MERRILL LYNCH UTILITY INCOME FUND INC, 485BPOS, 1994-03-03

MERRILL LYNCH UTILITY INCOME FUND INC
485BPOS, 1994-03-03

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 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. 1 /X/

AND/OR

REGISTRATION STATEMENT UNDER THE

INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 3 /X/
(CHECK APPROPRIATE BOX OR BOXES)

------------------------

MERRILL LYNCH UTILITY INCOME FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

<TABLE>
<S> <C>
BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(ADDRESS OF PRINCIPAL EXECUTIVE 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: 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:

/X/ Immediately upon filing pursuant to paragraph (b), or

/ / 60 days after filing pursuant to paragraph (a), or

/ / on (date) pursuant to paragraph (b), or

/ / on (date) pursuant to paragraph (a), of Rule 485.

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
Class A and Class B common stock, par value $.10 per share. No notice was
required to be filed pursuant to Rule 24f-2 for 1993.

- --------------------------------------------------------------------------------

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<PAGE> 2

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; Alternative Sales Arrangements;
Purchase of Shares; Additional
Information
Item 7. Purchase of Securities Being Offered....... Fee Table; Alternative Sales Arrangements;
Purchase of Shares; 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 Registration Statement.
<PAGE> 3

PROSPECTUS

MARCH 3, 1994

MERRILL LYNCH UTILITY INCOME FUND, INC.
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.

------------------------

The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus a sales charge
which, at the election of the purchaser, may be imposed (i) at the time of
purchase (the "Class A shares"), or (ii) on a deferred basis (the "Class B
shares"). Class A shares are subject to an initial sales charge of up to 6.5%.
The deferred sales charges to which the Class B shares are subject shall consist
of a contingent deferred sales charge which may be imposed on redemptions made
within four years of purchase and an ongoing account maintenance fee and
distribution fee. These alternatives permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares, and other circumstances.
Class A shares pay no ongoing fees; Class B shares pay ongoing fees at an annual
rate of 0.75% of the Fund's average daily net assets attributable to the Class B
shares, comprised of a 0.25% fee for account maintenance services and a 0.50%
fee for distribution services. Investors should understand that the purpose and
function of the deferred sales charges with respect to the Class B shares are
the same as those of the initial sales charge with respect to the Class A
shares. Investors should also understand that over time the deferred sales
charges and account maintenance fee related to Class B shares may exceed the
initial sales charge with respect to Class A shares. See "Alternative Sales
Arrangements" on page 3.

Each Class A and Class B share represents identical interests in the
investment portfolio of the Fund and has the same rights, except that Class B
shares bear the expenses of the account maintenance fee and the distribution fee
and certain other costs resulting from the deferred sales charge arrangement,
which will cause Class B shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares, and that Class B shares have
exclusive voting rights with respect to the account maintenance fee and the
distribution fee. The two classes also have different exchange privileges.

Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), 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 $250 and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
Transfer Agent are not subject to processing fees. 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 March 3, 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> 4

FEE TABLE

A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A shares and Class B shares follows:

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE ALTERNATIVE
----------------- ----------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price)............................................................... 6.50%(a) None
Sales Charge Imposed on Dividend Reinvestments......................... None None
Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, whichever is lower)............................. None 4.0% during the
first year,
decreasing 1.0%
annually to 0.0%
after the fourth
year(b)
Exchange Fee........................................................... None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
FOR THE PERIOD OCTOBER 29, 1993 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1993:
Management Fees (c).................................................... 0.55% 0.55%
Rule 12b-1 Fees........................................................ None 0.75% (d)
Other Expenses
Custodian Fees....................................................... 0.03% 0.03%
Shareholder Servicing Costs (e)...................................... 0.07% 0.09%
Other................................................................ 0.93% 0.93%
------ ------
Total Other Expenses............................................... 1.03 1.05
Reimbursement...................................................... (1.17) (1.17)
Total Fund Operating Expenses........................................ 0.41% 1.18%
------ -----
------ -----
</TABLE>

- ---------------

(a) Reduced for purchases of $10,000 and over, decreasing to 0.75% for purchases
of $1,000,000 and over. Certain purchasers of Class A shares investing
$1,000,000 or more may, in lieu of a front-end sales load, be assessed a
deferred sales charge on redemptions within the first year of such
investment. See "Purchase of Shares--Initial Sales Charge Alternative--Class
A Shares" -page 18.

