenses of
the Fund incurred in connection with the offering of its shares. See 'Purchase
of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares.'
16
<PAGE>
Duration and Termination. Unless earlier terminated as described below,
the Management Agreement will remain in effect for two years from the date of
its adoption. Thereafter, it will remain in effect from year to year if approved
annually (a) by the Board of Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties to
such contract or interested persons (as defined in the Investment Company Act)
of any such party. Such contracts are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party thereto
or by the vote of the shareholders of the Fund.
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(Service Mark) System: shares of Class A and Class D shares are sold to
investors choosing the initial sales charge alternatives and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Each Class A, Class B, Class C and Class D share of the Fund
represents identical interests in the investment portfolio of the Fund, has the
same rights, except that Class B, Class C and Class D shares bear the expenses
of the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 plan adopted with respect to such class pursuant to
which the account maintenance and/or distribution fees are paid. Each class has
different exchange privileges. See 'Shareholder Services--Exchange Privilege.'
The Merrill Lynch Select Pricing(Service Mark) System is used by more than
50 mutual funds advised by the Manager or its affiliate, FAM. Funds advised by
the Manager or FAM are referred to herein as 'MLAM-advised mutual funds.' The
Fund has entered into separate distribution agreements with the Distributor in
connection with the continuous offering of each class of shares of the Fund (the
'Distribution Agreements'). The Distribution Agreements obligate the Distributor
to pay certain expenses in connection with the offering of each class of shares
of the Fund. After the prospectuses, statements of additional information and
periodic reports have been prepared, set in type and mailed to shareholders, the
Distributor pays for the printing and distribution of copies thereof used in
connection with the offering to dealers and investors. The Distributor also pays
for other supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Management Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal
period ended August 31, 1994 were $252,797, of which the Distributor received
approximately $1,787 and Merrill Lynch received approximately $251,010. During
the fiscal period ended August 31, 1994, the Distributor received CDSCs on Class
A shares for which the initial sales charge was waived of $0.
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
17
<PAGE>
spouse and their children under the age of 21 years purchasing shares for his or
their own account and to single purchases by a trustee or other fiduciary
purchasing shares for a single trust estate or single fiduciary account although
more than one beneficiary is involved. The term 'purchase' also includes
purchases by any 'company,' as that term is defined in the Investment Company
Act of 1940, but does not include purchases of any such company which has not
been in existence for at least six months or which has no purpose other than the
purchase of shares of the Fund or shares of other registered investment
companies at a discount; provided, however, that it shall not include purchases
by any group of individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other 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 record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such 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 the
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares does not equal the amount stated in the Letter of Intention
(minimum of $25,000), the investor will be notified and must pay, within 20 days
of the expiration of such Letter, the difference between the sales charge on the
Class A or Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or Class
D shares equal to at least five percent of the intended amount will be held in
escrow during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the 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
18
<PAGE>
entitled on that purchase and subsequent purchases to the reduced percentage
sales charge which would be applicable to a single purchase equal to the total
dollar value of the Class A shares then being purchased under such Letter, but
there will be no retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intention will be
deducted from the total purchases made under such Letter. An exchange from 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.
Merrill Lynch Blueprint(Service Mark) Program. Class D shares of the Fund
are offered to participants in the Merrill Lynch Blueprint(Service Mark) Program
('Blueprint'). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
Blueprint is directed to small investors, group IRAs and participants in certain
affinity groups such as credit unions, trade associations and benefit plans.
Investors placing orders to purchase Class D shares of the Fund through
Blueprint will acquire the Class A or Class D shares at net asset value plus a
sales charge calculated in accordance with the Blueprint sales charge schedule
(i.e., up to $5,000 at 3.5% and $5,000.01 or more at the standard sales charge
rates disclosed in the Prospectus). In addition, Class A or Class D shares of
the Fund are being offered at net asset value plus a sales charge of 1/2 of 1%
for corporate or group IRA programs placing orders to purchase their Class A or
Class D shares through Blueprint. Services, including the exchange privilege,
available to Class A and Class D investors through Blueprint, however, may
differ from those available to other investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value to participants
in Blueprint through the Merrill Lynch Directed IRA Rollover Program ('IRA
Rollover Program') available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from Employer Sponsored Retirement and Savings Plans
(see definition below) whose Trustee and/or Plan Sponsor has entered into a
Merrill Lynch Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases from
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(Service Mark)
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employer Sponsored Retirement and Savings Plans. Class A and Class D
shares are offered at net asset value to employer sponsored retirement or
savings plans, such as tax qualified retirement plans within the meaning of
Section 401(a) of the Internal Revenue Code of 1986, as amended (the 'Code'),
deferred compensation plans within the meaning of Section 403(b) and 457 of the
Code, other deferred compensation arrangements, Voluntary Employee Benefits
Association ('VEBA') plans, and non-qualified After Tax Savings and Investment
programs, maintained on the Merrill Lynch Group Employee Services system, herein
referred to as 'Employer Sponsored Retirement or Savings Plans,' provided the
plan has accumulated at least $20 million in MLAM-advised mutual funds (in the
case of Class A shares) or $5 million in MLAM-advised mutual funds (in the case
of Class D shares). Class D shares may be offered at net asset value to new
Employer Sponsored Retirement or Savings Plans, provided the plan has $3 million
or more initially invested in MLAM-advised mutual funds. Assets of Employer
Sponsored Retirement or Savings Plans sponsored by the same sponsor or an
19
<PAGE>
affiliated sponsor may be aggregated. Class A shares and Class D shares also are
offered at net asset value to Employer Sponsored Retirement or Savings Plans
that have at least 1,000 employees eligible to participate in the plan (in the
case of Class A shares) or between 500 and 999 employees eligible to participate
in the plan (in the case of Class D shares). Employees eligible to participate
in Employer Sponsored Retirement or Savings Plans of the same sponsoring
employer or its affiliates may be aggregated. Tax qualified retirement plans
within the meaning of Section 401(a) of the Code meeting any of the foregoing
requirements and which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a wide
range of investments including individual corporate equities and other
securities in addition to mutual fund shares) by the Merrill Lynch
Blueprint(Service Mark) Program, are offered Class A shares at a price equal to
net asset value per share plus a reduced sales charge of 0.50%. Any Employer
Sponsored Retirement or Savings Plan which does not meet the above described
qualifications to purchase Class A shares or Class D shares at net asset value
has the option of (i) purchasing Class A shares at the initial sales charge and
possible CDSC schedule disclosed in the Prospectus, if it is otherwise eligible
to purchase Class A shares, (ii) purchasing Class D shares at the initial sales
charge and possible CDSC schedule disclosed in the Prospectus, (iii) if the
Employer Sponsored Retirement or Savings Plan meets the specified requirements,
purchasing Class B shares with a waiver of the CDSC upon redemption, or (iv) if
the Employer Sponsored Retirement or Savings Plan does not qualify to purchase
Class B shares with a waiver of the CDSC upon redemption, purchasing Class C
shares at the CDSC schedule disclosed in the Prospectus. The minimum initial and
subsequent purchase requirements are waived in connection with all the above
referenced Employer Sponsored Retirement or Savings Plans.
Purchase Privileges of Certain Persons. Directors of the Fund, members of
the 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. Under such programs, the
Fund realizes economies of scale and reduction of sales-related expenses by
virtue of familiarity with the Fund.
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, such redemption had been made within 60 days prior to the
investment in the Fund, and the proceeds from the redemption must have been
maintained in the interim in cash or a money market fund.
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationshp with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: First, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from a redemption of such shares of
other mutual funds and that such shares have been outstanding for a period of no
less than 6 months. Second, such purchase of Class D shares must be made within
60 days after the redemption and the proceeds from the redemption must have been
maintained in the interim in cash or a money market fund.
20
<PAGE>
Class D shares of the Fund also will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ('notice'), if the following conditions are
satisfied. First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund was
subject to a sales charge either at the time of purchase or on a deferred basis.
Second, such purchase of Class D shares must be made within 90 days after such
notice.
Employees and directors wishing to purchase shares of the Fund must satisfy
the Fund's suitability standards.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other mutual funds advised by the Manager ('Eligible Class A shares') are
offered at net asset value to shareholders of certain closed-end funds advised
by the Manager who purchased such closed-end fund shares prior to October 21,
1994 and wish to reinvest the net proceeds of 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 closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D shares. Second, the closed-end fund
shares must either have been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option. Class A
shares of the Fund are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund ('Senior Floating Rate Fund') who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
of Senior Floating Rate Fund in shares of the Fund. In order to exercise this
investment option, Senior Floating Rate Fund shareholders must sell their Senior
Floating Rate Fund shares to the Senior Floating Rate Fund in connection with a
tender offer conducted by the Senior Floating Rate Fund and reinvest the
proceeds immediately in the Fund. This investment option is available only with
respect to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund which
might result from an acquisition of assets having net unrealized appreciation
which is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the
21
<PAGE>
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).
TMA(Service Mark) Managed Trusts. Class A shares are also offered to
TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services at net asset value.
Reductions in or exceptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to 'Purchase of Shares--Distribution Plans' in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a 'Distribution Plan') with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholder. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
'interested persons' of the Fund, as defined in the Investment Company Act of
1940 (the 'Independent Directors'), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors or
by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholder, and all material amendments are required to be
approved by the vote of 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.
During the fiscal period ended August 31, 1994, the Fund paid the
Distributor account maintenance fees of $54,593 and distribution fees of
$109,185 under the Class B Distribution Plan. All such amounts were paid by MLFD
to defray a portion of its costs incurred in rendering account maintenance and
distribution services to the Fund, including advancement of sales commission to
its account executives for the sale of the Class B shares of the Fund.
22
<PAGE>
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ('NASD') imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares, but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge 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 August 31,
1994 with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule and
the Distributor's voluntary maximum for the period October 29, 1993
(commencement of the public offering of Class B shares) to August 31, 1994.
Since Class C shares of the Fund had not been publicly issued prior to the date
of this Statement of Additional Information, information concerning Class C
shares is not yet provided below.
DATA CALCULATED AS OF AUGUST 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
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>
Under NASD Rule as
Adopted.................. $ 33,903 $ 2,119 $114 $2,233 $183 $ 2,050 $137
Under Distributor's
Voluntary Waiver......... $ 33,903 $ 2,119 $170 $2,289 $183 $ 2,106 $137
</TABLE>
- ------------------
(1) Purchase price of all eligible Class B shares sold since October 29, 1993
(commencement of the public offering of Class B shares) other than shares
acquired through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals.
(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 voluntary maximum or the NASD
maximum.
23
<PAGE>
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 only for any period during which trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission or such Exchange is closed (other than customary weekend and holiday
closings), for any period during which an emergency exists as defined by the
Securities and Exchange Commission as a result of which disposal of portfolio
securities or determination of the net asset value of the Fund is not reasonably
practicable, and for such other periods as the Securities and Exchange
Commission may by order permit for the protection of shareholders of the Fund.
Shares are redeemable at the option of the Fund if, in the opinion of the
Fund, ownership of the shares has or may become concentrated to the extent which
would cause the Fund to be deemed a personal holding company within the meaning
of the Code.
DEFERRED SALES CHARGE--CLASS B 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 connection with certain
post-retirement withdrawals from an Individual Retirement Account ('IRA') or
other retirement plan or following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies are: (a) any partial or
complete redemption in connection with a distribution following retirement under
a tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for life (or life expectancy), or any redemption
resulting from the tax-free return of an excess contribution to an IRA; or (b)
any partial or complete redemption following the death or disability (as defined
in the Code) of a Class B shareholder (including one who owns the Class B shares
as joint tenant with his or her spouse), provided the redemption is requested
within one year of the death or initial determination of disability. For the
fiscal period ended August 31, 1994, the Distributor received CDSCs of $73,597,
all of which was paid to Merrill Lynch.
Merrill Lynch Blueprint(Service Mark) Program. Class B shares are offered
to participants in Blueprint. Blueprint is directed to small investors and
participants in certain affinity groups such as trade associations and credit
unions. Class B shares of the Fund are offered through Blueprint only to members
of certain affinity groups. The CDSC is waived in connection with purchase
orders placed through Blueprint. Services, including the exchange privilege,
available to Class B shareholders through Blueprint, however, may differ from
those available to other Class B investors. Orders for purchases and redemptions
of Class B shares of the Fund will be grouped for execution purposes which, in
some circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price is
$100, with a $50 minimum for subsequent purchases through Blueprint. There is no
minimum initial or subsequent purchase requirement for investors who are part of
a Blueprint automatic investment plan. Additional information concerning these
Blueprint programs, including any annual fees or transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint(Service Mark) Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.
24
<PAGE>
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A or Class D shares at net asset value has the
option of purchasing Class A or Class D shares at the sales charge schedule
disclosed in the Prospectus, or if the Retirement Plan meets the following
requirements, then it may purchase Class B shares with a waiver of the CDSC upon
redemption. The CDSC is waived for any Eligible 401(k) Plan redeeming Class B
shares. 'Eligible 401(k) Plan' is defined as a retirement plan qualified under
Section 401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC is also waived for redemptions from a
401(a) plan qualified under the Code, provided, however, that each such plan has
the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of MLAM-advised mutual funds ('Eligible 401(a) Plan').
Other tax qualified retirement plans within the meaning of Section 401(a) and
403(b) of the Code which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a menu of
investments) by independent administration firms contracted through Merrill
Lynch also may purchase Class B shares with a waiver of the CDSC. The CDSC also
is waived for any Class B shares which are purchased by an Eligible 401(k) Plan
or Eligible 401(a) Plan and are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA, that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. The minimum initial and subsequent
purchase requirements are waived in connection with all the above-referenced
Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions. In executing such transactions, the Manager 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. Subject to obtaining the best
price and execution, brokers who provide supplemental investment research to the
Manager 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 Manager under the Management Agreement and the expenses of the Manager
will not necessarily be reduced as a result of the receipt of such supplemental
information. In addition, consistent with the Rules of Fair Practice of the NASD
and policies established by the Directors of the Fund, the Manager may consider
sales of shares of the Fund as a factor in the selection of brokers or dealers
to execute portfolio transactions for the Fund.
The Fund is not required to use any particular broker or dealer, and
brokers who provide supplemental investment research to the Manager may receive
orders for transactions by the Fund. Such supplemental research services
ordinarily consist of assessments and analyses of the business or prospects of a
company, industry or economic sector. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Manager under the Management Agreement. If in the judgment of the Manager the
Fund will be benefitted by supplemental research services, the Manager is
authorized to pay brokerage commissions to a broker furnishing such services
which are in excess of commissions which another broker may have charged for
effecting the same transaction. The expenses of the Manager will not necessarily
be reduced as a result of the receipt of such supplemental information, and the
Manager may use such information in servicing its other accounts. During the
fiscal period ended August 31, 1994, the Fund did not acquire any securities
of brokers or dealers which executed its portfolio transactions.
25
<PAGE>
The Fund invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with the dealers who make a market in
the securities involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund are prohibited from dealing with the Fund as principal
in the purchase and sale of securities. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the Fund, including
Merrill Lynch, will not serve as the Fund's dealer in such transactions.
However, affiliated persons of the Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
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. There is generally less governmental supervision and regulation of
foreign stock exchanges and brokers than in the United States.
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 in United States dollars, the Fund intends to manage its portfolio so as
to give reasonable assurance that it will be able to obtain United States
dollars to the extent necessary to meet anticipated redemptions. Under present
conditions, it is not believed that these considerations will have any
significant effect on its portfolio strategy.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, Merrill Lynch may execute transactions for the Fund on the floor of any
national securities exchange provided that prior authorization of such
transactions is obtained and Merrill Lynch furnishes a statement to the Fund at
least annually setting forth the compensation it has received in connection with
such transactions. Pursuant to prior Section 11(a) and Rule 11a2-2(T)
thereunder, Merrill Lynch was not permitted to execute transactions for the Fund
on the floor of any national securities exchange, but was allowed to effect such
transactions through transmitting orders for execution, providing for clearance
and settlement and arranging for the performance of such functions. Under prior
Section 11(a) and as permitted by the Rule, the Fund entered into an agreement
with the Manager and Merrill Lynch which permitted Merrill Lynch to retain
compensation for effecting transactions for the Fund on national securities
exchanges, and provided, among other things, that Merrill Lynch must furnish the
Fund at least annually with a statement setting forth the total amount of all
compensation retained by Merrill Lynch under the agreement. Because the recent
amendments to Section 11(a) obviate the need for this type of agreement, this
agreement was terminated. Because such termination occurred prior to the date
the Fund commenced operations, no transactions were effected by Merrill Lynch in
accordance with the terms of the agreement.
For the fiscal period ended August 31, 1994, the Fund paid total brokerage
commissions of $55,623, none of which was paid to Merrill Lynch. The Directors
have considered the possibilities of seeking to recapture for the benefit of the
Fund brokerage commissions and other expenses of possible portfolio transactions
by conducting portfolio transactions through affiliated entities. For example,
brokerage commissions received by affiliated brokers could be offset against
the advisory fee paid by the Fund. After considering all factors deemed
relevant,
26
<PAGE>
the Directors made a determination not to seek such recapture. The Directors
will reconsider this matter from time to time.
While the Fund generally does not expect to engage in trading for
short-term gains, it will effect portfolio transactions without regard to
holding period if, in its management's 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.
Accordingly, while the Fund anticipates that its annual turnover rate should not
exceed 100% under normal conditions, it is impossible to predict portfolio
turnover rates. Higher portfolio turnover involves correspondingly greater
transaction costs in the form of dealer spreads and brokerage commissions, which
are borne directly by the Fund. 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 all securities whose maturities
at the time of acquisition were one year or less) by the monthly average value
of the securities in the portfolio during the year. For the fiscal period ended
August 31, 1994, the portfolio turnover rate for the Fund was 8.50%.
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 4:15 P.M. on each day the New York Stock Exchange is open
for trading. The New York Stock Exchange is not open on New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or dealers
on the day of valuation. The net asset value is computed by dividing the value
of the securities held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time. Expenses, including the fees payable to the Manager and the Distributor
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
Class B and Class C shares of the Fund. It is expected, however, that the per
share net asset value of the four classes will tend to converge immediately
after the payment of dividends or distributions, which will differ by
approximately the amount of the expense accrual differential between the
classes.
27
<PAGE>
Securities traded in the over-the-counter market are valued at the last
available bid price or yield equivalents obtained from one or more dealers in
the over-the-counter market prior to the time of valuation. When the Fund writes
a call option, the amount of the premium received is recorded on the books of
the Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last asked price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the average of the
last asked price as obtained from one or more dealers. Options purchased by the
Fund are valued at their last bid price in the case of exchange-traded options
or in the case of options traded in the over-the-counter market, the average of
the last bid price as obtained from two or more dealers. Portfolio securities
which are traded on stock exchanges are valued at the last sale price on the
principal market on which such securities are traded, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price. 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 market value, as
determined in good faith by or under the direction of the Board of Directors of
the Fund, including valuations furnished by a pricing service retained by the
Fund. Such valuations and procedures will be reviewed periodically by the Board
of Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to United States investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of 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 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 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 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.
If the new brokerage firm is willing to
28
<PAGE>
accommodate the shareholder in this manner, the shareholder must request that he
be issued certificates for his shares, and then must turn the certificates over
to the new firm for re-registration as described in the preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to the 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 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. For
investors who buy shares of the Fund through Merrill Lynch Blueprint(Service
Mark) Program, no minimum charge to the investors bank account is required.