(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares"
-page 20.

(d) Includes both the 0.25% account maintenance fee and the 0.50% distribution
fee. See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares--Distribution Plan" -page 21.

(e) See "Management of the Fund--Transfer Agency Services" -page 16.

<TABLE>
<CAPTION>
CUMULATIVE EXPENSES
PAID FOR THE
PERIOD OF:
----------------------
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
EXAMPLE:
An investor would pay the following expenses on a $1,000 investment including, for Class A
shares, the maximum $65 front-end sales charge and assuming (1) an operating expense ratio
of 0.41% for Class A shares and 1.18% for Class B shares, (2) a 5% annual return
throughout the period and (3) redemption at the end of the period:
Class A................................................................................. $68.92 $77.31
Class B................................................................................. $52.03 $57.47
An investor would pay the following expenses on the same $1,000 investment assuming no
redemption at the end of the period:
Class A................................................................................. $68.92 $77.31
Class B................................................................................. $12.03 $33.47
</TABLE>

The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on estimated
amounts through the end of the Fund's first 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 regulations. The Example should not be considered a
representation of past or future expenses or annual rate of return, and actual
expenses or annual rate of return may be more or less than those assumed for
purposes of the Example. Class B shareholders who own their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the

2
<PAGE> 5

economic equivalent of the maximum front-end sales charge permitted under the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
Merrill Lynch may charge its customers a processing fee (presently $4.85) for
confirming purchases and repurchases. Purchases and redemptions directly through
the Fund's Transfer Agent are not subject to the processing fee. See "Purchase
of Shares" and "Redemption of Shares."

ALTERNATIVE SALES ARRANGEMENTS

Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "initial
sales charge alternative"), or (ii) on a deferred basis (the "deferred sales
charge alternative").

Class A Shares. An investor who elects the initial sales charge
alternative acquires Class A shares. Although Class A shares incur a sales
charge when they are purchased, they enjoy the benefit of not being subject to
any ongoing account maintenance fee or distribution fee or, with the exception
of certain purchases for which initial sales charges are waived, any sales
charge when they are redeemed. Certain purchases of Class A shares qualify for
reduced initial sales charges. See "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares."

Class B Shares. An investor who elects the deferred sales charge
alternative acquires Class B shares. Class B shares do not incur a sales charge
when they are purchased, but they are subject to ongoing account maintenance and
distribution fees and a sales charge if they are redeemed within four years of
purchase. Class B shares provide the benefit of permitting all of the investor's
dollars to work from the time the investment is made. The ongoing account
maintenance and distribution fees paid by Class B shares will cause such shares
to have a higher expense ratio and to pay lower dividends than those related to
Class A shares. Payment of the distribution fee is subject to certain limits set
forth under "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares."

As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. See "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares." Moreover, shares acquired under the initial sales
charge alternative would not be subject to ongoing account maintenance and
distribution fees. However, because initial sales charges are deducted at the
time of purchase, such investors would not have all of their funds invested
initially. Investors not qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all of their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the deferred
sales charge alternative. However, there can be no assurance as to the return,
if any, which will be realized on such additional funds. Certain other investors
might determine it to be more advantageous to have all their funds invested
initially, although remaining subject to continued account maintenance and
distribution fees and, for a four-year period of time, a contingent deferred
sales charge.

The distribution expenses incurred by the Distributor and dealers
(primarily Merrill Lynch) in connection with the sale of the shares will be
paid, in the case of the Class A shares, from the proceeds of the

3
<PAGE> 6

initial sales charge and, in the case of the Class B shares, from the proceeds
of the ongoing distribution fee and, if applicable, the contingent deferred
sales charge incurred on redemption within four years of purchase. Expenses
incurred by the Distributor and dealers (primarily Merrill Lynch) in connection
with account maintenance activities with respect to the Class B shares will be
paid from the proceeds of the account maintenance fee. Sales personnel may
receive different compensation for selling Class A or Class B shares. Investors
should understand that the purpose and function of the deferred sales charges
with respect to the Class B shares are the same as those of the initial sales
charge with respect to the Class A shares. The account maintenance fees to which
Class B shares are subject will be used to compensate financial consultants and
other personnel for providing personal services to shareholders and to pay
administration costs related to maintenance of shareholder accounts.