Investors who maintain CMA(Registered) accounts may arrange to have periodic
investments made in the Fund, in the CMA(Registered) accounts or in certain
related accounts in amounts of $100 or more ($1 for retirement accounts) through
the CMA Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund, without sales charge, as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their income
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone 1-800 MER-FUND that they no longer wish to have their dividends and/or
distributions reinvested in shares of the Fund or vice versa and, commencing ten
days after the receipt by the Transfer Agent of such notice, those instructions
will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account in the form of payments by check or through automatic
payment by direct deposit to its bank account on either a monthly or quarterly
basis as provided below. Quarterly withdrawals are available for shareholders
who have acquired Class A or Class D shares of the Fund having a value, based on
cost or the current offering price, of $5,000 or more, and monthly withdrawals
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 Class A or
Class D shares. Redemptions will be made at net asset value as determined at the
close of business on the New York Stock Exchange on the 24th day of each month
or the 24th day of the last month of each quarter, whichever is applicable. If
the Exchange is not open for business on such date, the Class A or Class D
shares will be redeemed
29
<PAGE>
at the close of business on the following business day. The check for the
withdrawal payment will be mailed, or the direct deposit for withdrawal payment
will be made, on the next business day following redemption. When a shareholder
is making systematic withdrawals, dividends and distributions on all Class A or
Class D shares in the Investment Account are reinvested automatically in Fund
Class A or Class D shares, respectively. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the 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 reduced correspondingly.
Purchases of additional Class A or Class D shares concurrent with withdrawals
are ordinarily disadvantageous to the shareholder because of sales charges and
tax liabilities. The Fund will not knowingly accept purchase orders for Class A
or Class D shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a
CMA(Registered), CBA(Registered) or Retirement Account may elect to have shares
redeemed on a monthly, bi-monthly, quarterly, semiannual or annual basis through
the Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$25. The proceeds of systematic redemptions will be posted to the shareholder's
account five business days after the date the shares are redeemed. Monthly
systematic redemptions will be made at net asset value on the first Monday of
each month, bi-monthly systematic redemptions will be made at net asset value on
the first Monday of every other month, and quarterly, semiannual or annual
redemptions are made at net asset value on the first Monday of months selected
at the shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as
in other securities. Merrill Lynch charges an initial establishment fee and an
annual custodial fee for each account. Information with respect to these plans
is available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100 and the minimum subsequent purchase is $1.
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual fund listed below. Under the Merrill
Lynch Select PricingSM System, Class A shareholders may exchange Class A shares
of the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his account in which
the exchange is made at the time
30
<PAGE>
of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second MLAM-advised mutual fund, and the
shareholder does not hold Class A shares of the second fund in his account at
the time of the exchange and is not otherwise eligible to acquire Class A shares
of the second fund, the shareholder will receive Class D shares of the second
fund as a result of the exchange. Class D shares also may be exchanged for Class
A shares of a second MLAM-advised mutual fund at any time as long as, at the
time of the exchange, the shareholder holds Class A shares of the second fund in
the account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund. Class B, Class C and Class D shares will be
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is 'tacked' to the holding period of the newly acquired
shares of the other Fund as more fully described below. Class A, Class B, Class
C and Class D shares also will be exchangeable for shares of certain
MLAM-advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C or Class D shares. Shares with
a net asset value of at least $100 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have been held by the
shareholder for 15 days. It is contemplated that the exchange privilege may be
applicable to other new mutual funds whose shares may be distributed by the
Distributor.
Exchanges of Class A or Class D shares outstanding ('outstanding Class A or
Class D shares') for Class A or Class D shares of another MLAM-advised mutual
fund ('new Class A or Class D shares') are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the 'sales charge previously paid' shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
dividend reinvestment Class A and Class D shares shall be exchanged into the
Class A or Class D shares of the other funds or into shares of the Class A money
market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
('outstanding Class B or Class C shares') offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ('new Class B or Class C shares') on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher 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
load that may be payable on a disposition of the new Class B or Class C shares,
the period of time that the outstanding Class B or Class C shares were held will
count toward satisfaction of the holding period of the new Class B or Class C
shares. For example, an investor may exchange Class B shares of the Fund for
those of Merrill Lynch Special Value Fund, Inc. ('Special Value Fund') after
having held the Fund's Class B shares for two and a half years. The 2% sales
load that generally would apply to a redemption
31
<PAGE>
would not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Merrill Lynch Special Value Fund and receive cash.
There will be no contingent deferred sales load due on this redemption, since by
'tacking' the two-and-a-half-year holding period of the Fund's Class B shares to
the three year holding period for the Merrill Lynch Special Value Fund Class B
shares, the investor will be deemed to have held the new Class B shares for more
than five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
toward 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 such 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 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 will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds issuing Class A, Class B, Class C and Class D Shares:
<TABLE>
<S> <C>
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC............. High current income consistent with a
policy of limiting the degree of
fluctuation in net asset value of fund
shares resulting from movements in
interest rates by investing primarily
in a portfolio of adjustable rate
securities.
MERRILL LYNCH AMERICAS INCOME FUND,
INC.............................. As high a level of current income as is
consistent with prudent investment risk
through investment primarily in debt
securities denominated in a currency
of a country located in the Western
Hemisphere (i.e., North and South
America and the surrounding waters).
MERRILL LYNCH ARIZONA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Arizona income
taxes as is consistent with prudent
investment management through
investment in a portfolio
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
primarily of
intermediate-term investment grade
Arizona Municipal Bonds.
MERRILL LYNCH ARIZONA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from Federal and Arizona
income taxes as is consistent with
prudent investment management.
MERRILL LYNCH ARKANSAS MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Arkansas income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH ASSET GROWTH FUND,
INC.............................. High total investment return, consistent
with prudent risk, from investment in
United States and foreign equity, debt
and money market securities the
combination of which will be varied
both with respect to types of
securities and markets in response to
changing market and economic trends.
MERRILL LYNCH ASSET INCOME FUND,
INC.............................. A high level of current income through
investment primarily in United States
fixed income securities.
MERRILL LYNCH BALANCED FUND FOR
INVESTMENT AND RETIREMENT........ As high a level of total investment
return as is consistent with a
relatively low level of risk through
investment in common stock and other
types of securities, including fixed
income securities and convertible
securities.
MERRILL LYNCH BASIC VALUE FUND,
INC.............................. Capital appreciation and, secondarily,
income by investing in securities,
primarily equities, that are
undervalued and therefore represent
basic investment value.
MERRILL LYNCH CALIFORNIA INSURED
MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of insured income exempt from
Federal and California income taxes as
is consistent with prudent investment
management.
MERRILL LYNCH CALIFORNIA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide shareholders with as high a
level of income exempt from Federal
and California income taxes as is
consistent with prudent
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
investment management through in-
vestment in a portfolio primarily of
intermediate-term investment grade
California Municipal Bonds.
MERRILL LYNCH CALIFORNIA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and California income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CAPITAL FUND, INC.... The highest total investment return
consistent with prudent risk through a
fully managed investment policy
utilizing equity, debt and convertible
securities.
MERRILL LYNCH COLORADO MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Colorado income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CONNECTICUT MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Connecticut income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CORPORATE BOND FUND,
INC.............................. Current income from three separate
diversified portfolios of fixed income
securities.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC................ Long-term appreciation through
investment in securities, principally
equities, of issuers in countries
having smaller capital markets.
MERRILL LYNCH DRAGON FUND, INC..... Capital appreciation primarily through
investment in equity and debt securities
of issuers domiciled in developing
countries located in Asia and the
Pacific Basin.
MERRILL LYNCH EUROFUND............. Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
MERRILL LYNCH FEDERAL SECURITIES
TRUST............................ High current return through investments
in U.S. Government and Government agency
securities, including GNMA
mortgage-backed certificates and other
mortgage-backed Government securities.
</TABLE>
34
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH FLORIDA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment
management while seeking to offer
shareholders the opportunity to own
securities exempt from Florida
intangible personal property taxes
through investment in a portfolio
primarily of intermediate-term
investment grade Florida Municipal
Bonds.
MERRILL LYNCH FLORIDA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
income taxes as is consistent with
prudent investment management while
seeking to offer shareholders the
opportunity to own securities exempt
from Florida intangible personal
property taxes.
MERRILL LYNCH FUND FOR TOMORROW,
INC.............................. Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic
and cultural changes as they affect
consumer markets.
MERRILL LYNCH FUNDAMENTAL GROWTH
FUND, INC........................ Long-term growth through investment in a
diversified portfolio of equity
securities in placing particular
emphasis on companies that have
exhibited an above-average growth rate
in earnings.
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC........................ High total return consistent with
prudent risk, through a fully-managed
investment policy utilizing United
States and foreign equity, debt and
money market securities, the
combination of which will be varied
from time to time both with respect to
types of securities and markets in
response to changing market and
economic trends.
MERRILL LYNCH GLOBAL BOND FUND FOR
INVESTMENT AND RETIREMENT........ High total investment return from
investment in government and corporate
bonds denominated in various
currencies and multi-national currency
units.
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC........................ High total return from investment
primarily in an internationally
diversified portfolio of convertible
debt securities, convertible preferred
stock and
</TABLE>
35
<PAGE>
<TABLE>
<S> <C>
'synthetic' convertible securities
consisting of a combination of debt
securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS, INC.
(residents of Arizona must meet
investor
suitability standards)........... The highest total investment return
consistent with prudent risk through
worldwide investment in an
internationally diversified portfolio
of securities.
MERRILL LYNCH GLOBAL RESOURCES
TRUST............................ Long-term growth and protection of
capital from investment in securities of
domestic and foreign companies that
possess substantial natural resource
assets.
MERRILL LYNCH GLOBAL SMALLCAP FUND,
INC.............................. Long-term growth of capital by investing
primarily in equity securities of
companies with relatively small market
capitalizations located in various
foreign countries and in the United
States.
MERRILL LYNCH GLOBAL UTILITY FUND,
INC.............................. Capital appreciation and current income
through investment of at least 65% of
its total assets in equity and debt
securities issued by domestic and
foreign companies primarily engaged in
the ownership or operation of
facilities used to generate, transmit
or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT........ Growth of capital and, secondarily,
income from investment in a diversified
portfolio of equity securities placing
principal emphasis on those securities
which management of the fund believes
to be undervalued.
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents of Wisconsin must meet
investor suitability standards).. Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and services
in healthcare.
MERRILL LYNCH INTERNATIONAL EQUITY
FUND............................. Capital appreciation and, secondarily,
income by investing in a diversified
portfolio of equity securities of
issuers located in countries other
than the United States.
MERRILL LYNCH LATIN AMERICA FUND,
INC.............................. Capital appreciation by investing
primarily in Latin American equity and
debt securities.
</TABLE>
36
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH MARYLAND MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Maryland income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MASSACHUSETTS LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Massachusetts
income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Massachusetts Municipal Bonds.
MERRILL LYNCH MASSACHUSETTS
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from both Federal and
Massachusetts income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MICHIGAN LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Michigan
income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Michigan Municipal Bonds.
MERRILL LYNCH MICHIGAN MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Michigan income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MINNESOTA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Minnesota personal income taxes as
is consistent with prudent investment
management.
</TABLE>
37
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH MUNICIPAL BOND FUND,
INC.............................. Tax-exempt income from three separate
diversified portfolios of municipal
bonds.
MERRILL LYNCH MUNICIPAL
INTERMEDIATE TERM FUND........... Currently the only portfolio of Merrill
Lynch Municipal Series Trust, a series
fund, whose objective is to provide as
high a level as possible of income
exempt from Federal income taxes by
investing in investment grade
obligations with a dollar weighted
average maturity of five to twelve
years.
MERRILL LYNCH NEW JERSEY LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and New Jersey
income taxes as is consistent with
prudent investment management through
a portfolio primarily of
intermediate-term investment grade New
Jersey Municipal Bonds.
MERRILL LYNCH NEW JERSEY MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and New Jersey state income taxes as
is consistent with prudent investment
management.
MERRILL LYNCH NEW MEXICO MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and New Mexico income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal, New York State
and New York City income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of
intermediate-term investment grade New
York Municipal Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
Federal, New York State and New York
City income taxes as is consistent
with prudent investment management.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and North Carolina income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH OHIO MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from both Federal and
Ohio income taxes as is consistent
with prudent investment management.
MERRILL LYNCH OREGON MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from both Federal and
Oregon income taxes as is consistent
with prudent investment management.
MERRILL LYNCH PACIFIC FUND, INC.... Capital appreciation by investing in
equity securities of corporations
domiciled in Far Eastern and Western
Pacific countries, including Japan,
Australia, Hong Kong, Singapore and
the Philippines.
MERRILL LYNCH PENNSYLVANIA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Pennsylvania
income taxes as is consistent with
prudent investment management through
investment in a portfolio of
intermediate-term investment grade
Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Pennsylvania state income taxes as
is consistent with prudent investment
management.
MERRILL LYNCH PHOENIX FUND, INC.... Long-term growth of capital by investing
in equity and fixed income securities,
including tax-exempt securities, of
issuers in weak financial condition or
</TABLE>
39
<PAGE>
<TABLE>
<S> <C>
experiencing poor operating results
believed to be undervalued relative to
the current or prospective condition
of such issuer.
MERRILL LYNCH SHORT-TERM GLOBAL
INCOME FUND, INC................. As high a level of current income as is
consistent with prudent investment
management from a global portfolio of
high quality debt securities
denominated in various currencies and
multi-currency units having remaining
maturities not exceeding three years.
MERRILL LYNCH SPECIAL VALUE FUND,
INC.............................. Long-term growth of capital from
investments in securities, primarily
common stocks, of relatively small
companies believed to have special
investment value and emerging growth
companies regardless of size.
MERRILL LYNCH STRATEGIC DIVIDEND
FUND............................. Long-term total return from investment
in dividend paying common stocks which
yield more than Standard & Poor's 500
Composite Stock Price Index.
MERRILL LYNCH TECHNOLOGY FUND,
INC.............................. Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and services
in technology.
MERRILL LYNCH TEXAS MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from Federal income
taxes as is consistent with prudent
investment management by investing
primarily in a portfolio of long-term,
investment grade obligations issued by
the State of Texas, its political
subdivisions, agencies and
instrumentalities.
MERRILL LYNCH WORLD INCOME FUND,
INC.............................. High current income by investing in a
global portfolio of fixed income
securities denominated in various
currencies, including multinational
currencies.
</TABLE>
Class A Share Money Market Funds:
<TABLE>
<S> <C>
MERRILL LYNCH READY ASSETS TRUST... Preservation of capital, liquidity and
the highest possible current income
consistent with the foregoing
objectives from the short-term money
market securities in which the Trust
invests.
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH RETIREMENT RESERVES
MONEY FUND (available only for
exchanges within certain
retirement plans)................ Currently the only portfolio of Merrill
Lynch Retirement Series Trust, a series
fund, whose objectives are current
income, preservation of capital and
liquidity available from investing in
a diversified portfolio of short-term
money market securities.
MERRILL LYNCH U.S.A. GOVERNMENT
RESERVES......................... Preservation of capital, current income
and liquidity available from investing
in direct obligations of the U.S.
Government and repurchase agreements
relating to such securities.
MERRILL LYNCH U.S. TREASURY MONEY
FUND............................. Preservation of capital, liquidity and
current income through investment
exclusively in a diversified portfolio
of short-term marketable securities
which are direct obligations of the
U.S. Treasury.
</TABLE>
Class B; Class C and Class D Share Money Market Funds:
<TABLE>
<S> <C>
MERRILL LYNCH GOVERNMENT FUND...... A portfolio of Merrill Lynch Funds
for Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in securities issued or guaranteed by
the U.S. Government, its agencies and
instrumentalities and in repurchase
agreements secured by such
obligations.
MERRILL LYNCH INSTITUTIONAL
FUND............................. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide maximum
current income consistent with
liquidity and the maintenance of a
high-quality portfolio of money market
securities.
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND.................. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income exempt from Federal income
taxes, preservation of capital and
liquidity available from investing in
a diversified portfolio of short-term,
high quality municipal bonds.
MERRILL LYNCH TREASURY FUND........ A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in direct obligations of the U.S.
Treasury and up to 10% of its total
assets in repurchase agreements
secured by such obligations.
</TABLE>
41
<PAGE>
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire transfer through their securities dealers. The Fund
reserves the right to require a properly completed Exchange Application. This
exchange privilege may be modified or terminated in accordance with the rules
of the Commission. The Fund reserves the right to limit the number of times an*
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares to the general public at any time and may
thereafter resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may
be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
All or a portion of the Fund's net investment income will be declared and
paid as dividends monthly. The Fund may at times pay out less than the entire
amount of net investment income earned in any particular period and may at times
pay out such accumulated undistributed income in addition to net investment
income earned in any particular period in order to permit the Fund to maintain a
more stable level of distributions. As a result, the distribution paid by the
Fund for any particular period may be more or less than the amount of net
investment income earned by the Fund during such period. However, it is the
Fund's intention to distribute during any fiscal year all its net investment
income. Shares will accrue dividends as long as they are issued and outstanding.
Shares are issued and outstanding as of the settlement date of a purchase order
to the settlement date of a redemption order. All net realized long-term and
short-term capital gains, if any, will be distributed to the Fund's shareholders
at least annually. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with a
Federal income tax requirement that certain percentages of its ordinary income
and capital gains be distributed during the taxable year. Premiums from expired
call options written by the Fund and net gains from closing purchase
transactions are treated as short-term capital gains for Federal income tax
purposes. See 'Shareholder Services--Automatic Reinvestment of Dividends and
Capital Gains Distributions' for information concerning the manner in which
dividends and distributions may be reinvested automatically in shares of the
Fund. Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as described below whether they are invested in shares of the Fund
or received in cash. The per share dividends and distributions on Class B and
Class C shares will be lower than the per share dividends and distributions on
Class A and Class D shares as a result of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and Class
C shares; similarly, the per share dividends and distributions on Class D shares
will be lower than the per share dividends and distributions on Class A shares
as a result of the account maintenance fees applicable with respect to the Class
D shares. See 'Determination of Net Asset Value.'
42
<PAGE>
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ('RICs') under the Internal Revenue Code
of 1986, as amended (the 'Code'). As a RIC, the Fund will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains which it distributes to Class A, Class B, Class C and Class D
shareholders (together, the 'shareholders'). The Fund intends to distribute
substantially all of such income. In order to qualify, the Fund must among other
things, (i) derive at least 90% of its gross income from dividends, interest,
payments with respect to certain securities loans, gains from the sale of
securities, certain gains from foreign currencies, or other income (including
but not limited to gains from options, futures or forward contracts) derived
with respect to its business of investing in such stock, securities or
currencies; (ii) derive less than 30% of its gross income from gains from the
sale or other disposition of stock, securities, options, futures, forward
contracts and certain investments in foreign currencies held for less than three
months; (iii) distribute at least 90% of its dividend, interest and certain
other taxable income each year; (iv) at the end of each fiscal quarter maintain
at least 50% of the value of its total assets in cash, government securities,
securities of other RICs, and other securities of issuers which represent, with
respect to each issuer, no more than 5% of the value of the Fund's total assets
and 10% of the outstanding voting securities of such issuer; and (v) at the end
of each fiscal quarter have no more than 25% of its assets invested in
the securities (other than those of the government or other RICs) of any one
issuer or of two or more issuers which the Fund controls and which are engaged
in the same, similar or related trades and businesses.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as 'ordinary income dividends') are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options) are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares.