Dividends paid by the Fund with respect to Class A and Class B shares, to
the extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance and distribution fees and any incremental transfer agency costs
relating to Class B shares will be borne exclusively by that class. See
"Additional Information--Determination of Net Asset Value." Class A and Class B
shareholders of the Fund each have an exchange privilege for Class A and Class B
shares, respectively, with certain other mutual funds sponsored by Merrill
Lynch. Class A and Class B shareholders of the Fund also may exchange their
shares for shares of certain money market funds sponsored by Merrill Lynch. See
"Shareholder Services--Exchange Privilege."

The Directors of the Fund have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis, the
Directors of the Fund, pursuant to their fiduciary duties under the Investment
Company Act of 1940 and state laws, will seek to assure that no such conflict
arises.

THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE
METHOD OF PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES AND OTHER
CIRCUMSTANCES. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR PARTICULAR
CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES CHARGE AND NOT
BE SUBJECT TO ONGOING CHARGES, OR TO HAVE THE ENTIRE PURCHASE PRICE INVESTED
IN THE FUND WITH THE INVESTMENT THEREAFTER BEING SUBJECT TO ONGOING CHARGES.
TO ASSIST INVESTORS IN MAKING THIS DETERMINATION, THE FEE TABLE ON PAGE 2 SETS
FORTH THE CHARGES APPLICABLE TO EACH CLASS OF SHARES AND A DISCUSSION OF
FACTORS RELEVANT TO MAKING SUCH DETERMINATION IS SET FORTH UNDER "PURCHASE OF
SHARES--ALTERNATIVE SALES ARRANGEMENTS" ON PAGE 17.

4
<PAGE> 7

FINANCIAL HIGHLIGHTS

The financial information in the table below for the period October 29,
1993 (commencement of operations) to December 31, 1993 is unaudited. Unaudited
financial statements for the period ended December 31, 1993, as well as the
statement of assets and liabilities as of September 3, 1993 which has been
audited by Deloitte & Touche and the independent auditors' report thereon, are
included in the Statement of Additional Information.

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 PERIOD FOR THE PERIOD
OCTOBER 29, 1993+ TO OCTOBER 29, 1993+ TO
DECEMBER 31, 1993 DECEMBER 31, 1993
--------------------- --------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value beginning of period.................. $ 10.00 $ 10.00
---------- ----------
Investment income -- net........................... .08 .07
Realized and unrealized loss on investments and
foreign currency transactions -- net............ (.23) (.23)
---------- ----------
Total from investment operations..................... (.15) (.16)
---------- ----------
Less dividends and distributions:
Investment income -- net........................... (.04) (.04)
Realized gain on investments -- net................ -- --
---------- ----------
Total dividends and distributions.................... (.04) (.04)
---------- ----------
Net asset value, end of period....................... $ 9.81 $ 9.80
---------- ----------
---------- ----------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................. (1.46)%++ (1.63)++
---------- ----------
---------- ----------
RATIO TO AVERAGE NET ASSETS:
Expenses, excluding distribution fee and net of
reimbursement...................................... 0.41%* .43%*
---------- ----------
---------- ----------
Expenses, net of reimbursement....................... 0.41%* 1.18%*
---------- ----------
---------- ----------
Expenses............................................. 1.58%* 2.35%*
---------- ----------
---------- ----------
Investment income -- net............................. 4.96%* 4.19%*
---------- ----------
---------- ----------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $ 4,570 $ 27,831
---------- ----------
---------- ----------
Portfolio turnover................................... 0% 0%
---------- ----------
---------- ----------
</TABLE>

- ---------------

<TABLE>
<S> <C>
+ Commencement of Operations
++ Aggregate total investment returns.
* Annualized.
** Total investment returns exclude the effects of sales loads.
</TABLE>

See Notes to Financial Statements.

5
<PAGE> 8

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.
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 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,

6
<PAGE> 9

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 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

7
<PAGE> 10

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 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.

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<PAGE> 11

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
de-commissioning 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 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

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<PAGE> 12

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 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

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<PAGE> 13

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 National Association of Securities Dealers, Inc., 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 period October 29, 1993 (commencement of
operations) to December 31, 1993, the portfolio turnover of the Fund was 0%.