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
dividends or capital gains distributions. The portion of the Fund's ordinary
income dividends which is attributable to dividends received by the Fund from
U.S. corporations may be eligible for the dividends received deduction allowed
to corporations under the Code, if certain requirements are met. For this
purpose, the Fund will allocate dividends eligible for the dividends received
deduction between the Class A, Class B, Class C and Class D shareholders
according to a method (which it believes is consistent with the Securities and
Exchange Commission exemptive order permitting the issuance and sale of multiple
classes of stock) that is based upon the gross income that is allocable to the
Class A, Class B, Class C and Class D shareholders during the taxable year, or
such other method as the Internal Revenue Service may prescribe. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a date in such a month, then such
dividend or distribution will be treated for tax purposes as being paid on
December 31, and will be taxable to its shareholders on December 31 of the year
in which the dividend was declared.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains distributions
and redemption payments ('backup withholding'). Generally, shareholders subject
to backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
shareholder is not otherwise subject to backup withholding taxes.
43
<PAGE>
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States withholding tax under existing provisions of the Code applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.
Upon a sale or exchange of its shares, a shareholder will realize a taxable
gain or loss depending on its basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands and will be long-term capital gain or loss if the shares
have been held for more than one year. Generally, any loss realized on a sale or
exchange will be disallowed to the extent shares disposed of are replaced within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of. Any loss realized by a shareholder on the sale of shares of the
Fund held by the shareholder for six months or less will be treated for tax
purposes as long-term capital loss to the extent of any distributions of net
capital gains received by
the shareholder with respect to such shares. If a shareholder exercises his
exchange privilege within 90 days of acquiring Class A shares of the Fund to
acquire shares in a second fund ('New Fund'), then the loss he can recognize on
the exchange will be reduced (or the gain increased) to the extent the charge
paid to the Fund reduces any charge he would have owed upon purchase of the
shares of the New Fund in the absence of the exchange privilege. Instead, such
charge will be treated as an amount paid for the New Fund shares.
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 a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of the Fund's taxable income
and capital gains will be distributed to avoid entirely the imposition of the
tax. In such event, the Fund will be liable for the tax only on the amount by
which it does not meet the foregoing distribution requirements.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell options or futures. Options and futures
contracts that are 'Section 1256 contracts' will be 'marked to market' for
Federal income tax purposes at the end of each taxable year, i.e., each option
or futures contract will be treated as sold for its fair market value on the
last day of the taxable year. Unless such contract is a forward foreign exchange
contract, or is a non-equity option or a regulated futures contract for a
non-U.S. currency for which the Fund elects to have gain or loss treated as
ordinary gain or loss under Code Section 988 (as described below), gain or loss
from Section 1256 contracts will be 60% long-term and 40% short-term capital
gain or loss. The mark-to-market rules outlined above, however, will not apply
to
44
<PAGE>
certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest rates with respect to its investments.
Code Section 1092, which applies to certain 'straddles,' may affect the
taxation of the Fund's transactions in options and futures contracts. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the Fund
may be restricted in effecting closing transactions within three months after
entering into an 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, foreign currency futures and forward foreign
exchange contracts will be valued for purposes of the RIC diversification
requirements applicable to the Fund. The Fund may request a private letter
ruling from the Internal Revenue Service on some or all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain forward contracts not
traded in the interbank market, from futures contracts that are not 'regulated
futures contracts,' and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders as
ordinary income, rather than increasing or decreasing the amount of the Fund's
net capital gain. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary dividend distributions, and any distributions made
before the losses were realized but in the same taxable year would be treated as
a return of capital to shareholders, thereby reducing each shareholder's basis
in his Fund shares.
------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect, and does
not address state and local taxation. For the complete provisions, reference
should be made to the pertinent Code sections and the Treasury regulations
promulgated thereunder. The Code and the Treasury regulations are subject to
change by legislative or administrative action either prospectively or
retroactively.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state, local or foreign taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
45
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield, in advertisements or information
furnished to present or prospective shareholders. Total return and yield figures
are based on the Fund's historical performance and are not intended to indicate
future performance. Average annual total return and yield are determined
separately for Class A, Class B, Class C and Class D shares in accordance with a
formula specified by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the 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. Such data will be
computed as described above, except that (i) as required by the periods of the
quotations, actual annual, annualized or aggregate data, rather than average
annual data, may be quoted and (ii) the maximum applicable sales charges will
not be included. Actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time.
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 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 the waiver of sales charges, a lower amount of expenses may be
deducted.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period.
From time to time, the Fund may include the Fund's Morningstar
risk-adjusted performance ratings in advertisements or supplemental sales
literature.
Set forth below is total return and yield information for the Class A and
Class B shares of the Fund for the periods indicated. Since Class C and Class D
shares have not been issued prior to the date of this Statement of Additional
Information, performance information concerning Class C and Class D shares is
not yet provided.
46
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------ ------------------------------
REDEEMABLE EXPRESSED AS A REDEEMABLE
EXPRESSED AS A VALUE OF A PERCENTAGE VALUE OF A
PERCENTAGE HYPOTHETICAL BASED HYPOTHETICAL
BASED ON A $1,000 ON A $1,000
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF THE
PERIOD INVESTMENT THE PERIOD INVESTMENT PERIOD
- ------------------ --------------- -------------- --------------- --------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
October 29, 1993
(commencement of
operations) to
August 31,
1994............ (18.04)% $ 846.30 (18.44)% $ 842.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
October 29, 1993
(commencement of
operations) to
August 31,
1994............ (11.84)% $ 881.60 (12.34)% $ 876.60
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
October 29, 1993
(commencement of
operations) to
August 31,
1994............ (15.37)% $ 846.30 (15.71)% $ 842.90
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ending
August 31,
1994............ 6.23% 5.93%
</TABLE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on July 14, 1993. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the distribution of such shares
and the account maintenance fee and have exclusive voting rights with respect to
matters relating to such account maintenance and/or distribution expenditures.
The Fund has received an order from the Securities and Exchange Commission
permitting the issuance and sale of multiple classes of Common Stock. The Board
of Directors of the Fund may classify and reclassify the shares of the Fund into
additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent
47
<PAGE>
accountants. Also, the by-laws of the Fund require that a special
meeting of stockholders be held upon the written request of at least 10% of the
outstanding shares of the Fund entitled to vote at such meeting. Voting rights
for Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive rights. Redemption and conversion rights
are discussed elsewhere herein and in the Prospectus. Each share is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund upon liquidation or dissolution after satisfaction of
outstanding liabilities. Stock certificates are issued by the transfer agent
only on specific request. Certificates for fractional shares are not issued in
any case.
The Manager provided the initial capital for the Fund by purchasing 5,000
shares of each class of stock for an aggregate of $100,000. Such shares were
acquired for investment and can only be disposed of by redemption. The
organizational expenses of the Fund (estimated to be approximately $120,800)
were paid by the Fund and are amortized over a period not exceeding five years.
The proceeds realized by the Manager upon redemption of any of such shares will
be reduced by the proportionate amount of the unamortized organizational
expenses which the number of shares redeemed bears to the number of shares
initially purchased.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A and Class B shares of the Fund based on the
value of the Fund's net assets and number of shares outstanding as of August 31,
1994, is calculated as set forth below. Information is not provided for Class C
or Class D shares since no Class C or Class D shares were publicly issued prior
to the date of this Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ ------------
<S> <C> <C>
Net Assets........................................ $ 4,237,655 $ 27,395,024
------------ ------------
------------ ------------
Number of Shares Outstanding...................... 501,916 3,244,996
------------ ------------
------------ ------------
Net Asset Value Per Share (net assets divided by
number
of shares outstanding).......................... $ 8.44 $ 8.44
Sales Charge (for Class A shares: 4.00% of
offering price (4.17% of net asset value per
share))*........................................ 0.35 **
------------ ------------
Offering Price.................................... $ 8.79 $ 8.44
------------ ------------
------------ ------------
</TABLE>
- ------------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption. See 'Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares' in the Prospectus and
'Redemption of Shares--Deferred Sales Charge--Class B 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 ratification by the Fund's shareholders in
years when an annual meeting of shareholders is held. In addition, employment of
such auditors may be terminated without any penalty by vote of a majority of the
outstanding shares of the Fund at a meeting
48
<PAGE>
called for the purpose of terminating such employment. The independent auditors
are responsible for auditing the annual financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, One Heritage Drive P2N, North Quincy,
Massachusetts 02171, 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 United States and with certain foreign
banks and securities depositories. The Custodian is responsible for safeguarding
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities and collecting interest and dividends on the Fund's
investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See 'Management of the
Fund--Transfer Agency Services' in the Prospectus.
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, 919 Third Avenue, New York, New York
10022, is counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on August 31 of each year. The Fund sends
to its shareholders at least quarterly reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
independent auditors, is sent to shareholders each year. After the end of each
year shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act of 1940, to which reference is hereby made.
Under a separate agreement Merrill Lynch has granted the Fund the right to
use the 'Merrill Lynch' name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of any class of the Fund's shares on September 30, 1994.
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Utility Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Utility Income Fund, Inc. as of
August 31, 1994, the related statements of operations and changes in net assets,
and the financial highlights for the period October 29, 1993 (commencement of
operations) to August 31, 1994. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and 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 August 31, 1994, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Utility Income Fund, Inc. as of August 31, 1994, the results of its operations,
the changes in its net assets, and the financial highlights for the period
October 29, 1993 to August 31, 1994 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 29, 1994
50
<PAGE>
Merrill Lynch Utility Income Fund, Inc. August 31, 1994
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Value Percent of
Industries Shares Held Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Communications 20,000 Pacific Telesis Group $ 623,700 $ 660,000 2.1%
Utilities--Electric 22,500 Allegheny Power System, Inc. 483,750 506,250 1.6
40,900 American Electric Power Company, Inc. 1,519,871 1,288,350 4.1
16,000 Baltimore Gas & Electric Co. 396,848 368,000 1.2
18,000 Boston Edison Co. 498,793 481,500 1.5
26,000 Carolina Power & Light Co. 774,899 689,000 2.2
22,000 Central & Southwest Corp. 475,750 495,000 1.6
26,600 Commonwealth Edison Co. 785,722 638,400 2.0
29,100 Consolidated Edison Company of New York 980,888 796,613 2.5
18,400 Detroit Edison Co. 595,472 501,400 1.6
20,800 Dominion Resources, Inc. 980,112 782,600 2.5
25,300 Duke Power Co. 1,101,816 980,375 3.1
18,100 Entergy Corp. 466,075 450,238 1.4
23,500 FPL Group, Inc. 919,184 737,313 2.3
20,500 General Public Utilities Corp. 527,875 535,562 1.7
23,300 Houston Industries, Inc. 1,097,517 809,675 2.6
32,000 Long Island Lighting Co. 769,920 576,000 1.8
27,000 New York State Electric & Gas Corp. 780,994 560,250 1.8
17,900 Niagara Mohawk Power Corp. 385,366 266,262 0.8
35,700 Northeast Utilities Co. 907,836 830,025 2.6
11,000 Northern States Power Co. 479,160 475,750 1.5
24,900 Ohio Edison Co. 559,888 482,437 1.5
21,000 Oklahoma Gas & Electric Co. 757,886 719,250 2.3
34,800 PacifiCorp 680,713 595,950 1.9
20,400 PECO Energy Co. 624,518 555,900 1.8
30,000 Pennsylvania Power & Light Co. 778,050 633,750 2.0
20,000 Public Service Company of Colorado 636,200 542,500 1.7
40,400 Public Service Enterprise Group Inc. 1,319,991 1,121,100 3.5
42,200 SCEcorp 887,436 574,975 1.8
60,400 Southern Co. 1,362,076 1,140,050 3.6
33,000 Texas Utilities Company 1,412,932 1,105,500 3.5
12,600 Union Electric Co. 513,993 450,450 1.4
20,000 Western Resources Co. 562,500 575,000 1.8
18,400 Wisconsin Energy Corp. 477,204 478,400 1.5
------------ ------------ ------
25,501,235 21,743,825 68.7
Total Stocks 26,124,935 22,403,825 70.8
<CAPTION>
Face Amount Corporate Bonds
<S> <C> <C> <C> <C> <C>
Telecommuni- $ 1,000,000 Southwestern Bell Capital Corp., 7.00%
cations due 7/01/2015 1,034,480 892,160 2.8
1,000,000 Tele-Communications, Inc., 9.80% due
2/01/2012 1,263,890 1,055,460 3.3
1,000,000 United Telephone of Florida, 6.875%
due 7/15/2013 1,019,950 873,970 2.8
------------ ------------ ------
3,318,320 2,821,590 8.9
Utilities-- 1,000,000 Public Service Company of Colorado, 6.375%
Electric due 11/01/2005 991,300 883,090 2.8
Utilities--Gas 1,000,000 El Paso Natural Gas Co., 7.75% due 1/15/2002 1,090,950 1,001,310 3.2
1,000,000 Enron Corp., 6.75% due 7/01/2005 1,023,800 907,720 2.9
1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 1,491,030 1,344,975 4.3
------------ ------------ ------
3,605,780 3,254,005 10.4
Total Corporate Bonds 7,915,400 6,958,685 22.1
</TABLE>
51
<PAGE>
Merrill Lynch Utility Income Fund, Inc. August 31, 1994
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Value Percent of
Face Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Commercial $ 1,317,000 General Electric Co., 4.75% due 9/01/1994 $ 1,317,000 $ 1,317,000 4.1%
Paper* 1,000,000 Unilever Capital Corp., 4.575% due
9/12/1994 998,602 998,602 3.1
Total Short-Term Securities 2,315,602 2,315,602 7.2
Total Investments $ 36,355,937 31,678,112 100.1
============
Liabilities in Excess of Other Assets (45,433) (0.1)
------------ ------
Net Assets $ 31,632,679 100.0%
============ ======
<FN>
*Commercial Paper is traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
</TABLE>
See Notes to Financial Statements.
52
<PAGE>
Merrill Lynch Utility Income Fund, Inc. August 31, 1994
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of August 31, 1994
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$36,355,937) (Note 1a) $ 31,678,112
Cash 483
Receivables:
Securities sold $ 598,180
Beneficial interest sold 388,219
Dividends 187,400
Investment adviser (Note 2) 149,301
Interest 79,860 1,402,960
------------
Deferred organization expenses (Note 1f) 75,500
------------
Prepaid registration fees and other assets (Note 1f) 123,565
------------
Total assets 33,280,620
------------
Liabilities: Payables:
Securities purchased 1,234,084
Beneficial interest redeemed 353,707
Distributor (Note 2) 18,364 1,606,155
------------
Accrued expenses and other liabilities 41,786
------------
Total liabilities 1,647,941
------------
Net Assets: Net assets $ 31,632,679
============
Net Assets Class A Shares of Common Stock, $.10 par value; 100,000,000
Consist of: shares authorized $ 50,192
Class B Shares of Common Stock, $.10 par value; 100,000,000
shares authorized 324,500
Paid-in capital in excess of par 36,276,972
Undistributed investment income--net 183,101
Undistributed realized capital losses on investments--net (524,261)
Unrealized depreciation on investments--net (4,677,825)
------------
Net assets $ 31,632,679
============
Net Asset Value: Class A--Based on net assets of $4,237,655 and 501,916 shares
outstanding $ 8.44
============
Class B--Based on net assets of $27,395,024 and 3,244,996 shares
outstanding $ 8.44
============
</TABLE>
See Notes to Financial Statements.
53
<PAGE>
Merrill Lynch Utility Income Fund, Inc. August 31, 1994
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Period
October 29, 1993++
to August 31, 1994
<S> <C> <C>
Investment Dividends $ 1,052,833
Income Interest and amortization of premium and discount earned 565,056
(Note 1e): ------------
Total income 1,617,889
------------
Expenses: Distribution fees--Class B (Note 2) 163,778
Investment advisory fees (Note 2) 138,575
Registration fees (Note 1f) 84,441
Printing and shareholder reports 49,555
Accounting services (Note 2) 32,035
Directors' fees and expenses 26,974
Transfer agent fees--Class B (Note 2) 22,176
Professional fees 18,474
Amortization of organization expenses (Note 1f) 15,100
Custodian fees 6,013
Transfer agent fees--Class A (Note 2) 2,793
Pricing fees 1,792
Other 4,301
------------
Total expenses before reimbursement 566,007
Reimbursement of expenses (Note 2) (287,875)
------------
Total expenses net of reimbursement 278,132
------------
Investment income--net 1,339,757
------------
Realized & Un- Realized loss from investments--net (524,261)
realized Gain on Unrealized depreciation on investments--net (4,677,825)
Investments--Net ------------
(Notes 1e & 3): Net Decrease in Net Assets Resulting from Operations $ (3,862,329)
============
<FN>
++ Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
54
<PAGE>
Merrill Lynch Utility Income Fund, Inc. August 31, 1994
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
For the Period
October 29, 1993++
Increase (Decrease) in Net Assets: to August 31, 1994
<S> <C> <C>
Operations: Investment income--net $ 1,339,757
Realized loss on investments--net (524,261)
Unrealized depreciation on investments--net (4,677,825)
------------
Net decrease in net assets resulting from operations (3,862,329)
------------
Dividends to Investment income--net:
Shareholders Class A (172,046)
(Note 1g): Class B (984,610)
------------
Net decrease in net assets resulting from dividends to shareholders (1,156,656)
------------
Capital Share Net increase in net assets derived from capital share transactions 36,551,664
Transactions ------------
(Note 4):
Net Assets: Total increase in net assets 31,532,679
Beginning of period 100,000
------------
End of period* $ 31,632,679
============
<FN>
*Undistributed investment income--net $ 183,101
============
++ Commencement of Operations.
</TABLE>
See Notes to Financial Statements.
55
<PAGE>
Merrill Lynch Utility Income Fund, Inc. August 31, 1994
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. October 29, 1993++ to
August 31, 1994
Increase (Decrease) in Net Asset Value: Class A Class B
<S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00
Operating ------------ ------------
Performance: Investment income--net .40 .35
Realized and unrealized loss on investments--net (1.57) (1.57)
------------ ------------
Total from investment operations (1.17) (1.22)
------------ ------------
Dividends to shareholders:
Investment income--net (.39) (.34)
------------ ------------
Total dividends (.39) (.34)
------------ ------------
Net asset value, end of period $ 8.44 $ 8.44
============ ============
Total Investment Based on net asset value per share (11.84%)+++ (12.34%)+++
Return:** ============ ============
Ratios to Expenses, net of reimbursement and excluding distribution fee .44%* .46%*
Average ============ ============
Net Assets: Expenses, net of reimbursement .44%* 1.21%*
============ ============
Expenses 1.58%* 2.35%*
============ ============
Investment income--net 5.92%* 5.22%*
============ ============
Supplemental Net assets, end of period (in thousands) $ 4,238 $ 27,395
Data: ============ ============
Portfolio turnover 8.50% 8.50%
============ ============
<FN>
++ Commencement of Operations.
+++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
</TABLE>
See Notes to Financial Statements.
56
<PAGE>
Merrill Lynch Utility Income Fund, Inc. August 31, 1994
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Utility Income Fund, Inc. (the "Fund")
is registered under the Investment Company Act of
1940 as a diversified, open-end management invest-
ment company. Prior to commencement of operations
on October 29, 1993, the Fund had no operations
other than those relating to organizational matters
and the sale of 5,000 Class A and 5,000 Class B
Shares of common stock of the Fund to Merrill Lynch
Asset Management, L.P. ("MLAM") for $100,000. The
Fund offers both Class A and Class B Shares. Class A
Shares are sold with a front-end sales charge. Class B
Shares may be subject to a contingent deferred sales
charge. Both classes of shares have identical voting,
dividend, liquidation and other rights and the same
terms and conditions, except that Class B Shares
bear certain expenses related to the account main-
tenance and distribution of such shares and have
exclusive voting rights with respect to matters
relating to such expenditures. On September 27, 1994,
shareholders approved the implementation of the
Merrill Lynch Select Pricing(Service Mark) System,
which will offer two new classes of shares, Class C
and Class D. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of Securities--Securities traded in the
over-the-counter market are valued at the last avail-
able bid price or yield equivalents obtained from one
or more dealers in the over-the-counter market prior
to the time of valuation. Portfolio securities which
are traded on stock exchanges are valued at the last
sale price on the principal market on which such
securities are traded, as of the close of business on
the day the securities are being valued or, lacking any
sales, at the last available bid price. Options written
are valued based upon the last asked price in the
case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the
average of the last asked price as obtained from one
or more dealers. Options purchased by the Fund are
valued at their last bid price in the case of exchange-
traded options or in the case of options traded in the
over-the-counter market, the average of the last bid
price as obtained by two or more dealers. Other
investments, including futures contracts and related
options, are stated at market value. Securities with
remaining maturities of sixty days or less are valued
at amortized cost, which approximates market value.