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<PAGE> 14

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 Securities and
Exchange 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. dollars or non-U.S. currencies in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.

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<PAGE> 15

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 and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements and purchase and sale contracts may be entered into only
with a member bank of the Federal Reserve System or primary dealer in U.S.
Government Securities. 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 accrued interest on the
underlying obligation; whereas, in the case of purchase and sale contracts, the
prices take into account accrued interest. Such agreements usually cover short
periods, such as under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, as a
purchaser, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement; the Fund does not have the right to
seek additional collateral in the case of purchase and sale contracts. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with disposition of the collateral. A purchase and sale
contract differs from a repurchase agreement in that the contract arrangements
stipulate that the securities are owned by the Fund. In the event of a default
under such a repurchase agreement or under a purchase and sale contract, instead
of the contractual fixed rate, the rate of return to the Fund 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 and purchase and sale contracts maturing in more than
seven days are deemed illiquid by the Securities and Exchange 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 of 1940. 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. In the event that the
borrower defaults on its obligation to return borrowed

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<PAGE> 16

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
of 1940 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 Securities and
Exchange Commission staff of its position regarding OTC options, as discussed
above.

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 of 1940. 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 of 1940.

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<PAGE> 17

The Directors of the Fund are:

ARTHUR ZEIKEL*--President, Director and Chief Investment Officer of the
Manager and Fund Asset Management, L.P. ("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 since 1990 and
Senior Vice President thereof from 1985 to 1990; 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 1940, of the
Fund.

MANAGEMENT AND ADVISORY ARRANGEMENTS

The Manager, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey
(mailing address: 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 a Delaware limited partnership and is owned and
controlled by Merrill Lynch & Co., Inc., the parent of Merrill Lynch. The
Manager or its affiliate, FAM, acts as the manager for more than 90 other
registered investment companies. The Manager also offers portfolio management
and portfolio analysis services to individuals and institutions. As of January
31, 1994, the Manager and FAM had a total of approximately $167.1 billion in
investment company and other portfolio assets under management, including
accounts of certain affiliates of the Manager.

Merrill Lynch & Co., Merrill Lynch Investment Management, Inc. and
Princeton Services, Inc. may be deemed "controlling persons" of the Manager as
defined under the Investment Company Act because of their power to exercise a
controlling influence over its management policies.

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.

15
<PAGE> 18

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 period October
29, 1993 (commencement of operations) to December 31, 1993, the Manager earned
fees of $28,913 (based upon average net assets of approximately $30.0 million),
all of which was voluntarily waived. For the period October 29, 1993
(commencement of operations) to December 31, 1993, the ratio of total expenses
net of reimbursement to average net assets was 0.41% for Class A shares and
1.18% for Class B shares.

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 $7.00 per Class A shareholder account and $9.00 per
Class B shareholder account and is entitled to reimbursement for out-of-pocket
expenses incurred by it under the Transfer Agency Agreement. For the period
October 29, 1993 (commencement of operations) to December 31, 1993, the total
fee paid by the Fund to the Transfer Agent was $4,431.

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 period October 29, 1993 (commencement of operations)
to December 31, 1993, the amount of such reimbursement was $6,109.

PURCHASE OF SHARES

The Distributor, a subsidiary of the Manager and an affiliate of Merrill
Lynch, acts as the distributor of Class A and Class B shares of the Fund.

Shares of the Fund are offered continuously for sale by the Distributor and
other eligible securities dealers (including Merrill Lynch). Shares of the Fund
may be purchased from securities dealers or by mailing a purchase order directly
to the Transfer Agent. The minimum initial purchase is $1,000 and the minimum
subsequent purchase is $50, except that for retirement plans, the minimum
initial purchase is $250 and the minimum subsequent purchase is $1. Different
minimums may apply to purchases through the Merrill Lynch BlueprintSM Program.
See "Purchase of Shares -- Reduced Initial Sales Charges -- Class A Shares --
Merrill Lynch BlueprintSM Program" in the Statement of Additional Information.

The Fund is offering its shares at a public offering price equal to the
next determined net asset value per share plus sales charges which, at the
option of the purchaser, may be imposed either at the time of purchase

16
<PAGE> 19

(the "initial sales charge alternative") or on a deferred basis (the "deferred
sales charge alternative"), as described below. The applicable offering price
for purchase orders is based upon the net asset value of the Fund next
determined after receipt of the purchase order 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 determined as of 4:15 P.M., New York time, on the day the order is
placed with the Distributor, provided the order is received by the Distributor
prior to 4:30 P.M., New York time, on that day. If the purchase orders are not
received by the Distributor prior to 4:30 P.M., New York time, such orders shall
be deemed received on the next business day. Any order may be rejected by the
Distributor or the Fund. The Fund or the Distributor may suspend the continuous
offering of the Fund's shares at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. 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 two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B shares bear the expenses of the account maintenance fee and deferred sales
arrangements, and any expenses (including incremental transfer agency costs)
resulting from such sales arrangements and have exclusive voting rights with
respect to the Rule 12b-1 distribution plan pursuant to which the account
maintenance and distribution fees are paid. See "Deferred Sales Charge
Alternative--Class B Shares--Distribution Plan." The two classes also have
different exchange privileges. See "Shareholder Services--Exchange Privilege."
The net income attributable to Class B shares and the dividends payable on Class
B shares will be reduced by the amount of the account maintenance and
distribution fees and incremental expenses associated with such account
maintenance and distribution fees; accordingly, the net asset value of the Class
B shares will be reduced by such amount to the extent the Fund has undistributed
net income. Sales personnel may receive different compensation for selling Class
A or Class B shares. Investors are advised that only Class A shares may be
available for purchase through securities dealers, other than Merrill Lynch,
which are eligible to sell shares.

ALTERNATIVE SALES ARRANGEMENTS

The alternative sales arrangements of the Fund permit an investor to choose
the method of purchasing shares that is most beneficial given the amount of his
purchase, the length of time the investor expects to hold his shares and other
relevant circumstances. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR
PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES
CHARGE AND NOT BE SUBJECT TO ONGOING CHARGES, AS DISCUSSED BELOW, OR TO HAVE THE
ENTIRE INITIAL PURCHASE PRICE INVESTED IN THE FUND WITH THE INVESTMENT
THEREAFTER BEING SUBJECT TO ONGOING ACCOUNT MAINTENANCE AND DISTRIBUTION FEES.

As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Shares acquired under the initial sales
charge alternative would not be subject to an ongoing account maintenance fee
and distribution fee as described below. However, because initial sales charges
are deducted at the time of purchase, such investors would not have all their
funds invested initially.

17
<PAGE> 20

Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the deferred
alternative. Another factor that may be applicable under certain circumstances
is that the payment of the Class B distribution fee and contingent deferred
sales charge is subject to certain limits as set forth under "Deferred Sales
Charge Alternative-- Class B Shares."

Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continued
account maintenance and distribution fees and, for a four-year period of time, a
contingent deferred sales charge as described below. For example, an investor
subject to the Class A 6.5% initial sales charge will have to hold his
investment at least 8 2/3 years for the aggregate 0.25% account maintenance fee
and 0.50% distribution fee of the Class B shares to exceed the initial sales
charge of the Class A shares. This example does not take into account the time
value of money which further reduces the impact of the Class B account
maintenance and distribution fees on the investment, fluctuations in the net
asset value, the effect of the return on the investment over this period of time
or the effect of any limits that may be imposed upon the payment of the
distribution fee and the contingent deferred sales charge.

INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES

The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales loads), as set forth below.

<TABLE>
<CAPTION>
SALES CHARGE DISCOUNT TO
AS SELECTED DEALERS
SALES CHARGE AS PERCENTAGE* OF AS PERCENTAGE
PERCENTAGE* OF THE NET AMOUNT OF THE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OFFERING PRICE
---------------------------------------- --------------- -------------- ----------------
<S> <C> <C> <C>
Less than $10,000....................... 6.50% 6.95% 6.25%
$10,000 but less than $25,000........... 6.00 6.38 5.75
$25,000 but less than $50,000........... 5.00 5.26 4.75
$50,000 but less than $100,000.......... 4.00 4.17 3.75
$100,000 but less than $250,000......... 3.00 3.09 2.75
$250,000 but less than $1,000,000....... 2.00 2.04 1.80
$1,000,000 and over**................... 0.75 0.76 0.65
</TABLE>

- ---------------
* Rounded to the nearest one-hundredth percent.