Securities and assets for which market quotations
are not readily available are valued at fair value as
determined in good faith by or under the direction of
the Directors of the Fund.
(b) Foreign Currency Transactions--Transactions
denominated in foreign currencies are recorded at
the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are
valued at the exchange rate at the end of the period.
Foreign currency transactions are the result of set-
tling (realized) or valuing (unrealized) receivables or
payables expressed in foreign currencies into US
dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange
rates on investments.
The Fund is authorized to enter into forward foreign
exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the
effect on operations is recorded from the date the
Fund enters into such contracts. Premium or dis-
count is amortized over the life of the contracts.
(c) Options--When the Fund writes an option, an
amount equal to the premium received by the Fund
is reflected as an asset and an 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 pre-
mium paid (or received) is deducted from (or added
to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transac-
tion), the Fund realizes a gain or loss on the option
to the extent of the premiums received or paid (or
gain or loss to the extent the cost of the closing
transaction is less than or exceeds the premiums
paid or received).
Written and purchased options are non-income pro-
ducing 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
57
<PAGE>
Merrill Lynch Utility Income Fund, Inc. August 31, 1994
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). Inter-
est 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. Dividend income is
recorded on the ex-dividend date, except that if the
ex-dividend date has passed, certain dividends from
foreign securities are recorded as soon as the Fund is
informed of the ex-dividend date.
(f) Deferred Organization Expenses and Prepaid
Registration Fees--Deferred organization expenses
are charged to expense over a five-year period.
Prepaid registration fees are charged to expense as
the related shares are issued.
(g) Dividends and Distributions--Dividends from
net investment income, excluding transaction
gains (losses), are declared and paid monthly. Dis-
tribution of capital gains are recorded on the
ex-dividend date.
(h) Financial Futures Contracts--The Fund is
authorized to engage in transactions in stock index
futures and financial futures and related options on
such futures. A futures contract is an agreement
between two parties to buy and sell a security or, in
the case of an index-based futures contract, to make
and accept a cash settlement for a set price on a
future date. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial mar-
gin as required by the exchange on which the trans-
action 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.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory
Agreement with MLAM. Effective January 1, 1994,
the investment advisory business of MLAM was
reorganized from a corporation to a limited partner-
ship. Both prior to and after the reorganization,
ultimate control of MLAM was vested with Merrill
Lynch & Co., Inc. ("ML & Co."). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of ML & Co. The
limited partners are ML & Co. and Merrill Lynch
Investment Management, Inc. ("MLIM"), which is
also an indirect wholly-owned subsidiary of ML & Co.
The Fund has also entered into a Distribution Agree-
ment and a Distribution Plan with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of MLIM.
MLAM is responsible for the management of the
Fund's portfolio and provides the necessary person-
nel, facilities, equipment and certain other services
necessary to the operation of the Fund. For such
services, the Fund pays a monthly fee of 0.55%, on an
annual basis, of the average daily value of the Fund's
net assets. The most restrictive annual expense limi-
tation requires that the Investment Adviser reim-
burse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, broker-
age fees and commissions, and extraordinary items)
exceed 2.5% of the Fund's first $30 million of average
daily net assets, 2.0% of the next $70 million of aver-
age daily net assets, and 1.5% of the average daily net
assets in excess thereof. The Investment Adviser's
obligation to reimburse the Fund is limited to the
amount of the investment advisory fee. No fee pay-
ment will be made to the Investment Adviser during
any fiscal year which will cause such expenses to ex-
ceed the most restrictive expense limitation at the
time of such payment. For the period ended August 31,
1994, MLAM earned fees of $138,575, all of which
were voluntarily waived. MLAM also voluntarily reim-
bursed the Fund for additional expenses of $149,300.
Pursuant to a distribution plan (the "Distribution
Plan") adopted by the Fund in accordance with
Rule 12b-1 under the Investment Company Act of
58
<PAGE>
Merrill Lynch Utility Income Fund, Inc. August 31, 1994
NOTES TO FINANCIAL STATEMENTS (concluded)
1940, the Fund pays the Distributor an ongoing
account maintenance fee and distribution fee, which
are accrued daily and paid monthly at the annual
rates of 0.25% and 0.50%, respectively, of the aver-
age daily net assets of the Class B Shares of the
Fund. Pursuant to a sub-agreement with the Distrib-
utor, Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), a subsidiary of ML & Co., also pro-
vides account maintenance and distribution services
to the Fund with respect to Class B Shares. The
ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account main-
tenance services to Class B shareholders. The
ongoing distribution fee compensates the Distributor
and MLPF&S for providing shareholder and distri-
bution services and bearing certain distribution-
related expenses of the Fund. For the period
October 29, 1993 to August 31, 1994, MLFD earned
$163,778 under the Plan, all of which was paid to
MLPF&S pursuant to the agreement.
For the period October 29, 1993 to August 31, 1994,
MLFD earned underwriting discounts of $1,787, and
MLPF&S earned dealer concessions of $251,010 on
sales of Class A Shares. MLPF&S also received con-
tingent deferred sales charges of $73,597 relating to
Class B Share transactions.
Financial Data Services, Inc. ("FDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by
MLAM at cost.
Certain officers and/or directors of the Fund are
officers and/or directors of MLFD, MLIM, PSI, MLAM,
MLPF&S, FDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-
term securities, for the period October 29, 1993 to
August 31, 1994 were $36,632,417 and $2,068,040,
respectively.
Realized and unrealized gains (losses) as of August
31, 1994 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $ (524,043) $ (4,677,825)
Short-term investments (218) --
------------ ------------
Total $ (524,261) $ (4,677,825)
============ ============
As of August 31, 1994, net unrealized depreciation
for Federal income tax purposes aggregated $4,677,825,
of which $99,433 related to appreciated securities
and $4,777,258 related to depreciated securities. At
August 31, 1994, the aggregate cost of investments
for Federal income tax purposes was $36,355,937.
4. Capital Share Transactions:
Net increase in net assets derived from capital share
transactions was $36,551,664 for the period ended
August 31, 1994. Transactions in capital shares were
as follows:
Class A Shares for the Period October Dollar
29, 1993++ to August 31, 1994 Shares Amount
Shares sold 896,487 $ 8,334,878
Shares issued to shareholders
in reinvestment of dividends 12,806 113,825
------------ ------------
Total issued 909,293 8,448,703
Shares redeemed (412,377) (3,586,609)
------------ ------------
Net increase 496,916 $ 4,862,094
============ ============
++Prior to October 29, 1993 (commencement of operations), the
Fund issued 5,000 Class A Shares to MLAM for $50,000.
Class B Shares for the Period October Dollar
29, 1993++ to August 31, 1994 Shares Amount
Shares sold 4,113,267 $ 39,423,027
Shares issued to shareholders
in reinvestment of dividends 66,851 590,131
------------ ------------
Total issued 4,180,118 40,013,158
Shares redeemed (940,122) (8,323,588)
------------ ------------
Net increase 3,239,996 $ 31,689,570
============ ============
++Prior to October 29, 1993 (commencement of operations), the Fund issued 5,000
Class B shares to MLAM for $50,000.
59
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ('MOODY'S') CORPORATE RATINGS
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as 'gilt edge.' Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
BAA Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate,
and therefore not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
</TABLE>
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of
A-1
<PAGE>
its generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term 'commercial paper' as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
'commercial paper' or is exempt from registration under the Securities Act of
1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
--Leading market positions in well established industries
--High rates of return on funds employed
--Conservative capitalization structures with moderate reliance on
debt and ample asset protection
--Broad margins in earnings coverage of fixed financial charges and
high internal cash generation
--Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
A-2
<PAGE>
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stocks occupy a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<S> <C>
AAA An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
AA An issue which is rated 'aa' is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that
earnings and asset protection will remain relatively well maintained
in the foreseeable future.
A An issue which is rated 'a' is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the 'aaa' and 'aa' classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
BAA An issue which is rated 'baa' is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
BA An issue which is rated 'ba' is considered to have speculative
elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
B An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be small.
CAA An issue which is rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
CA An issue which is rated 'ca' is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of
eventual payment.
C This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
</TABLE>
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from 'aa' through 'b' in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
A-3
<PAGE>
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S
('STANDARD & POOR'S') CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.
Debt rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and
C the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and
principal payment. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
BBB-rating.
</TABLE>
A-4
<PAGE>
<TABLE>
<S> <C>
B Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions would likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB-rating.
CCC Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic
conditions to meet timely payments of interest and repayments of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or
B-rating.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
</TABLE>
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
Provisional ratings: The letter 'p' indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
<TABLE>
<S> <C>
L The letter 'L' indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is insured by the Federal Savings & Loan Insurance Corp. or
the Federal Deposit Insurance Corp. and interest is adequately
collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
</TABLE>
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ('AAA,' 'AA,' 'A,' 'BBB,' commonly
A-5
<PAGE>
known as 'investment grade' ratings) are generally regarded as eligible for bank
investment. In addition, the laws of various states governing legal investments
impose certain rating or other standards for obligations eligible for investment
by savings banks, trust companies, insurance companies and fiduciaries
generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from 'A' for the
highest quality obligations to 'D' for the lowest. The four categories are as
follows:
<TABLE>
<S> <C>
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree
of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus
(+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated 'A-1.'
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B Issues rated 'B' are regarded as having only adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
</TABLE>
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the bond rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
<TABLE>
<S> <C>
I. Likelihood of payment--capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the
obligation.
II. Nature of, and provisions of, the issue.
</TABLE>
A-6
<PAGE>
<TABLE>
<S> <C>
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity
to pay the preferred stock obligations.
AA A preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated
'AAA.'
A An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated 'BBB' is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to make payments for a preferred stock in this category than for
issues in the 'A' category.
BB, Preferred stock rated 'BB,' 'B,' and 'CCC' are regarded, on balance,
B, CC as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest degree of speculation. While such
issues will likely have some quality and protection characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating 'CC' is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated 'C' is a non-paying issue.
D A preferred stock rated 'D' is a non-paying issue with the issuer in
default on debt instruments.
</TABLE>
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from 'AA' to 'CCC' may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information.
A-7
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies................ 2
Portfolio Strategies Involving Options and
Futures...................................... 2
Other Investment Policies and Practices........ 7
Current Investment Restrictions................ 10
Management of the Fund........................... 14
Directors and Officers......................... 14
Management and Advisory Arrangements........... 15
Purchase of Shares............................... 17
Initial Sales Charge Alternatives--
Class A and Class D Shares................... 17
Reduced Initial Sales Charges.................. 18
Distribution Plans............................. 22
Limitations on the Payment of Deferred Sales
Charges...................................... 23
Redemption of Shares............................. 24
Deferred Sales Charge--
Class B Shares............................... 24
Portfolio Transactions and Brokerage............. 25
Determination of Net Asset Value................. 27
Shareholder Services............................. 28
Investment Account............................. 29
Automatic Investment Plans..................... 29
Automatic Reinvestment of Dividends and Capital
Gains Distributions.......................... 29
Systematic Withdrawal Plans--Class A
and Class D Shares........................... 29
Retirement Plans............................... 30
Exchange Privilege............................. 30
Dividends, Distributions and Taxes............... 42
Dividends and Distributions.................... 42
Taxes.......................................... 43
Tax Treatment of Options and Futures
Transactions................................. 44
Performance Data................................. 46
General Information.............................. 47
Description of Shares.......................... 47
Computation of Offering Price Per Share........ 48
Independent Auditors........................... 48
Custodian...................................... 49
Transfer Agent................................. 49
Legal Counsel.................................. 49
Reports to Shareholders........................ 49
Additional Information......................... 49
Independent Auditors' Report..................... 50
Financial Statements............................. 51
Appendix......................................... A-1
</TABLE>
Code #16857-1094
Statement of
Additional Information
- ------------------------------------------------------
MERRILL LYNCH
UTILITY INCOME
FUND, INC.
October 21, 1994
Distributor:
Merrill Lynch Funds
Distributor, Inc.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR Submission File due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
Contained in Part A, the Prospectus:
Financial Highlights (selected per share data and ratios) for the
period October 29, 1993 (commencement of operations) to August
31, 1994.
Contained in Part B, the Statement of Additional Information:
Schedule of Investments as of August 31, 1994.
Statement of Assets and Liabilities as of August 31, 1994.
Statement of Operations for the period October 29, 1993
(commencement of operations) to August 31, 1994.
Statement of Changes in Net Assets for the period October 29, 1993
(commencement of operations) to August 31, 1994.
Financial Highlights for the period October 29, 1993 (commencement
of operations) to August 31, 1994.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------
<S> <C>
1 -- Articles of Incorporation of Registrant.*
2 -- Amended and Restated By-Laws of Registrant.**
3 -- None.
4 -- Instruments defining rights of Shareholders.**
5 -- Management Agreement between Registrant and Merrill Lynch
Investment Management, Inc. (reorganized as Merrill Lynch Asset
Management, L.P.)**
6 (a) -- Form of Class A Shares Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc.
(b) -- Class B Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.**
(c) -- Form of Class C Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).
(d) -- Form of Class D Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).
7 -- None.
8 -- Custody Agreement between Registrant and State Street Bank and
Trust Company.***
9 (a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc.**
(b) -- License Agreement relating to Use of Name between Merrill Lynch &
Co., Inc. and Registrant.***
10 -- Opinion and consent of Shereff, Friedman, Hoffman & Goodman,
counsel for Registrant.***
11 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Investment Management, Inc.***
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------
14 -- None.
<S> <C>
15 (a) -- Class B Distribution Plan and Class B Distribution Plan
Sub-Agreement.
15 (b) -- Form of Class C Distribution Plan and Class C Distribution Plan
Sub-Agreement.
15 (c) -- Form of Class D Distribution Plan and Class D Distribution Plan
Sub-Agreement.
16 (a) -- Schedule for computation for each performance quotation relating to
Class A shares provided in the Registration Statement in Response
to Item 22.****
(b) -- Schedule for computation of each performance quotation relating to
Class B shares provided in the Registration Statement in Response
to Item 22.****
17 (a) -- Financial Data Schedule for Class A shares.
17 (b) -- Financial Data Schedule for Class B shares.
18 -- Other Exhibits.
Powers of Attorney for Officers and Directors
Arthur Zeikel****
Gerald M. Richard****
Ronald W. Forbes****
Cynthia A. Montgomery****
Charles C. Reilly****
Kevin A. Ryan****
Richard R. West****
</TABLE>
- ------------------
* Incorporated by reference to identically numbered Exhibit to Registrant's
initial Registration Statement on Form N-1A (File No. 33-49787).
** Incorporated by reference to identically numbered Exhibit to the
Pre-Effective Amendment No. 1 to Registrant's Registration Statement on
Form N-1A (File No. 33-49787).
*** Incorporated by reference to identically numbered Exhibit to Pre-Effective
Amendment No. 2 to Registrant's Registration Statement on Form N-1A (File
No. 33-49787).
**** Incorporated by reference to Exhibits to Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A (File No. 33-49787).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1994
- -------------------------------------------------- ------------------
<S> <C>
Class A Common Stock, par value $.10 per share.... 11
Class B Common Stock, par value $.10 per share.... 41
Class C Shares of Common Stock, par value $0.10
per share....................................... 0
Class D Shares of Common Stock, par value $0.10
per share....................................... 0
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's Amended and Restated By-Laws (the 'By-Laws'), Section
9 of the Distribution Agreements and Section 2-418 of the Maryland General
Corporation Law.
C-2
<PAGE>
Article VI of the By-Laws provides that each officer and Director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. Absent a court determination that
an officer or Director seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent directors, after
review of the facts, that such officer or Director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Each officer and Director of the Registrant claiming indemnification with
the scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the General Laws of the State of Maryland; provided, however,
that the person seeking indemnification shall provide to the Registrant a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Registrant has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Registrant at the
time the advance is proposed to be made, that there is reason to believe that
the person seeking indemnification will ultimately be found to be entitled to
indemnification.
The Registrant may purchase insurance on behalf of an officer or Director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
Director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or Director of the Registrant that protects or purports
to protect such person from liability to the Registrant or to its stockholders
to which such officer or Director would otherwise by subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
The Registrant may indemnify or purchase insurance to the extent provided
in Article VI of the By-Laws on behalf of an employee or agent who is not an
officer or Director of the Registrant.
In Section 9 of the 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 (the 'Act'), against certain types of civil liabilities
arising in connection with the Registration Statement or Prospectus and
Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Manager also acts as investment adviser for the following registered
investment companies: Convertible Holdings, Inc., Merrill Lynch Adjustable Rate
Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Balanced Fund
C-3
<PAGE>
for Investment and Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global Convertible
Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility
Fund, Inc., Merrill Lynch Growth Fund for Investment and Retirement, Merrill
Lynch Healthcare Fund, Inc. (residents of Wisconsin must meet investor
suitability standards), Merrill Lynch High Income Municipal Bond Fund, Merrill
Lynch Institutional Intermediate Fund, Inc., Merrill Lynch International Equity
Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Series Trust, Merrill Lynch Senior Floating Rate Fund,
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 Variable Series
Fund, Inc. and Merrill Lynch U.S.A. Government Reserves. Fund Asset Management,
L.P. ('FAM'), an affiliate of the Manager, acts as the investment adviser for
the following registered investment companies: Apex Municipal Fund, Inc., CBA
Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Financial Institutions Series Trust, Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch
Funds for Institutions Series, Merrill Lynch Institutional Tax-Exempt Fund,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Municipal Bond Fund,
Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc., MuniAssets Fund, Inc., MuniBond Income
Fund, Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund,
Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured
Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income
Portfolio II, Inc., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia
Holdings, Inc., Taurus 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
Institutional Intermediate Fund, and Merrill Lynch Funds for Institutions Series
is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2665. The
address of the Manager and FAM Princeton Services, Inc. ('Princeton Services'),
Merrill Lynch Funds Distributor, Inc. ('MLFD') and Princeton Administrators,
L.P. is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ('Merrill Lynch') and Merrill
Lynch & Co., Inc. ('ML & Co.') is World Financial Center, North Tower, 250 Vesey
Street, New York, NY 10281. The address of Financial Data Services, Inc.,
('FDS') is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since July 1, 1992
for his own account or in the capacity of director, officer, employee, partner
or trustee. In addition, Mr. Zeikel is President, Mr. Richard is Treasurer and
Mr. Glenn is Executive Vice President of all or substantially all of the
investment companies advised by the Manager or FAM and Mr. Zeikel is a director
of substantially all of such companies and Mr. Glenn is a director of certain of
such companies. Messrs. Durnin, Giordano, Harvey, Hewitt, Monagle and Ms.
Griffin are directors or officers of one or more of such companies.