** Initial sales charges will be waived for shareholders purchasing $1,000,000
or more in a single transaction (other than an employer sponsored retirement
or savings plan, such as a tax qualified retirement plan under Section 401 of
the Internal Revenue Code of 1986, as amended (the "Code"), or a deferred
compensation plan under Section 403(b) and Section 457 of the Code, other
deferred compensation arrangements, VEBA plans and non-qualified After Tax
Savings and Investment programs maintained on the Merrill Lynch Group
Employee Services system herein referred to as "Employer Sponsored Retirement
or Savings Plans"), or a purchase by a TMASM Managed Trust, of Class A shares
of the Fund. In addition, purchases of Class A shares of the Fund made in
connection with a single investment of

18
<PAGE> 21

$1 million or more under the Merrill Lynch Mutual Fund Adviser program will not
be subject to an initial sales charge. Purchases described in this paragraph
will be subject to a contingent deferred sales charge if the shares are redeemed
within one year after purchase at the following rates:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF DOLLAR
AMOUNT OF PURCHASE AMOUNT OF PURCHASE
------------------------------------------------------------------- --------------------
<S> <C>
$1 million up to $2.5 million...................................... 1.00%
Over $2.5 million up to $3.5 million............................... .60%
Over $3.5 million up to $5 million................................. .40%
Over $5 million.................................................... .25%
</TABLE>

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 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.

Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Directors of the Fund, to participants in certain benefit
plans, to directors or trustees of certain other Merrill Lynch-sponsored
investment companies, to an investor who has a business relationship with a
financial consultant who joined Merrill Lynch from another investment firm
within six months prior to the date of purchase if certain conditions set forth
in the Statement of Additional Information are met, to Directors of ML & Co. and
to employees of ML & Co. and its subsidiaries. Class A shares are offered with
reduced sales charges and, in certain circumstances, at net asset value to
participants in the Merrill Lynch BlueprintSM Program. A transaction of
$1,000,000 or more by a TMASM Managed Trust to purchase Class A shares of the
Fund will not be subject to an initial sales charge. Class A shares are offered
at a net asset value to certain Employer Sponsored Retirement or Savings Plans
(as defined above) provided such plans meet the required number of eligible
employees or required amount of assets advised by the Manager or its affiliate
FAM. Also, Class A shares may be offered at net asset value in connection with
the acquisition of assets of other investment companies. No initial sales
charges are imposed upon Class A shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.

Class A shares of the Fund are also offered at net asset value to
shareholders of certain closed-end funds advised by the Manager or FAM who wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund, provided certain conditions are met.

Class A shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
first, the investor must purchase Class A shares of the Fund with the proceeds
from a redemption of shares of such other mutual fund and such fund must have
imposed a sales charge either at the time of purchase or on a deferred basis;
second, such a purchase of Class A shares must be made within 90 days after such
notice of termination of the arrangement.

Additional information concerning these reduced initial sales charges,
including information regarding investments by Employer Sponsored Retirement or
Savings Plans, is set forth in the Statement of Additional Information.

19
<PAGE> 22

DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES

Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being sold without an initial sales
charge so that the Fund will receive the full amount of the investor's purchase
payment. Merrill Lynch compensates its financial consultants for selling Class B
shares at the time of purchase from its own funds. The proceeds of the
contingent deferred sales charge and the ongoing distribution fee discussed
below are used to defray Merrill Lynch's expenses, including compensating its
financial consultants. The proceeds from the ongoing account maintenance fee are
used to compensate Merrill Lynch for providing continuing account maintenance
activities.

Proceeds from the contingent deferred sales charge are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to financial consultants for
selling Class B shares, from its own funds. Payments of the distribution fee by
the Fund to the Distributor under the distribution plan described below also may
be used in whole or in part by the Distributor for this purpose. The combination
of the contingent deferred sales charge and the ongoing distribution fee
facilitates the ability of the Fund to sell the Class B shares without a sales
charge being deducted at the time of purchase. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder
Services--Exchange Privilege" will continue to be subject to the Fund's
contingent deferred sales charge schedule if such schedule is higher than the
deferred sales charge schedule relating to the Class B shares acquired as a
result of the exchange.