C-4
<PAGE>
Officers and partners of MLAM are set forth as follows:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
BUSINESS,
POSITION WITH THE PROFESSION, VOCATION OR
NAME INVESTMENT ADVISOR EMPLOYMENT
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
ML & Co.................. Limited Partner Financial Services
Holding Company
Merrill Lynch Investment Limited Partner Investment Advisory
Management, Inc........ Services
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.;
Executive Vice
President of Merrill
Lynch
Terry K. Glenn........... Executive Vice President Executive Vice President
of FAM; Executive Vice
President and Director
of Princeton Services;
President and Director
of MLFD; President of
Princeton
Administrators
Bernard J. Durnin........ Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services
Vincent R. Giordano...... Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services
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
N. John Hewitt........... 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 and General Counsel and
Secretary Secretary of FAM;
Senior Vice 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.
Joseph T. Monagle, Jr.... 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 Treasurer of FAM; Senior
Vice President and
Treasurer of Princeton
Services; Vice
President and Treasurer
of FAM
Richard L. Rufener....... Senior Vice President Senior Vice President of
FAM; Senior Vice
President of Princeton
Services; Vice
President 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>
C-5
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first paragraph of Item
28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest
Pennsylvania Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II,
Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc.,
Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus
MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Graczyk, Fatseas and Wasel is One Financial Center, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
POSITIONS AND POSITIONS AND
(1) OFFICES WITH THE OFFICES WITH
NAME DISTRIBUTOR REGISTRANT
- ------------------------------ -------------------- --------------------
<S> <C> <C>
Executive Vice
Terry K. Glenn................ President President
President and
Arthur Zeikel................. Director Director
Philip L. Kirstein............ Director None
William E. Aldrich............ Senior Vice None
President
Robert W. Crook............... Senior Vice None
President
Kevin P. Boman................ Vice President None
Michael J. Brady.............. Vice President None
Sharon Creveling.............. Vice President and None
Assistant
Treasurer
Mark A. DeSario............... Vice President None
James J. Fatseas.............. Vice President None
Stanley Graczyk............... Vice President None
Debra W. Landsman-Yaros....... Vice President None
Michelle T. Lau............... Vice President None
Gerald M. Richard............. Vice President and Treasurer
Treasurer
Richard L. Rufener............ Vice President None
Salvatore Venezia............. Vice President None
William Wasel................. Vice President None
Lisa Gobora................... Assistant Vice None
President
Susan Kibler.................. Assistant Vice None
President
Mark A. Maguire............... Assistant Vice None
President
Richard Romm.................. Assistant Vice None
President
Patricia A. Schena............ Assistant Vice None
President
Robert Harris................. Secretary None
</TABLE>
(c) Not Applicable.
C-6
<PAGE>
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, 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--Management and Advisory Arrangements' in the Prospectus constituting Part
A of the Registration Statement and under 'Management of the Fund--Management
and Advisory Arrangements' in the Statement of Additional Information
constituting Part B of the Registration Statement, the Registrant is not party
to any management-related service contract.
ITEM 32. UNDERTAKINGS.
If requested to do so by the holders of at least 10% of the Fund's
outstanding shares, the Fund will call a meeting of shareholders for the purpose
of voting upon the removal of a director or directors and the Fund will assist
communications with other shareholders as required by Section 16(c) of the
Investment Company Act of 1940.
The Registrant will furnish each person to whom a Prospectus is delivered
with a copy of Registrant's latest annual request to shareholders, upon request
and without charge.
C-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF
THE REQUIREMENTS FOR EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933
AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
TOWNSHIP OF PLAINSBORO, AND STATE OF NEW JERSEY, ON THE 12TH DAY OF OCTOBER,
1994.
MERRILL LYNCH UTILITY INCOME FUND,
INC.
(Registrant)
By /s/__ARTHUR ZEIKEL
(ARTHUR ZEIKEL, PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------- ------------------------- -------------------------
<C> <S> <C>
/s/ ARTHUR ZEIKEL President (Chief October 12, 1994
- ------------------------- Executive Officer) and
(ARTHUR ZEIKEL) Director
/s/ GERALD M. RICHARD Treasurer (Principal October 12, 1994
- ------------------------- Financial and
(GERALD M. RICHARD) Accounting Officer)
* Director
- -------------------------
(RONALD W. FORBES)
* Director
- -------------------------
(CYNTHIA A. MONTGOMERY)
* Director
- -------------------------
(CHARLES C. REILLY)
* Director
- -------------------------
(KEVIN A. RYAN)
* Director October 12, 1994
- -------------------------
(RICHARD R. WEST)
*By /s/ARTHUR ZEIKEL
- -------------------------
(ARTHUR ZEIKEL,
ATTORNEY-IN-FACT)
</TABLE>
C-8
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ------------------------------------------------------- --------
<S> <C> <C>
6(a) -- Form of Class A Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.
6(c) -- Form of Class C Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.
6(d) -- Form of Class D Distribution Agreement between
Registrant and Merrill Lynch Funds Distributor, Inc.
11 -- Consent of Deloitte & Touche LLP, independent auditors
for Registrant
15(b) -- Form of Class C Distribution Plan and Class C
Distribution Plan Sub-Agreement.
15(c) -- Form of Class D Distribution Plan and Class C
Distribution Plan Sub-Agreement.
17(a) -- Financial Data Schedule for Class A Shares.
17(b) -- Financial Data Schedule for Class B Shares.
</TABLE>
CLASS A SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of October 1994 between
MERRILL LYNCH UTILITY INCOME FUND, INC., a Maryland corporation
(the "Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a
Delaware corporation (the "Distributor").
W I T N E S S E T H:
WHEREAS, the Fund is registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), as an
open-end investment company, and it is affirmatively in the
interest of the Fund to offer its shares for sale continuously;
and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either
directly to purchasers or through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Class A shares of common stock in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby
appoints the Distributor as the principal underwriter and distri-
1
<PAGE>
butor of the Fund to sell Class A shares of common stock in the
Fund (sometimes herein referred to as "Class A shares") to
eligible investors (as defined below) and hereby agrees during
the term of this Agreement to sell Class A shares of the Fund to
the Distributor upon the terms and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Fund to act as prin-
cipal underwriter and distributor, except that:
A. The Fund may, upon written notice to the Distributor,
from time to time designate other principal underwriters and dis-
tributors of Class A shares with respect to areas other than the
United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
Agreement to sell Class A shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
B. The exclusive right granted to the Distributor to pur-
chase Class A shares from the Fund shall not apply to Class A
shares issued in connection with the merger or consolidation of
any other investment company or personal holding company with the
Fund or the acquisition by purchase or otherwise of all (or sub-
stantially all) the assets or the outstanding Class A shares of
any such company by the Fund.
2
<PAGE>
C. Such exclusive right also shall not apply to Class A
shares issued by the Fund pursuant to reinvestment of dividends
or capital gains distributions.
D. Such exclusive right also shall not apply to Class A
shares issued by the Fund pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class A shares as shall be agreed between the Fund and the
Distributor from time to time.
Section 3. Purchase of Class A shares from the Fund.
(a) The Distributor shall have the right to buy from the
Fund the Class A shares needed, but not more than the Class A
shares needed (except for clerical errors in transmission) to
fill unconditional orders for Class A shares of the Fund placed
with the Distributor by eligible investors or securities dealers.
Investors eligible to purchase Class A shares shall be those
persons so identified in the currently effective prospectus and
statement of additional information of the Fund (the "prospectus"
and "statement of additional information", respectively) under
the Securities Act of 1933, as amended (the "Securities Act"),
relating to such Class A shares ("eligible investors"). The
price which the Distributor shall pay for the Class A shares so
purchased from the Fund shall be the net asset value, determined
as set forth in Section 3(d) hereof, used in determining the
public offering price on which such orders were based.
(b) The Class A shares are to be resold by the Distributor
to eligible investors at the public offering price, as set forth
3
<PAGE>
in Section 3(c) hereof, or to securities dealers having
agreements with the Distributor upon the terms and conditions set
forth in Section 7 hereof.
(c) The public offering price(s) of the Class A shares,
i.e., the price per share at which the Distributor or selected
dealers may sell Class A shares to eligible investors, shall be
the public offering price as set forth in the prospectus and
statement of additional information relating to such Class A
shares, but not to exceed the net asset value at which the
Distributor is to purchase the Class A shares, plus a sales
charge not to exceed 4.00% of the public offering price (4.17% of
the net amount invested), subject to reductions for volume
purchases. Class A shares may be sold to certain Directors,
officers and employees of the Fund, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries, and to certain
other persons described in the prospectus and statement of
additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the
prospectus and statement of additional information. If the
public offering price does not equal an even cent, the public
offering price may be adjusted to the nearest cent. All payments
to the Fund hereunder shall be made in the manner set forth in
Section 3(f).
(d) The net asset value of Class A shares shall be deter-
mined by the Fund or any agent of the Fund in accordance with the
method set forth in the prospectus and statement of additional
4
<PAGE>
information of the Fund and guidelines established by the
Directors.
(e) The Fund shall have the right to suspend the sale of
its Class A shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Fund
shall also have the right to suspend the sale of its Class A
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Fund, makes it
impracticable or inadvisable to sell the Class A shares.
(f) The Fund, or any agent of the Fund designated in
writing by the Fund, shall be promptly advised of all purchase
orders for Class A shares received by the Distributor. Any order
may be rejected by the Fund; provided, however, that the Fund
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class A shares from
eligible investors. The Fund (or its agent) will confirm orders
upon their receipt, will make appropriate book entries and, upon
receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such Class A shares
pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds. The
Distributor agrees to cause such payment and such instructions to
be delivered promptly to the Fund (or its agent).
5
<PAGE>
Section 4. Repurchase or Redemption of Class A shares by
the Fund.
(a) Any of the outstanding Class A shares may be tendered
for redemption at any time, and the Fund agrees to repurchase or
redeem the Class A shares so tendered in accordance with its
obligations as set forth in Article VII of its Articles of
Incorporation, as amended from time to time, and in accordance
with the applicable provisions set forth in the prospectus and
statement of additional information. The price to be paid to
redeem or repurchase the Class A shares shall be equal to the net
asset value calculated in accordance with the provisions of
Section 3(d) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in
the prospectus and statement of additional information of the
Fund. All payments by the Fund hereunder shall be made in the
manner set forth below. The redemption or repurchase by the Fund
of any of the Class A shares purchased by or through the Distri-
butor will not affect the sales charge secured by the Distributor
or any selected dealer in the course of the original sale, except
that if any Class A shares are tendered for redemption or repur-
chase within seven business days after the date of the confirma-
tion of the original purchase, the right to the sales charge
shall be forfeited by the Distributor and the selected dealer
which sold such Class A shares.
The Fund shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
6
<PAGE>
the Distributor in New York Clearing House funds on or before the
seventh business day subsequent to its having received the notice
of redemption in proper form. The proceeds of any redemption of
shares shall be paid by the Fund as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall
be paid to or for the account of the shareholder, in each case in
accordance with the applicable provisions of the prospectus and
statement of additional information.
(b) Redemption of Class A shares or payment may be
suspended at times when the New York Stock Exchange is closed,
when trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Dis-
tributor may reasonably request for use in connection with the
distribution of Class A shares of the Fund, and this shall in-
clude, upon request by the Distributor, one certified copy of all
financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor
7
<PAGE>
such number of copies of the prospectus and statement of addi-
tional information as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to
any necessary approval of the Class A shareholders, all necessary
action to fix the number of authorized Class A shares and such
steps as may be necessary to register the same under the Securi-
ties Act, to the end that there will be available for sale such
number of Class A shares as the Distributor may reasonably be
expected to sell.
(c) The Fund shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
A shares for sale under the securities laws of such states as the
Distributor and the Fund may approve. Any such qualification may
be withheld, terminated or withdrawn by the Fund at any time in
its discretion. As provided in Section 8(c) hereof, the expense
of qualification and maintenance of qualification shall be borne
by the Fund. The Distributor shall furnish such information and
other material relating to its affairs and activities as may be
required by the Fund in connection with such qualification.
(d) The Fund will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
8
<PAGE>
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class A shares of the Fund but shall not be
obligated to sell any specific number of Class A shares. The
services of the Distributor to the Fund hereunder are not to be
deemed exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other in-
vestment companies so long as the performance of its obligations
hereunder is not impaired thereby.
(b) In selling the Class A shares of the Fund, the Distri-
butor shall use its best efforts in all respects duly to conform
with the requirements of all Federal and state laws relating to
the sale of such securities. Neither the Distributor nor any
selected dealer, as defined in Section 7 hereof, nor any other
person is authorized by the Fund to give any information or to
make any representations, other than those contained in the
registration statement or related prospectus and statement of
additional information and any sales literature specifically
approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Fund, for the confirmation of
sales to eligible investors and selected dealers, the collection
of amounts payable by eligible investors and selected dealers on
such sales, and the cancellation of unsettled transactions, as
may be necessary to comply with the requirements of the National
9
<PAGE>
Association of Securities Dealers, Inc. (the "NASD"), as such
requirements may from time to time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into
selected dealers agreements with securities dealers of its choice
("selected dealers") for the sale of Class A shares and fix
therein the portion of the sales charge which may be allocated to
the selected dealers; provided that the Fund shall approve the
forms of agreements with dealers and the dealer compensation set
forth therein. Class A shares sold to selected dealers shall be
for resale by such dealers only at the public offering price(s)
set forth in the prospectus and statement of additional
information. The form of agreement with selected dealers to be
used during the continuous offering of the Class A shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class A shares only to such selected dealers as are mem-
bers in good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund,
including fees and disbursements of its counsel and auditors, in
connection with the preparation and filing of any required regis-
tration statements and/or prospectuses and statements of
additional information under the Investment Company Act, the
Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
10
<PAGE>
materials to Class A shareholders (including but not limited to
the expense of setting in type any such registration statements,
prospectuses, statements of additional information, annual or
interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class A
shares to selected dealers or eligible investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class A shares for sale to
eligible investors and any expenses of advertising incurred by
the Distributor in connection with such offering.
(c) The Fund shall bear the cost and expenses of qualifi-
cation of the Class A shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
fying the Fund as a broker or dealer in such states of the United
States or other jurisdictions as shall be selected by the Fund
and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing
11
<PAGE>
qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class A shares, which may be
based upon the Securities Act, or on any other statute or at com-
mon law, on the ground that the registration statement or related
prospectus and statement of additional information, as from time
to time amended and supplemented, or an annual or interim report
to shareholders of the Fund, includes an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements
therein not misleading, unless such statement or omission was
made in reliance upon, and in conformity with, information
furnished to the Fund in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the
indemnity of the Fund in favor of the Distributor and any such
controlling persons to be deemed to protect such Distributor or
any such controlling persons thereof against any liability to the
Fund or its security holders to which the Distributor or any such
controlling persons would otherwise be subject by reason of
12
<PAGE>
willful misfeasance, bad faith or gross negligence in the per-
formance of their duties or by reason of the reckless disregard
of their obligations and duties under this Agreement; or (ii) is
the Fund to be liable under its indemnity agreement contained in
this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the
Distributor or such controlling persons, as the case may be,
shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information
of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor
or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund
of any such claim shall not relieve it from any liability which
it may have to the person against whom such action is brought
otherwise than on account of its indemnity agreement contained in
this paragraph. The Fund will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but if
the Fund elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or
defendants in the suit. In the event the Fund elects to assume
the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or
defendants in the suit shall bear the fees and expenses of any
13
<PAGE>
additional counsel retained by them, but in case the Fund does
not elect to assume the defense of any such suit, it will reim-
burse the Distributor or such controlling person or persons, de-
fendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Fund shall
promptly notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or
Directors in connection with the issuance or sale of any of the
Class A shares.
(b) The Distributor shall indemnify and hold harmless the
Fund and each of its Directors and officers and each person, if
any, who controls the Fund against any loss, liability, claim,
damage or expense described in the foregoing indemnity contained
in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity
with, information furnished to the Fund in writing by or on
behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
annual or interim reports to Class A shareholders. In case any
action shall be brought against the Fund or any person so
indemnified, in respect of which indemnity may be sought against
the Distributor, the Distributor shall have the rights and duties
given to the Fund, and the Fund and each person so indemnified
shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
14
<PAGE>
Section 10. Merrill Lynch Mutual Fund Advisor Program. In
connection with the Merrill Lynch Mutual Fund Adviser Program,
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until October __, 1995 and
thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Directors or
by the vote of a majority of the outstanding voting securities of
the Fund and (ii) by the vote of a majority of those Directors
who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose
of voting on such approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Directors or by vote of a majority
of the outstanding voting securities of the Fund, or by the Dis-
tributor, on sixty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its
assignment.
15
<PAGE>
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 12. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Directors or by the vote of a majority
of outstanding voting securities of the Fund and (ii) by the vote
of a majority of those Directors of the Fund who are not parties
to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such
approval.
Section 13. Governing Law. The provisions of this
Agreement shall be construed and interpreted in accordance with
the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
Section 14. This Agreement supersedes the prior
Distribution Agreement entered into by the parties hereto with
respect to the Class A shares of the Fund.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH UTILITY INCOME FUND, INC.
By ____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By ____________________________________
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH UTILITY INCOME FUND, INC.
CLASS A SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch Utility Income Fund, Inc., a
Maryland corporation (the "Fund"), pursuant to which it acts as
the distributor for the sale of Class A shares of common stock,
par value $0.10 per share (herein referred to as "Class A
shares"), of the Fund and as such has the right to distribute
Class A shares of the Fund for resale. The Fund is an open-end
investment company registered under the Investment Company Act of
1940, as amended, and its Class A shares are registered under the
Securities Act of 1933, as amended. You have received a copy of
the Class A shares Distribution Agreement (the "Distribution
Agreement") between ourself and the Fund and reference is made
herein to certain provisions of such Distribution Agreement. The
terms "Prospectus" and "Statement of Additional Information" used
herein refer to the prospectus and statement of additional
information, respectively, on file with the Securities and
Exchange Commission which is part of the most recent effective
registration statement pursuant to the Securities Act of 1933, as
amended. We offer to sell to you, as a member of the Selected
Dealers Group, Class A shares of the Fund for resale to investors
identified in the Prospectus and Statement of Additional
Information as eligible to purchase Class A shares ("eligible
investors") upon the following terms and conditions:
1. In all sales of these Class A shares to eligible
investors, you shall act as dealer for your own account and in no
transaction shall you have any authority to act as agent for the
Fund, for us or for any other member of the Selected Dealers
Group, except in connection with the Merrill Lynch Mutual Fund
Adviser program and such other special programs as we from time
to time agree, in which case you shall have authority to offer
and sell shares, as agent for the Fund, to participants in such
program.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
1
<PAGE>
Information of the Fund. The procedure relating to the handling
of orders shall be subject to Section 5 hereof and instructions
which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor
or the Fund in the sole discretion of either. The minimum
initial and subsequent purchase requirements are as set forth in
the current Prospectus and Statement of Additional Information of
the Fund.
3. The sales charges for sales to eligible investors,
computed as percentages of the public offering price and the
amount invested, and the related discount to Selected Dealers are
as follows:
Discount to
Selected
Sales Charge Dealers as
Sales Charge as Percentage* Percentage
as Percentage of the Net of the
of the Amount Offering
Amount of Purchase Offering Price Invested Price
- --------------------- -------------- -------------- -----------
Less than $25,000.... 4.00% 4.17% 3.75%
$25,000 but less
than $50,000........ 3.75 3.90 3.50
$50,000 but less
than $100,000....... 3.25 3.36 3.00
$100,000 but less
than $250,000....... 2.50 2.56 2.25
$250,000 but less
than $1,000,000..... 1.50 1.52 1.25
$1,000,000 and over** 0.00 0.00 0.00
- -------------------
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of offerees as
set forth in the current Prospectus and Statement of Additional Information
of the Fund. Such purchases may be subject to a contingent deferred sales
charge as set forth in the current Prospectus and Statement of Additional
Information.