Contingent Deferred Sales Charge. Class B shares which are redeemed within
four years of purchase may be subject to a contingent deferred sales charge at
the rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
current market value or the cost of the shares being redeemed. Accordingly, no
contingent deferred sales charge will be imposed on increases in net asset value
above the initial purchase price. In addition, no contingent deferred sales
charge will be assessed on shares derived from reinvestment of dividends or
capital gains distributions.

The following table sets forth the rates of the contingent deferred sales
charge:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
YEAR SINCE PURCHASE CHARGE AS A PERCENTAGE OF
PAYMENT MADE DOLLAR AMOUNT SUBJECT TO CHARGE
---------------------------------------------- -------------------------------
<S> <C>
0-1.................................... 4.0%
1-2.................................... 3.0%
2-3.................................... 2.0%
3-4.................................... 1.0%
4 and thereafter....................... None
</TABLE>

In determining whether a contingent deferred sales charge is applicable to
a redemption, the calculation will be determined in the manner that results in
the lowest possible rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over 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.

20
<PAGE> 23

To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to the charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).

The contingent deferred sales charge is waived on redemptions of shares in
connection with certain post-retirement withdrawals from an IRA or other
retirement plan or following the death or disability (as defined in the Internal
Revenue Code) of a shareholder. The contingent deferred sales charge also is
waived on redemptions of shares in connection with certain group plans placing
orders through the Merrill Lynch BlueprintSM Program and on redemption of shares
by certain eligible 401(a) and eligible 401(k) plans. The contingent deferred
sales charge is also waived for any Class B shares which are purchased by an
eligible 401(k) or eligible 401(a) plan and are rolled over into a Merrill Lynch
or Merrill Lynch Trust Company custodied Individual Retirement Account and held
in such account at the time of redemption. Additional information concerning the
waiver of the contingent deferred sales charge is set forth in the Statement of
Additional Information.

Distribution Plan. Pursuant to a distribution plan adopted by the Fund
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"Distribution Plan"), the Fund pays the Distributor an ongoing account
maintenance fee and distribution fee, which are accrued daily and paid monthly,
at the annual rate of 0.25% and 0.50%, respectively, of the average daily net
assets of the Fund attributable to Class B shares. Pursuant to a sub-agreement
with the Distributor, Merrill Lynch provides account maintenance and
distribution services to the Fund with respect to Class B shares. The ongoing
account maintenance fee compensates the Distributor and Merrill Lynch for
providing account maintenance services to Class B shareholders. Account
maintenance fees will be used to compensate financial consultants and other
personnel for providing personal service to shareholders and to pay
administrative costs related to the maintenance of the shareholder accounts. The
ongoing distribution fee compensates the Distributor and Merrill Lynch for
providing shareholder and distribution services and bearing certain
distribution-related expenses of the Fund, including payment to financial
consultants for selling Class B shares of the Fund. The Distribution Plan is
designed to permit an investor to purchase Class B shares through dealers
without the assessment of a front-end sales load and at the same time permit the
dealer to compensate its financial consultants in connection with the sale of
the Class B shares. In this regard, the purpose and function of the ongoing
account maintenance and distribution fees and the contingent deferred sales
charge are the same as those of the initial sales charge with respect to the
Class A shares of the Fund in that the deferred sales charges provide for the
financing of the distribution of the Fund's Class B shares. For the period
October 29, 1993 (commencement of operations) to December 31, 1993, the Fund
paid the Distributor $33,724 pursuant to the Distribution Plan (based on average
net assets of the Class B shares of approximately $25.6 million), all of which
was paid to Merrill Lynch for providing distribution-related services in
connection with the Class B shares.

The payments under the Distribution Plan are based upon a percentage of
average daily net assets attributable to Class B shares regardless of the amount
of expenses incurred and, accordingly, distribution-related revenues may be more
or less than distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the Directors for
their consideration in connection with their deliberations as to the continuance
of the Distribution Plan. This information is presented annually as of December
31 of each year on a "fully allocated accrual" basis and quarterly on a "direct
expense and

21
<PAGE> 24

revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, the distribution fees, the contingent deferred
sales charges and certain other related revenues, and expenses consist of
financial consultant compensation, branch office and regional operation center
selling and transaction processing expenses, advertising, sales promotion and
marketing expenses, corporate overhead and interest expense. On the direct
expense and revenue/cash basis, revenues consist of the account maintenance
fees, the distribution fees and contingent deferred sales charges 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).