2
<PAGE>
The term "purchase" refers to a single purchase by an individual,
or to concurrent purchases, which in the aggregate are at least equal to
the prescribed amounts, by an individual, his spouse and their children
under the age of 21 years purchasing Class A shares for his or their own
account and to single purchases by a trustee or other fiduciary
purchasing Class A shares for a single trust estate or single fiduciary
account although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company" as that term is
defined in the Investment Company Act of 1940, as amended, but does not
include purchases by any such company which has not been in existence
for at least six months or which has no purpose other than the purchase
of Class A shares of the Fund or Class A shares of other registered
investment companies at a discount; provided, however, that it shall not
include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a
company, policyholders of an insurance company, customers of either a
bank or broker-dealer or clients of an investment adviser.
The reduced sales charges are applicable through a right of
accumulation under which certain eligible investors are permitted to
purchase Class A shares of the Fund at the offering price applicable to
the total of (a) the public offering price of the shares then being
purchased plus (b) an amount equal to the then current net asset value
or cost, whichever is higher, of the purchaser's combined holdings of
Class A, Class B, Class C and Class D shares of the Fund and of any
other investment company with an initial sales charge for which the
Distributor acts as the distributor. For any such right of accumulation
to be made available, the Distributor must be provided at the time of
purchase, by the purchaser or you, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is
subject to such confirmation.
The reduced sales charges are applicable to purchases aggregating
$25,000 or more of Class A shares or of Class D shares of any other
investment company with an initial sales charge for which the
Distributor acts as the distributor made through you within a
thirteen-month period starting with the first purchase pursuant to a
Letter of Intention in the form provided in the Prospectus. A purchase
not originally made pursuant to a Letter of Intention may be included
under a subsequent letter executed within 90 days of such purchase if
the Distributor is informed in writing of this intent within such 90-day
period. If the intended amount of shares is not purchased within the
thirteen-month period, an appropriate price adjustment will be made
pursuant to the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts of any
sales made by you to eligible investors qualifying for reduced sales
charges. Further information as to the reduced sales charges pursuant
3
<PAGE>
to the right of accumulation or a Letter of Intention is set forth in
the Prospectus and Statement of Additional Information.
4. You shall not place orders for any of the Class A shares
unless you have already received purchase orders for such Class A shares
at the applicable public offering prices and subject to the terms hereof
and of the Distribution Agreement. You agree that you will not offer or
sell any of the Class A shares except under circumstances that will
result in compliance with the applicable Federal and state securities
laws and that in connection with sales and offers to sell Class A shares
you will furnish to each person to whom any such sale or offer is made a
copy of the Prospectus and, if requested, the Statement of Additional
Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class A shares of the Fund
which is inconsistent in any respect with the information contained in
the Prospectus and Statement of Additional Information (as then amended
or supplemented) or cause any advertisement to be published in any
newspaper or posted in any public place without our consent and the
consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to place
orders directly with the Fund for Class A shares of the Fund to be
resold by us to you subject to the applicable terms and conditions
governing the placement of orders by us set forth in Section 3 of the
Distribution Agreement and subject to the compensation provisions of
Section 3 hereof and (ii) to tender Class A shares directly to the Fund
or its agent for redemption subject to the applicable terms and
conditions set forth in Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such withholding:
e.g., by a change in the "net asset value" from that used in determining
the offering price to your customers.
7. If any Class A shares sold to you under the terms of this
Agreement are repurchased by the Fund or by us for the account of the
Fund or are tendered for redemption within seven business days after the
date of the confirmation of the original purchase by you, it is agreed
that you shall forfeit your right to, and refund to us, any discount
received by you on such Class A shares.
8. No person is authorized to make any representations concerning
Class A shares of the Fund except those contained in the current
Prospectus and Statement of Additional Information of the Fund and in
such printed information subsequently issued by us or the Fund as
information supplemental to such Prospectus and Statement of Additional
Information. In purchasing Class A shares through us you shall rely
solely on the representations contained in the Prospectus and Statement
of Additional Information and supplemental information above mentioned.
4
<PAGE>
Any printed information which we furnish you other than the Fund's
Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no
liability or responsibility to you in these respects unless expressly
assumed in connection therewith.
9. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to the
time of offering or sale and you agree thereafter to deliver to such
purchasers copies of the annual and interim reports and proxy
solicitation materials of the Fund. You further agree to endeavor to
obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim
reports and proxy solicitation materials of the Fund will be supplied to
you in reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to
suspend sales or withdraw the offering of Class A shares entirely or to
certain persons or entities in a class or classes specified by us. Each
party hereto has the right to cancel this agreement upon notice to the
other party.
11. We shall have full authority to take such action as we may
deem advisable in respect of all matters pertaining to the continuous
offering. We shall be under no liability to you except for lack of good
faith and for obligations expressly assumed by us herein. Nothing
contained in this paragraph is intended to operate as, and the
provisions of this paragraph shall not in any way whatsoever constitute,
a waiver by you of compliance with any provision of the Securities Act
of 1933, as amended, or of the rules and regulations of the Securities
and Exchange Commission issued thereunder.
12. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any sales
in the United States, we both hereby agree to abide by the Rules of Fair
Practice of such Association.
13. Upon application to us, we will inform you as to the states in
which we believe the Class A shares have been qualified for sale under,
or are exempt from the requirements of, the respective securities laws
of such states, but we assume no responsibility or obligation as to your
right to sell Class A shares in any jurisdiction. We will file with the
Department of State in New York a Further State Notice with respect to
the Class A shares, if necessary.
5
<PAGE>
14. All communications to us should be sent to the address below.
Any notice to you shall be duly given if mailed or telegraphed to you at
the address specified by you below.
15. Your first order placed pursuant to this Agreement for the
purchase of Class A shares of the Fund will represent your acceptance of
this Agreement.
16. This Agreement supersedes any prior Selected Dealers Agreement
entered into by the parties hereto with respect to the Class A shares of
the Fund.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By __________________________________
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
By:
Address: 800 Scudders Mill Road
Plainsboro, New Jersey 08536
Date: October , 1994
6
<PAGE>
CLASS C SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ______ day of October 1994, between
MERRILL LYNCH UTILITY INCOME FUND, INC., a Maryland corporation
(the "Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a
Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Fund is registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), as an
open-end investment company, and it is affirmatively in the in-
terest of the Fund to offer its shares for sale continuously; and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either direct-
ly to purchasers or through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Fund's Class C shares in order to promote the growth of
the Fund and facilitate the distribution of its Class C shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby
appoints the Distributor as the principal underwriter and
distributor of the Fund to sell Class C shares of common stock
in the Fund (sometimes herein referred to as "Class C shares") to
1
<PAGE>
the public and hereby agrees during the term of this Agreement to
sell shares of the Fund to the Distributor upon the terms and
conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Fund to act as prin-
cipal underwriter and distributor of the Class C shares, except
that:
(a) The Fund may, upon written notice to the Distributor,
from time to time designate other principal underwriters and
distributors of Class C shares with respect to areas other than
the United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
Agreement to sell Class C shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
(b) The exclusive right granted to the Distributor to
purchase Class C shares from the Fund shall not apply to Class C
shares of the Fund issued in connection with the merger or conso-
lidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise
of all (or substantially all) the assets or the outstanding Class
C shares of any such company by the Fund.
2
<PAGE>
(c) Such exclusive right also shall not apply to Class C
shares issued by the Fund pursuant to reinvestment of dividends
or capital gains distributions.
(d) Such exclusive right also shall not apply to Class C
shares issued by the Fund pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class C shares as shall be agreed between the Fund and the
Distributor from time to time.
Section 3. Purchase of Class C Shares from the Fund.
(a) It is contemplated that the Fund will commence an
offering of its Class C shares, and thereafter the Distributor
shall have the right to buy from the Fund the Class C shares
needed, but not more than the Class C shares needed (except for
clerical errors in transmission) to fill unconditional orders for
Class C shares of the Fund placed with the Distributor by
eligible investors or securities dealers. Investors eligible to
purchase Class C shares shall be those persons so identified in
the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act
of 1933, as amended (the "Securities Act"), relating to such
Class C shares. The price which the Distributor shall pay for the
Class C shares so purchased from the Fund shall be the net asset
value, determined as set forth in Section 3(c) hereof.
3
<PAGE>
(b) The Class C shares are to be resold by the Distributor
to investors at net asset value, as set forth in Section 3(c)
hereof, or to securities dealers having agreements with the Dis-
tributor upon the terms and conditions set forth in Section 7
hereof.
(c) The net asset value of Class C shares of the Fund shall
be determined by the Fund or any agent of the Fund in accordance
with the method set forth in the prospectus and statement of
additional information and guidelines established by the Board of
Directors.
(d) The Fund shall have the right to suspend the sale of
its Class C shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Fund
shall also have the right to suspend the sale of its Class C
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Fund, makes it imprac-
ticable or inadvisable to sell the Class C shares.
(e) The Fund, or any agent of the Fund designated in
writing by the Fund, shall be promptly advised of all purchase
orders for Class C shares received by the Distributor. Any order
may be rejected by the Fund; provided, however, that the Fund
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class C shares. The Fund
4
<PAGE>
(or its agent) will confirm orders upon their receipt, will make
appropriate book entries and, upon receipt by the Fund (or its
agent) of payment therefor, will deliver deposit receipts or
certificates for such Class C shares pursuant to the instructions
of the Distributor. Payment shall be made to the Fund in New
York Clearing House funds. The Distributor agrees to cause such
payment and such instructions to be delivered promptly to the
Fund (or its agent).
Section 4. Repurchase or Redemption of Class C Shares by
the Fund.
(a) Any of the outstanding Class C shares may be tendered
for redemption at any time, and the Fund agrees to repurchase or
redeem the Class C shares so tendered in accordance with its
obligations as set forth in Article VII of its Articles of
Incorporation, as amended from time to time, and in accordance
with the applicable provisions set forth in the prospectus and
statement of additional information of the Fund. The price to be
paid to redeem or repurchase the Class C shares shall be equal to
the net asset value calculated in accordance with the provisions
of Section 3(c) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in
the prospectus and statement of additional information of the
Fund. All payments by the Fund hereunder shall be made in the
manner set forth below.
5
<PAGE>
The Fund shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
the Distributor on or before the seventh business day subsequent
to its having received the notice of redemption in proper form.
The proceeds of any redemption of shares shall be paid by the
Fund as follows: (i) any applicable CDSC shall be paid to the
Distributor, and (ii) the balance shall be paid to or for the
account of the shareholder, in each case in accordance with the
applicable provisions of the prospectus and statement of
additional information.
(b) Redemption of Class C shares or payment may be sus-
pended at times when the New York Stock Exchange is closed, when
trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the
Distributor may reasonably request for use in connection with the
distribution of Class C shares of the Fund, and this shall in-
clude, upon request by the Distributor, one certified copy of all
6
<PAGE>
financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor
such number of copies of its prospectus and statement of addi-
tional information as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to
any necessary approval of the shareholders, all necessary action
to fix the number of authorized shares and such steps as may be
necessary to register the same under the Securities Act to the
end that there will be available for sale such number of Class C
shares as the Distributor reasonably may be expected to sell.
(c) The Fund shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
C shares for sale under the securities laws of such states as the
Distributor and the Fund may approve. Any such qualification may
be withheld, terminated or withdrawn by the Fund at any time in
its discretion. As provided in Section 8(c) hereof, the expense
of qualification and maintenance of qualification shall be borne
by the Fund. The Distributor shall furnish such information and
other material relating to its affairs and activities as may be
required by the Fund in connection with such qualification.
(d) The Fund will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
7
<PAGE>
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class C shares of the Fund but shall not be
obligated to sell any specific number of shares. The services of
the Distributor to the Fund hereunder are not to be deemed exclu-
sive and nothing herein contained shall prevent the Distributor
from entering into like arrangements with other investment com-
panies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class C shares of the Fund, the Distri-
butor shall use its best efforts in all respects duly to conform
with the requirements of all Federal and state laws relating to
the sale of such securities. Neither the Distributor nor any se-
lected dealer, as defined in Section 7 hereof, nor any other
person is authorized by the Fund to give any information or to
make any representations, other than those contained in the
registration statement or related prospectus and statement of
additional information and any sales literature specifically
approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Fund, for the confirmation of
sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales,
and the cancellation of unsettled transactions, as may be neces-
sary to comply with the requirements of the National Association
8
<PAGE>
of Securities Dealers, Inc. (the "NASD"), as such requirements
may from time to time exist.
Section 7. Selected Dealer Agreements.
(a) The Distributor shall have the right to enter into
selected dealer agreements with securities dealers of its choice
("selected dealers") for the sale of Class C shares; provided,
that the Fund shall approve the forms of agreements with dealers.
Class C shares sold to selected dealers shall be for resale by
such dealers only at net asset value determined as set forth in
Section 3(c) hereof. The form of agreement with selected dealers
to be used during the continuous offering of the shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class C shares only to such selected dealers that are
members in good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund,
including fees and disbursements of its counsel and auditors, in
connection with the preparation and filing of any required
registration statements and/or prospectuses and statements of
additional information under the Investment Company Act, the
Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
materials to Class C shareholders (including but not limited to
the expense of setting in type any such registration statements,
9
<PAGE>
prospectuses, statements of additional information, annual or
interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class C
shares to selected dealers or investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class C shares for sale to
the public and any expenses of advertising incurred by the Dis-
tributor in connection with such offering. It is understood and
agreed that so long as the Fund's Class C Shares Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act
remains in effect, any expenses incurred by the Distributor here-
under may be paid from amounts recovered by it from the Fund
under such Plan.
(c) The Fund shall bear the cost and expenses of qualifi-
cation of the Class C shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
10
<PAGE>
fying the Fund as a broker or dealer in such states of the United
States or other jurisdictions as shall be selected by the Fund
and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing
qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class C shares, which may be
based upon the Securities Act, or on any other statute or at
common law, on the ground that the registration statement or
related prospectus and statement of additional information, as
from time to time amended and supplemented, or an annual or
interim report to Class C shareholders of the Fund, includes an
untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make
the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with, in-
formation furnished to the Fund in connection therewith by or on
behalf of the Distributor; provided, however, that in no case (i)
11
<PAGE>
is the indemnity of the Fund in favor of the Distributor and any
such controlling persons to be deemed to protect such Distributor
or any such controlling persons thereof against any liability to
the Fund or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the
performance of their duties or by reason of the reckless
disregard of their obligations and duties under this Agreement;
or (ii) is the Fund to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made
against the Distributor or any such controlling persons, unless
the Distributor or such controlling persons, as the case may be,
shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information
of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor
or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund
of any such claim shall not relieve it from any liability which
it may have to the person against whom such action is brought
otherwise than on account of its indemnity agreement contained in
this paragraph. The Fund will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but if
the Fund elects to assume the defense, such defense shall be
12
<PAGE>
conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or
defendants in the suit. In the event the Fund elects to assume
the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or
defendants in the suit shall bear the fees and expenses, as
incurred, of any additional counsel retained by them, but in case
the Fund does not elect to assume the defense of any such suit,
it will reimburse the Distributor or such controlling person or
persons, defendant or defendants in the suit, for the reasonable
fees and expenses, as incurred, of any counsel retained by them.
The Fund shall promptly notify the Distributor of the commence-
ment of any litigation or proceedings against it or any of its
officers or Directors in connection with the issuance or sale of
any of the Class C shares.
(b) The Distributor shall indemnify and hold harmless the
Fund and each of its Directors and officers and each person, if
any, who controls the Fund against any loss, liability, claim,
damage or expense, as incurred, described in the foregoing indem-
nity contained in subsection (a) of this Section, but only with
respect to statements or omissions made in reliance upon, and in
conformity with, information furnished to the Fund in writing by
or on behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
13
<PAGE>
annual or interim reports to shareholders. In case any action
shall be brought against the Fund or any person so indemnified,
in respect of which indemnity may be sought against the Distri-
butor, the Distributor shall have the rights and duties given to
the Fund, and the Fund and each person so indemnified shall have
the rights and duties given to the Distributor by the provisions
of subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Advisor Program. In
connection with the Merrill Lynch Mutual Fund Adviser Program,
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first
above written and shall remain in force until October __, 1995
and thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Directors or
by the vote of a majority of the outstanding voting securities of
the Fund and (ii) by the vote of a majority of those Directors
who are not parties to this Agreement or interested persons of
14
<PAGE>
any such party cast in person at a meeting called for the purpose
of voting on such approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Directors or by vote of a majority
of the outstanding voting securities of the Fund, or by the
Distributor, on sixty days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
assignment.
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 12. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Directors or by the vote of a majority
of outstanding voting securities of the Fund and (ii) by the vote
of a majority of those Directors of the Fund who are not parties
to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such
approval.
Section 13. Governing Law. The provisions of this Agree-
ment shall be construed and interpreted in accordance with the
laws of the State of New York as at the time in effect and the
applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
15
<PAGE>
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH UTILITY INCOME FUND, INC.
By ____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By ____________________________________
Title:
16
<PAGE>
EXHIBIT A
MERRILL LYNCH UTILITY INCOME FUND, INC.
CLASS C SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch Utility Income Fund, Inc., a
Maryland corporation (the "Fund"), pursuant to which it acts as
the distributor for the sale of Class C shares of common stock,
par value $0.10 per share (herein referred to as the "Class C
shares"), of the Fund and as such has the right to distribute
Class C shares of the Fund for resale. The Fund is an open-end
investment company registered under the Investment Company Act of
1940, as amended, and its Class C shares being offered to the
public are registered under the Securities Act of 1933, as
amended. You have received a copy of the Class C Shares
Distribution Agreement (the "Distribution Agreement") between
ourself and the Fund and reference is made herein to certain
provisions of such Distribution Agreement. The terms "Prospec-
tus" and "Statement of Additional Information" as used herein
refer to the prospectus and statement of additional information,
respectively, on file with the Securities and Exchange Commission
which is part of the most recent effective registration statement
pursuant to the Securities Act of 1933, as amended. We offer to
sell to you, as a member of the Selected Dealers Group, Class C
shares of the Fund upon the following terms and conditions:
1. In all sales of these Class C shares to the public, you
shall act as dealer for your own account and in no transaction
shall you have any authority to act as agent for the Fund, for us
or for any other member of the Selected Dealers Group, except in
connection with the Merrill Lynch Mutual Fund Adviser program and
such other special programs as we from time to time agree, in
which case you shall have authority to offer and sell shares, as
agent for the Fund, to participants in such program.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
of orders shall be subject to Section 4 hereof and instructions
which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor
or the Fund in the sole discretion of either. The minimum ini-
1
<PAGE>
tial and subsequent purchase requirements are as set forth in the
current Prospectus and Statement of Additional Information of the
Fund.
3. You shall not place orders for any of the Class C shares
unless you have already received purchase orders for such Class C
shares at the applicable public offering prices and subject to
the terms hereof and of the Distribution Agreement. You agree
that you will not offer or sell any of the Class C shares except
under circumstances that will result in compliance with the
applicable Federal and state securities laws and that in
connection with sales and offers to sell Class C shares you will
furnish to each person to whom any such sale or offer is made a
copy of the Prospectus and, if requested, the Statement of Addi-
tional Information (as then amended or supplemented) and will not
furnish to any person any information relating to the Class C
shares of the Fund which is inconsistent in any respect with the
information contained in the Prospectus and Statement of Addi-
tional Information (as then amended or supplemented) or cause any
advertisement to be published in any newspaper or posted in any
public place without our consent and the consent of the Fund.
4. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Fund for Class C shares of the
Fund to be resold by us to you subject to the applicable terms
and conditions governing the placement of orders by us set forth
in Section 3 of the Distribution Agreement and (ii) to tender
Class C shares directly to the Fund or its agent for redemption
subject to the applicable terms and conditions set forth in Sec-
tion 4 of the Distribution Agreement.
5. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such with-
holding: e.g., by a change in the "net asset value" from that
used in determining the offering price to your customers.
6. No person is authorized to make any representations
concerning Class C shares of the Fund except those contained in
the current Prospectus and Statement of Additional Information of
the Fund and in such printed information subsequently issued by
us or the Fund as information supplemental to such Prospectus and
Statement of Additional Information. In purchasing Class C
shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional Informa-
tion and supplemental information above mentioned. Any printed
information which we furnish you other than the Fund's Prospec-
tus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not
the responsibility of the Fund, and you agree that the Fund shall
2
<PAGE>
have no liability or responsibility to you in these respects
unless expressly assumed in connection therewith.
7. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to
the time of offering or sale and you agree thereafter to deliver
to such purchasers copies of the annual and interim reports and
proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional
copies of the Prospectus and Statement of Additional Information,
annual or interim reports and proxy solicitation materials of the
Fund will be supplied to you in reasonable quantities upon re-
quest.
8. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of Class C shares
entirely or to certain persons or entities in a class or classes
specified by us. Each party hereto has the right to cancel this
Agreement upon notice to the other party.
9. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
10. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association.
11. Upon application to us, we will inform you as to the
states in which we believe the Class C shares have been qualified
for sale under, or are exempt from the requirements of, the
respective securities laws of such states, but we assume no
responsibility or obligation as to your right to sell Class C
shares in any jurisdiction. We will file with the Department of
State in New York a Further State Notice with respect to the
Class C shares, if necessary.
12. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or tele-
graphed to you at the address specified by you below.
3
<PAGE>
13. Your first order placed pursuant to this Agreement for
the purchase of Class C shares of the Fund will represent your
acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By __________________________________
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
By:
Address: 800 Scudders Mill Road
Plainsboro, New Jersey 08536
Date: October , 1994
4
<PAGE>
CLASS D SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of October 1994 between
MERRILL LYNCH UTILITY INCOME FUND, INC., a Maryland corporation
(the "Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a
Delaware corporation (the "Distributor").
W I T N E S S E T H:
WHEREAS, the Fund is registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), as an
open-end investment company, and it is affirmatively in the
interest of the Fund to offer its shares for sale continuously;
and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either
directly to purchasers or through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Class D shares of common stock in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby
appoints the Distributor as the principal underwriter and distri-
butor of the Fund to sell Class D shares of common stock in the
1
<PAGE>
Fund (sometimes herein referred to as "Class D shares") to the
public and hereby agrees during the term of this Agreement to
sell Class D shares of the Fund to the Distributor upon the terms
and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Fund to act as prin-
cipal underwriter and distributor, except that:
A. The Fund may, upon written notice to the Distributor,
from time to time designate other principal underwriters and dis-
tributors of Class D shares with respect to areas other than the
United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
Agreement to sell Class D shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
B. The exclusive right granted to the Distributor to pur-
chase Class D shares from the Fund shall not apply to Class D
shares issued in connection with the merger or consolidation of
any other investment company or personal holding company with the
Fund or the acquisition by purchase or otherwise of all (or sub-
stantially all) the assets or the outstanding Class D shares of
any such company by the Fund.
C. Such exclusive right also shall not apply to Class D
shares issued by the Fund pursuant to reinvestment of dividends
or capital gains distributions.
2
<PAGE>
D. Such exclusive right also shall not apply to Class D
shares issued by the Fund pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class D shares as shall be agreed between the Fund and the
Distributor from time to time.
Section 3. Purchase of Class D Shares from the Fund.
(a) It is contemplated that the Fund will commence an
offering of its Class D shares, and thereafter the Distributor
shall have the right to buy from the Fund the Class D shares
needed, but not more than the Class D shares needed (except for
clerical errors in transmission) to fill unconditional orders for
Class D shares of the Fund placed with the Distributor by
eligible investors or securities dealers. Investors eligible to
purchase Class D shares shall be those persons so identified in
the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act
of 1933, as amended (the "Securities Act"), relating to such
Class D shares. The price which the Distributor shall pay for the
Class D shares so purchased from the Fund shall be the net asset
value, determined as set forth in Section 3(d) hereof, used in
determining the public offering price on which such orders were
based.
(b) The Class D shares are to be resold by the Distributor
to investors at the public offering price, as set forth in Sec-
tion 3(c) hereof, or to securities dealers having agreements
3
<PAGE>
with the Distributor upon the terms and conditions set forth in
Section 7 hereof.
(c) The public offering price(s) of the Class D shares,
i.e., the price per share at which the Distributor or selected
dealers may sell Class D shares to the public, shall be the
public offering price as set forth in the prospectus and
statement of additional information relating to such Class D
shares, but not to exceed the net asset value at which the
Distributor is to purchase the Class D shares, plus a sales
charge not to exceed 4.00% of the public offering price (4.17% of
the net amount invested), subject to reductions for volume
purchases. Class D shares may be sold to certain Directors,
officers and employees of the Fund, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries, and to certain
other persons described in the prospectus and statement of
additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the
prospectus and statement of additional information. If the
public offering price does not equal an even cent, the public
offering price may be adjusted to the nearest cent. All payments
to the Fund hereunder shall be made in the manner set forth in
Section 3(f).
(d) The net asset value of Class D shares shall be deter-
mined by the Fund or any agent of the Fund in accordance with the
method set forth in the prospectus and statement of additional
4
<PAGE>
information of the Fund and guidelines established by the
Directors.
(e) The Fund shall have the right to suspend the sale of
its Class D shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Fund
shall also have the right to suspend the sale of its Class D
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Fund, makes it
impracticable or inadvisable to sell the Class D shares.
(f) The Fund, or any agent of the Fund designated in
writing by the Fund, shall be promptly advised of all purchase
orders for Class D shares received by the Distributor. Any order
may be rejected by the Fund; provided, however, that the Fund
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class D shares. The Fund
(or its agent) will confirm orders upon their receipt, will make
appropriate book entries and, upon receipt by the Fund (or its
agent) of payment therefor, will deliver deposit receipts or
certificates for such Class D shares pursuant to the instructions
of the Distributor. Payment shall be made to the Fund in New
York Clearing House funds. The Distributor agrees to cause such
payment and such instructions to be delivered promptly to the
Fund (or its agent).
5
<PAGE>
Section 4. Repurchase or Redemption of Class D Shares by
the Fund.
(a) Any of the outstanding Class D shares may be tendered
for redemption at any time, and the Fund agrees to repurchase or
redeem the Class D shares so tendered in accordance with its
obligations as set forth in Article VII of its Articles of
Incorporation, as amended from time to time, and in accordance
with the applicable provisions set forth in the prospectus and
statement of additional information. The price to be paid to
redeem or repurchase the Class D shares shall be equal to the net
asset value calculated in accordance with the provisions of
Section 3(d) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in
the prospectus and statement of additional information of the
Fund. All payments by the Fund hereunder shall be made in the
manner set forth below. The redemption or repurchase by the Fund
of any of the Class D shares purchased by or through the Distri-
butor will not affect the sales charge secured by the Distributor
or any selected dealer in the course of the original sale, except
that if any Class D shares are tendered for redemption or repur-
chase within seven business days after the date of the confirma-
tion of the original purchase, the right to the sales charge
shall be forfeited by the Distributor and the selected dealer
which sold such Class D shares.
The Fund shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
6
<PAGE>
the Distributor in New York Clearing House funds on or before the
seventh business day subsequent to its having received the notice
of redemption in proper form. The proceeds of any redemption of
shares shall be paid by the Fund as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall
be paid to or for the account of the shareholder, in each case in
accordance with the applicable provisions of the prospectus and
statement of additional information.
(b) Redemption of Class D shares or payment may be
suspended at times when the New York Stock Exchange is closed,
when trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Dis-
tributor may reasonably request for use in connection with the
distribution of Class D shares of the Fund, and this shall in-
clude, upon request by the Distributor, one certified copy of all
financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor
7
<PAGE>
such number of copies of the prospectus and statement of addi-
tional information as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to
any necessary approval of the Class D shareholders, all necessary
action to fix the number of authorized Class D shares and such
steps as may be necessary to register the same under the Securi-
ties Act, to the end that there will be available for sale such
number of Class D shares as the Distributor may reasonably be
expected to sell.
(c) The Fund shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
D shares for sale under the securities laws of such states as the
Distributor and the Fund may approve. Any such qualification may
be withheld, terminated or withdrawn by the Fund at any time in
its discretion. As provided in Section 8(c) hereof, the expense
of qualification and maintenance of qualification shall be borne
by the Fund. The Distributor shall furnish such information and
other material relating to its affairs and activities as may be
required by the Fund in connection with such qualification.
(d) The Fund will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
8
<PAGE>
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class D shares of the Fund but shall not be
obligated to sell any specific number of Class D shares. The
services of the Distributor to the Fund hereunder are not to be
deemed exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other in-
vestment companies so long as the performance of its obligations
hereunder is not impaired thereby.
(b) In selling the Class D shares of the Fund, the Distri-
butor shall use its best efforts in all respects duly to conform
with the requirements of all Federal and state laws relating to
the sale of such securities. Neither the Distributor nor any
selected dealer, as defined in Section 7 hereof, nor any other
person is authorized by the Fund to give any information or to
make any representations, other than those contained in the
registration statement or related prospectus and statement of
additional information and any sales literature specifically
approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Fund, for the confirmation of
sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales,
and the cancellation of unsettled transactions, as may be
necessary to comply with the requirements of the National
9
<PAGE>
Association of Securities Dealers, Inc. (the "NASD"), as such
requirements may from time to time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into
selected dealers agreements with securities dealers of its choice
("selected dealers") for the sale of Class D shares and fix
therein the portion of the sales charge which may be allocated to
the selected dealers; provided that the Fund shall approve the
forms of agreements with dealers and the dealer compensation set
forth therein. Class D shares sold to selected dealers shall be
for resale by such dealers only at the public offering price(s)
set forth in the prospectus and statement of additional
information. The form of agreement with selected dealers to be
used during the continuous offering of the Class D shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class D shares only to such selected dealers as are mem-
bers in good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund,
including fees and disbursements of its counsel and auditors, in
connection with the preparation and filing of any required regis-
tration statements and/or prospectuses and statements of
additional information under the Investment Company Act, the
Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
10
<PAGE>
materials to Class D shareholders (including but not limited to
the expense of setting in type any such registration statements,
prospectuses, statements of additional information, annual or
interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class D
shares to selected dealers or investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class D shares for sale to
the public and any expenses of advertising incurred by the
Distributor in connection with such offering. It is understood
and agreed that so long as the Fund's Class D Shares Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act
remains in effect, any expenses incurred by the Distributor
hereunder in connection with account maintenance activities may
be paid from amounts recovered by it from the Fund under such
plan.
11
<PAGE>
(c) The Fund shall bear the cost and expenses of qualifi-
cation of the Class D shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
fying the Fund as a broker or dealer in such states of the United
States or other jurisdictions as shall be selected by the Fund
and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing
qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class D shares, which may be
based upon the Securities Act, or on any other statute or at com-
mon law, on the ground that the registration statement or related
prospectus and statement of additional information, as from time
to time amended and supplemented, or an annual or interim report
to shareholders of the Fund, includes an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements
therein not misleading, unless such statement or omission was
made in reliance upon, and in conformity with, information
12
<PAGE>
furnished to the Fund in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the
indemnity of the Fund in favor of the Distributor and any such
controlling persons to be deemed to protect such Distributor or
any such controlling persons thereof against any liability to the
Fund or its security holders to which the Distributor or any such
controlling persons would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the per-
formance of their duties or by reason of the reckless disregard
of their obligations and duties under this Agreement; or (ii) is
the Fund to be liable under its indemnity agreement contained in
this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the
Distributor or such controlling persons, as the case may be,
shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information
of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor
or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund
of any such claim shall not relieve it from any liability which
it may have to the person against whom such action is brought
otherwise than on account of its indemnity agreement contained in
this paragraph. The Fund will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but if
13
<PAGE>
the Fund elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or
defendants in the suit. In the event the Fund elects to assume
the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or
defendants in the suit shall bear the fees and expenses of any
additional counsel retained by them, but in case the Fund does
not elect to assume the defense of any such suit, it will reim-
burse the Distributor or such controlling person or persons, de-
fendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Fund shall
promptly notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or
Directors in connection with the issuance or sale of any of the
Class D shares.
(b) The Distributor shall indemnify and hold harmless the
Fund and each of its Directors and officers and each person, if
any, who controls the Fund against any loss, liability, claim,
damage or expense described in the foregoing indemnity contained
in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity
with, information furnished to the Fund in writing by or on
behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
14
<PAGE>
annual or interim reports to Class D shareholders. In case any
action shall be brought against the Fund or any person so
indemnified, in respect of which indemnity may be sought against
the Distributor, the Distributor shall have the rights and duties
given to the Fund, and the Fund and each person so indemnified
shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Advisor Program. In
connection with the Merrill Lynch Mutual Fund Adviser Program,
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until October __, 1995 and
thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Directors or
by the vote of a majority of the outstanding voting securities of
the Fund and (ii) by the vote of a majority of those Directors
who are not parties to this Agreement or interested persons of
15
<PAGE>
any such party cast in person at a meeting called for the purpose
of voting on such approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Directors or by vote of a majority
of the outstanding voting securities of the Fund, or by the Dis-
tributor, on sixty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its
assignment.
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 12. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Directors or by the vote of a majority
of outstanding voting securities of the Fund and (ii) by the vote
of a majority of those Directors of the Fund who are not parties
to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such
approval.
Section 13. Governing Law. The provisions of this
Agreement shall be construed and interpreted in accordance with
the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
16
<PAGE>
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH UTILITY INCOME FUND, INC.
By ____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By ____________________________________
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH UTILITY INCOME FUND, INC.
CLASS D SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch Utility Income Fund, Inc., a
Maryland corporation (the "Fund"), pursuant to which it acts as
the distributor for the sale of Class D shares of common stock,
par value $0.10 per share (herein referred to as "Class D
shares"), of the Fund and as such has the right to distribute
Class D shares of the Fund for resale. The Fund is an open-end
investment company registered under the Investment Company Act of
1940, as amended, and its Class D shares being offered to the
public are registered under the Securities Act of 1933, as
amended. You have received a copy of the Class D Shares
Distribution Agreement (the "Distribution Agreement") between
ourself and the Fund and reference is made herein to certain
provisions of such Distribution Agreement. The terms
"Prospectus" and "Statement of Additional Information" used
herein refer to the prospectus and statement of additional
information, respectively, on file with the Securities and
Exchange Commission which is part of the most recent effective
registration statement pursuant to the Securities Act of 1933, as
amended. We offer to sell to you, as a member of the Selected
Dealers Group, Class D shares of the Fund upon the following
terms and conditions:
1. In all sales of these Class D shares to the public, you
shall act as dealer for your own account and in no transaction
shall you have any authority to act as agent for the Fund, for us
or for any other member of the Selected Dealers Group, except in
connection with the Merrill Lynch Mutual Fund Adviser program and
such other special programs as we from time to time agree, in
which case you shall have authority to offer and sell shares, as
agent for the Fund, to participants in such program.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
of orders shall be subject to Section 5 hereof and instructions
1
<PAGE>
which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor
or the Fund in the sole discretion of either. The minimum
initial and subsequent purchase requirements are as set forth in
the current Prospectus and Statement of Additional Information of
the Fund.
3. The sales charges for sales to the public, computed as
percentages of the public offering price and the amount invested,
and the related discount to Selected Dealers are as follows:
Discount to
Selected
Sales Charge Dealers as
Sales Charge as Percentage* Percentage
as Percentage of the Net of the
of the Amount Offering
Amount of Purchase Offering Price Invested Price
- --------------------- -------------- -------------- -----------
Less than $25,000.... 4.00% 4.17% 3.75%
$25,000 but less
than $50,000........ 3.75 3.90 3.50
$50,000 but less
than $100,000....... 3.25 3.36 3.00
$100,000 but less
than $250,000....... 2.50 2.56 2.25
$250,000 but less
than $1,000,000..... 1.50 1.52 1.25
$1,000,000 and over** 0.00 0.00 0.00
- -------------------
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of offerees as
set forth in the current Prospectus and Statement of Additional Information
of the Fund. Such purchases may be subject to a contingent deferred sales
charge as set forth in the current Prospectus and Statement of Additional
Information.
2
<PAGE>
The term "purchase" refers to a single purchase by an individual,
or to concurrent purchases, which in the aggregate are at least equal to
the prescribed amounts, by an individual, his spouse and their children
under the age of 21 years purchasing Class D shares for his or their own
account and to single purchases by a trustee or other fiduciary
purchasing Class D shares for a single trust estate or single fiduciary
account although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company" as that term is
defined in the Investment Company Act of 1940, as amended, but does not
include purchases by any such company which has not been in existence
for at least six months or which has no purpose other than the purchase
of Class D shares of the Fund or Class D shares of other registered
investment companies at a discount; provided, however, that it shall not
include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a
company, policyholders of an insurance company, customers of either a
bank or broker-dealer or clients of an investment adviser.
The reduced sales charges are applicable through a right of
accumulation under which eligible investors are permitted to purchase
Class D shares of the Fund at the offering price applicable to the total
of (a) the public offering price of the shares then being purchased plus
(b) an amount equal to the then current net asset value or cost,
whichever is higher, of the purchaser's combined holdings of Class A,
Class B, Class C and Class D shares of the Fund and of any other
investment company with an initial sales charge for which the
Distributor acts as the distributor. For any such right of accumulation
to be made available, the Distributor must be provided at the time of
purchase, by the purchaser or you, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is
subject to such confirmation.
The reduced sales charges are applicable to purchases aggregating
$25,000 or more of Class A shares or of Class D shares of any other
investment company with an initial sales charge for which the
Distributor acts as the distributor made through you within a
thirteen-month period starting with the first purchase pursuant to a
Letter of Intention in the form provided in the Prospectus. A purchase
not originally made pursuant to a Letter of Intention may be included
under a subsequent letter executed within 90 days of such purchase if
the Distributor is informed in writing of this intent within such 90-day
period. If the intended amount of shares is not purchased within the
thirteen-month period, an appropriate price adjustment will be made
pursuant to the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts of any
sales made by you to the public qualifying for reduced sales charges.
Further information as to the reduced sales charges pursuant to the
3
<PAGE>
right of accumulation or a Letter of Intention is set forth in the
Prospectus and Statement of Additional Information.
4. You shall not place orders for any of the Class D shares
unless you have already received purchase orders for such Class D shares
at the applicable public offering prices and subject to the terms hereof
and of the Distribution Agreement. You agree that you will not offer or
sell any of the Class D shares except under circumstances that will
result in compliance with the applicable Federal and state securities
laws and that in connection with sales and offers to sell Class D shares
you will furnish to each person to whom any such sale or offer is made a
copy of the Prospectus and, if requested, the Statement of Additional
Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class D shares of the Fund
which is inconsistent in any respect with the information contained in
the Prospectus and Statement of Additional Information (as then amended
or supplemented) or cause any advertisement to be published in any
newspaper or posted in any public place without our consent and the
consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to place
orders directly with the Fund for Class D shares of the Fund to be
resold by us to you subject to the applicable terms and conditions
governing the placement of orders by us set forth in Section 3 of the
Distribution Agreement and subject to the compensation provisions of
Section 3 hereof and (ii) to tender Class D shares directly to the Fund
or its agent for redemption subject to the applicable terms and
conditions set forth in Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such withholding:
e.g., by a change in the "net asset value" from that used in determining
the offering price to your customers.
7. If any Class D shares sold to you under the terms of this
Agreement are repurchased by the Fund or by us for the account of the
Fund or are tendered for redemption within seven business days after the
date of the confirmation of the original purchase by you, it is agreed
that you shall forfeit your right to, and refund to us, any discount
received by you on such Class D shares.
8. No person is authorized to make any representations concerning
Class D shares of the Fund except those contained in the current
Prospectus and Statement of Additional Information of the Fund and in
such printed information subsequently issued by us or the Fund as
information supplemental to such Prospectus and Statement of Additional
Information. In purchasing Class D shares through us you shall rely
solely on the representations contained in the Prospectus and Statement
of Additional Information and supplemental information above mentioned.
4
<PAGE>
Any printed information which we furnish you other than the Fund's
Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no
liability or responsibility to you in these respects unless expressly
assumed in connection therewith.
9. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to the
time of offering or sale and you agree thereafter to deliver to such
purchasers copies of the annual and interim reports and proxy
solicitation materials of the Fund. You further agree to endeavor to
obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim
reports and proxy solicitation materials of the Fund will be supplied to
you in reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to
suspend sales or withdraw the offering of Class D shares entirely or to
certain persons or entities in a class or classes specified by us. Each
party hereto has the right to cancel this agreement upon notice to the
other party.
11. We shall have full authority to take such action as we may
deem advisable in respect of all matters pertaining to the continuous
offering. We shall be under no liability to you except for lack of good
faith and for obligations expressly assumed by us herein. Nothing
contained in this paragraph is intended to operate as, and the
provisions of this paragraph shall not in any way whatsoever constitute,
a waiver by you of compliance with any provision of the Securities Act
of 1933, as amended, or of the rules and regulations of the Securities
and Exchange Commission issued thereunder.
12. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any sales
in the United States, we both hereby agree to abide by the Rules of Fair
Practice of such Association.
13. Upon application to us, we will inform you as to the states in
which we believe the Class D shares have been qualified for sale under,
or are exempt from the requirements of, the respective securities laws
of such states, but we assume no responsibility or obligation as to your
right to sell Class D shares in any jurisdiction. We will file with the
Department of State in New York a Further State Notice with respect to
the Class D shares, if necessary.
5
<PAGE>
14. All communications to us should be sent to the address below.
Any notice to you shall be duly given if mailed or telegraphed to you at
the address specified by you below.
15. Your first order placed pursuant to this Agreement for the
purchase of Class D shares of the Fund will represent your acceptance of
this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By __________________________________
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
By:
Address: 800 Scudders Mill Road
Plainsboro, New Jersey 08536
Date: October , 1994
6
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders,
Merrill Lynch Utility Income Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 2 to
Registration Statement No. 33-49787 of our report dated September 29,
1994 appearing in the Statement of Additional Information, which is a
part of such Registration Statement, and to the reference to us under the
caption "Financial Highlights" appearing in the Prospectus, which also
is a part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
October 10, 1994
CLASS C DISTRIBUTION PLAN
OF
MERRILL LYNCH UTILITY INCOME FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the day of October 1994,
by and between Merrill Lynch Utility Income Fund, Inc., a
Maryland corporation (the "Fund"), and Merrill Lynch Funds
Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H:
WHEREAS, the Fund is engaged in business as an open-end
investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business
of selling shares of investment companies either directly to
purchasers or through other securities dealers; and
WHEREAS, the Fund proposes to enter into a Class C Shares
Distribution Agreement with MLFD, pursuant to which MLFD will act
as the exclusive distributor and representative of the Fund in
the offer and sale of Class C shares of common stock, par value
$0.10 per share (the "Class C shares"), of the Fund to the
public; and
WHEREAS, the Fund desires to adopt this Class C Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act, pursuant to which the Fund will pay an account
maintenance fee and a distribution fee to MLFD with respect to
the Fund's Class C shares; and
WHEREAS, the Directors of the Fund have determined that
there is a reasonable likelihood that adoption of the Plan will
benefit the Fund and its shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby
agrees to the terms of, the Plan in accordance with Rule 12b-1
under the Investment Company Act on the following terms and
conditions:
1. The Fund shall pay MLFD an account maintenance fee under
the Plan at the end of each month at the annual rate of 0.25% of
average daily net assets of the Fund relating to Class C shares
to compensate MLFD and securities firms with which MLFD enters
into related agreements pursuant to Paragraph 3 hereof ("Sub-
Agreements") for providing account maintenance activities with
1
<PAGE>
respect to Class C shareholders of the Fund. Expenditures under
the Plan may consist of payments to financial consultants for
maintaining accounts in connection with Class C shares of the
Fund and payment of expenses incurred in connection with such
account maintenance activities including the costs of making
services available to shareholders including assistance in
connection with inquiries related to shareholder accounts.
2. The Fund shall pay MLFD a distribution fee under the
Plan at the end of each month at the annual rate of .55% of
average daily net assets of the Fund relating to Class C shares
to compensate MLFD and securities firms with which MLFD enters
into related Sub-Agreements for providing sales and promotional
activities and services. Such activities and services will
relate to the sale, promotion and marketing of the Class C shares
of the Fund. Such expenditures may consist of sales commissions
to financial consultants for selling Class C shares of the Fund,
compensation, sales incentives and payments to sales and
marketing personnel, and the payment of expenses incurred in its
sales and promotional activities, including advertising
expenditures related to the Fund and the costs of preparing and
distributing promotional materials. The distribution fee may
also be used to pay the financing costs of carrying the
unreimbursed expenditures described in this Paragraph 2. Payment
of the distribution fee described in this Paragraph 2 shall be
subject to any limitations set forth in any applicable regulation
of the National Association of Securities Dealers, Inc.
3. The Fund hereby authorizes MLFD to enter into
Sub-Agreements with certain securities firms ("Securities
Firms"), including Merrill Lynch, Pierce, Fenner & Smith
Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs
1 and 2 hereof. MLFD may reallocate all or a portion of its
account maintenance fee or distribution fee to such Securities
Firms as compensation for the above-mentioned activities and
services. Such Sub-Agreement shall provide that the Securities
Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting require-
ments set forth in Paragraph 4 hereof.
4. MLFD shall provide the Fund for review by the Board of
Directors, and the Directors shall review, at least quarterly, a
written report complying with the requirements of Rule 12b-1
regarding the disbursement of the account maintenance fee and the
distribution fee during such period.
5. This Plan shall not take effect until it has been
approved by a vote of at least a majority, as defined in the
Investment Company Act, of the outstanding Class C voting securi-
ties of the Fund.
2
<PAGE>
6. This Plan shall not take effect until it has been
approved, together with any related agreements, by votes of a
majority of both (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the
Fund, as defined in the Investment Company Act, and have no
direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the "Rule 12b-1
Directors"), cast in person at a meeting or meetings called for
the purpose of voting on the Plan and such related agreements.
7. The Plan shall continue in effect for so long as such
continuance is specifically approved at least annually in the
manner provided for approval of the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a
majority of the Rule 12b-1 Directors, or by vote of a majority of
the outstanding Class C voting securities of the Fund.
9. The Plan may not be amended to increase materially the
rate of payments provided for herein unless such amendment is
approved by at least a majority, as defined in the Investment
Company Act, of the outstanding Class C voting securities of the
Fund, and by the Directors of the Fund in the manner provided for
in Paragraph 6 hereof, and no material amendment to the Plan
shall be made unless approved in the manner provided for approval
and annual renewal in Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomina-
tion of Directors who are not interested persons, as defined in
the Investment Company Act, of the Fund shall be committed to the
discretion of the Directors who are not interested persons.
11. The Fund shall preserve copies of the Plan and any
related agreements and all reports made pursuant to Paragraph 4
hereof, for a period of not less than six years from the date of
the Plan, or the agreements or such report, as the case may be,
the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this
Distribution Plan as of the date first above written.
MERRILL LYNCH UTILITY INCOME FUND, INC.
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
3
<PAGE>
CLASS C SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the day of October 1994, by and
between Merrill Lynch Funds Distributor, Inc., a Delaware corpo-
ration ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a Delaware corporation ("Securities Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill
Lynch Utility Income Fund, Inc., a Maryland corporation (the
"Fund"), pursuant to which it acts as the exclusive distributor
for the sale of Class C shares of common stock, par value $0.10
per share (the "Class C shares"), of the Fund; and
WHEREAS, MLFD and the Fund have entered into a Class C
Shares Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "Act"),
pursuant to which MLFD receives an account maintenance fee from
the Fund at the annual rate of 0.25% of average daily net assets
of the Fund relating to Class C shares for account maintenance
activities related to Class C shares of the Fund and a
distribution fee from the Fund at the annual rate of .55% of
average daily net assets of the Fund relating to Class C shares
for providing sales and promotional activities and services
related to the distribution of Class C shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain
account maintenance activities and sales and promotional
activities and services for the Fund's Class C shareholders and
the Securities Firm is willing to perform such activities and
services;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance
activities and services with respect to the Class C shares of the
Fund and incur expenditures in connection with such activities
and services of the types referred to in Paragraph 1 of the Plan.
2. The Securities Firm shall provide sales and promotional
activities and services with respect to the sale of the Class C
shares of the Fund, and incur distribution expenditures, of the
types referred to in Paragraph 2 of the Plan.
3. As compensation for its activities and services
performed under this Agreement, MLFD shall pay the Securities
Firm an account maintenance fee and a distribution fee at the end
1
<PAGE>
of each calendar month in an amount agreed upon by the parties
hereto.
4. The Securities Firm shall provide MLFD, at least
quarterly, such information as reasonably requested by MLFD to
enable MLFD to comply with the reporting requirements of Rule
12b-1 regarding the disbursement of the account maintenance fee
and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been
approved by votes of a majority of both (a) the Directors of the
Fund and (b) those Directors of the Fund who are not "interested
persons" of the Fund, as defined in the Act, and have no direct
or indirect financial interest in the operation of the Plan, this
Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as
such continuance is specifically approved at least annually in
the manner provided for approval of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the
event of its assignment or in the event of the termination of the
Plan or any amendment to the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
Title:
2
<PAGE>
CLASS D DISTRIBUTION PLAN
OF
MERRILL LYNCH UTILITY INCOME FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the day of October 1994,
by and between Merrill Lynch Utility Income Fund, Inc., a
Maryland corporation (the "Fund"), and Merrill Lynch Funds
Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H :
WHEREAS, the Fund is engaged in business as an open-end
investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business
of selling shares of investment companies either directly to
purchasers or through other securities dealers; and
WHEREAS, the Fund proposes to enter into a Class D Shares
Distribution Agreement with MLFD, pursuant to which MLFD will act
as the exclusive distributor and representative of the Fund in
the offer and sale of Class D shares of common stock, par value
$0.10 per share (the "Class D shares"), of the Fund to the
public; and
WHEREAS, the Fund desires to adopt this Class D Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act, pursuant to which the Fund will pay an account main-
tenance fee to MLFD with respect to the Fund's Class D shares;
and
WHEREAS, the Directors of the Fund have determined that
there is a reasonable likelihood that adoption of the Plan will
benefit the Fund and its shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby
agrees to the terms of, the Plan in accordance with Rule 12b-1
under the Investment Company Act on the following terms and
conditions:
1. The Fund shall pay MLFD an account maintenance fee under
the Plan at the end of each month at the annual rate of 0.25% of
average daily net assets of the Fund relating to Class D shares
to compensate MLFD and securities firms with which MLFD enters
into related agreements ("Sub-Agreements") pursuant to Paragraph
1
<PAGE>
2 hereof for providing account maintenance activities with
respect to Class D shareholders of the Fund. Expenditures under
the Plan may consist of payments to financial consultants for
maintaining accounts in connection with Class D shares of the
Fund and payment of expenses incurred in connection with such
account maintenance activities including the costs of making
services available to shareholders including assistance in
connection with inquiries related to shareholder accounts.
2. The Fund hereby authorizes MLFD to enter into
Sub-Agreements with certain securities firms ("Securities
Firms"), including Merrill Lynch, Pierce, Fenner & Smith
Incorporated, to provide compensation to such Securities Firms
for activities of the type referred to in Paragraph 1. MLFD may
reallocate all or a portion of its account maintenance fee to
such Securities Firms as compensation for the above-mentioned
activities. Such Sub-Agreement shall provide that the Securities
Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting
requirements set forth in Paragraph 3 hereof.
3. MLFD shall provide the Fund for review by the Board of
Directors, and the Directors shall review, at least quarterly, a
written report complying with the requirements of Rule 12b-1
regarding the disbursement of the account maintenance fee during
such period.
4. This Plan shall not take effect until it has been
approved by a vote of at least a majority, as defined in the
Investment Company Act, of the outstanding Class D voting securi-
ties of the Fund.
5. This Plan shall not take effect until it has been
approved, together with any related agreements, by votes of a
majority of both (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the
Fund, as defined in the Investment Company Act, and have no
direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the "Rule 12b-1
Directors"), cast in person at a meeting or meetings called for
the purpose of voting on the Plan and such related agreements.
6. The Plan shall continue in effect for so long as such
continuance is specifically approved at least annually in the
manner provided for approval of the Plan in Paragraph 5.
7. The Plan may be terminated at any time by vote of a
majority of the Rule 12b-1 Directors, or by vote of a majority of
the outstanding Class D voting securities of the Fund.
2
<PAGE>
8. The Plan may not be amended to increase materially the
rate of payments provided for in Paragraph 1 hereof unless such
amendment is approved by at least a majority, as defined in the
Investment Company Act, of the outstanding Class D voting
securities of the Fund, and by the Directors of the Fund in the
manner provided for in Paragraph 5 hereof, and no material
amendment to the Plan shall be made unless approved in the
manner provided for approval and annual renewal in Paragraph 5
hereof.
9. While the Plan is in effect, the selection and nomina-
tion of Directors who are not interested persons, as defined in
the Investment Company Act, of the Fund shall be committed to the
discretion of the Directors who are not interested persons.
10. The Fund shall preserve copies of the Plan and any
related agreements and all reports made pursuant to Paragraph 3
hereof, for a period of not less than six years from the date of
the Plan, or the agreements or such report, as the case may be,
the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this
Distribution Plan as of the date first above written.
MERRILL LYNCH UTILITY INCOME FUND, INC.
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
3
<PAGE>
CLASS D SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the day of October 1994, by and
between Merrill Lynch Funds Distributor, Inc. a Delaware corpo-
ration ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a Delaware corporation ("Securities Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill
Lynch Utility Income Fund, Inc., a Maryland corporation (the
"Fund"), pursuant to which it acts as the exclusive distributor
for the sale of Class D shares of common stock, par value $0.10
per share (the "Class D shares"), of the Fund; and
WHEREAS, MLFD and the Fund have entered into a Class D
Shares Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "Act"),
pursuant to which MLFD receives an account maintenance fee from
the Fund at the annual rate of 0.25% of average daily net assets
of the Fund relating to Class D shares for providing account
maintenance activities and services with respect to Class D
shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain
account maintenance activities and services, including assistance
in connection with inquiries related to shareholder accounts, for
the Fund's Class D shareholders and the Securities Firm is
willing to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance
activities and services with respect to the Class D shares of the
Fund and incur expenditures in connection with such activities
and services, of the types referred to in Paragraph 1 of the
Plan.
2. As compensation for its services performed under this
Agreement, MLFD shall pay the Securities Firm a fee at the end of
each calendar month in an amount agreed upon by the parties
hereto.
3. The Securities Firm shall provide MLFD, at least
quarterly, such information as reasonably requested by MLFD to
enable MLFD to comply with the reporting requirements of Rule
12b-1 regarding the disbursement of the fee during such period
referred to in Paragraph 3 of the Plan.
1
<PAGE>
4. This Agreement shall not take effect until it has been
approved by votes of a majority of both (a) the Directors of the
Fund and (b) those Directors of the Fund who are not "interested
persons" of the Fund, as defined in the Act, and have no direct
or indirect financial interest in the operation of the Plan, this
Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on this Agreement.
5. This Agreement shall continue in effect for as long as
such continuance is specifically approved at least annually in
the manner provided for approval of the Plan in Paragraph 5.
6. This Agreement shall automatically terminate in the
event of its assignment or in the event of the termination of the
Plan or any amendment to the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
2
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000908882
<NAME> MERRILL LYNCH UTILITY INCOME FUND, INC.
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-START> OCT-29-1993
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 36355937
<INVESTMENTS-AT-VALUE> 31678112
<RECEIVABLES> 1402960
<ASSETS-OTHER> 199548
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 33280620
<PAYABLE-FOR-SECURITIES> 1234084
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 413857
<TOTAL-LIABILITIES> 1647941
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 36651664
<SHARES-COMMON-STOCK> 501916
<SHARES-COMMON-PRIOR> 5000
<ACCUMULATED-NII-CURRENT> 183101
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (524261)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4677825)
<NET-ASSETS> 4237655
<DIVIDEND-INCOME> 1052833
<INTEREST-INCOME> 565056
<OTHER-INCOME> 0
<EXPENSES-NET> 278132
<NET-INVESTMENT-INCOME> 1339757
<REALIZED-GAINS-CURRENT> (524261)
<APPREC-INCREASE-CURRENT> (4677825)
<NET-CHANGE-FROM-OPS> (3862329)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 172046
<DISTRIBUTIONS-OF-GAINS> 984610
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 901487
<NUMBER-OF-SHARES-REDEEMED> 412377
<SHARES-REINVESTED> 12806
<NET-CHANGE-IN-ASSETS> 31532679
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 138575
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 566007
<AVERAGE-NET-ASSETS> 3992774
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .40
<PER-SHARE-GAIN-APPREC> (1.57)
<PER-SHARE-DIVIDEND> .39
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.44
<EXPENSE-RATIO> 1.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000908882
<NAME> MERRILL LYNCH UTILITY INCOME FUND, INC.
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-START> OCT-29-1993
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 36355937
<INVESTMENTS-AT-VALUE> 31678112
<RECEIVABLES> 1402960
<ASSETS-OTHER> 199548
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 33280620
<PAYABLE-FOR-SECURITIES> 1234084
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 413857
<TOTAL-LIABILITIES> 1647941
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 36651664
<SHARES-COMMON-STOCK> 3244996
<SHARES-COMMON-PRIOR> 5000
<ACCUMULATED-NII-CURRENT> 183101
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (524261)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4677825)
<NET-ASSETS> 27395024
<DIVIDEND-INCOME> 1052833
<INTEREST-INCOME> 565056
<OTHER-INCOME> 0
<EXPENSES-NET> 278132
<NET-INVESTMENT-INCOME> 1339757
<REALIZED-GAINS-CURRENT> (524261)
<APPREC-INCREASE-CURRENT> (4677825)
<NET-CHANGE-FROM-OPS> (3862329)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 172046
<DISTRIBUTIONS-OF-GAINS> 984610
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4118267
<NUMBER-OF-SHARES-REDEEMED> 940122
<SHARES-REINVESTED> 66851
<NET-CHANGE-IN-ASSETS> 31532679
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 138575
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 566007
<AVERAGE-NET-ASSETS> 25962624
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .35
<PER-SHARE-GAIN-APPREC> (1.57)
<PER-SHARE-DIVIDEND> .34
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.44
<EXPENSE-RATIO> 2.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