The Fund has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch in connection with the Class B
shares, and there is no assurance that the Board of Directors of the Fund will
approve the continuance of the Distribution Plan from year to year. However, the
Distributor intends to seek annual continuation of the Distribution Plan. In
their review of the Distribution Plan, the Directors will not be asked to take
into consideration expenses incurred in connection with the distribution of
Class A shares or of shares of other funds for which the Distributor acts as
distributor. The account maintenance fee, the distribution fee and the
contingent deferred sales charge in the case of Class B shares will not be used
to subsidize the sale of Class A shares.

LIMITATIONS ON THE PAYMENT OF SALES CHARGES

The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the Fund's distribution fee and the contingent
deferred sales charge, but not the account maintenance fee. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and contingent deferred sales charges payable by the Fund to (1) 6.25%
of eligible gross sales of Class B shares (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges) plus (2) interest on the
unpaid balance at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fee
and the contingent deferred sales charge). The Distributor has voluntarily
agreed to waive interest charges on the unpaid balance in excess of 0.50% of
eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges at
any time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee and any contingent
deferred sales charges will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance fee.

22
<PAGE> 25

DATA CALCULATED AS OF DECEMBER 31, 1993

<TABLE>
<CAPTION>
ALLOWABLE ALLOWABLE AMOUNTS
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE ANNUAL DISTRIBUTION
GROSS SALES UNPAID AMOUNT PAID TO UNPAID FEE AT CURRENT NET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE ASSET LEVEL(4)
-------- --------- ----------- ------- -------------- --------- --------------------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted......... $ 26,642 $ 1,665 $ 18 $1,683 $ 24 $ 1,659 $ 139
Under
Distributor's
Voluntary
Waiver.......... $ 26,642 $ 1,665 $ 133 $1,798 $ 24 $ 1,774 $ 139
</TABLE>

- ---------------

(1) Purchase price of all eligible Class B shares sold since October 29, 1993
(commencement of operations of Class B shares) other than shares acquired
through dividend reinvestment and the exchange privilege.

(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in the Wall Street Journal, plus 1%, as permitted under the NASD
Rule.

(3) Consists of contingent deferred sales charge payments, distribution fee
payments and accruals.

(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any contingent deferred sales
charge payments) is amortizing the unpaid balance. No assurance can be
given that payments of the distribution fee will reach either the voluntary
maximum or the NASD maximum.

REDEMPTION OF SHARES

The Fund is required to redeem for cash all full and fractional 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 contingent deferred sales charge
which may be applicable to Class B shares, there will be no charge for
redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.

REDEMPTION

A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Fund's Transfer Agent, Financial Data
Services, Inc., Transfer Agency Operations Department, 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
Operations Department, 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

23
<PAGE> 26

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
contingent deferred sales charge in the case of Class B shares). Securities
firms which do not have selected dealer agreements with the Distributor,
however, may impose a transaction charge on the shareholder for transmitting the
notice of repurchase to the Fund. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a repurchase of shares to such
customers. Redemptions directly through the 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.

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 SHARES

Shareholders who have redeemed their Class A shares have a one-time
privilege to reinstate their accounts by purchasing Class A shares of the Fund
at net asset value without a sales charge up to the dollar amount redeemed. The
reinstatement privilege may be exercised by sending a notice of exercise along
with a check for the amount to be reinstated to the Transfer Agent within 30
days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the net asset value
per share next determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds. The reinstatement privilege
is a one-time privilege and may be exercised by the Class A shareholder only the
first time such shareholder makes a redemption.

24
<PAGE> 27

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 monthly statements
from the Transfer Agent showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions. A shareholder may make additions to his Investment Account
at any time by mailing a check directly to the Transfer Agent. Shareholders may
also maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically, without charge, at
the Transfer Agent. Shareholders considering transferring their Class A shares
from Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A shares are to be transferred will
not take delivery of shares of the Fund, a shareholder either must redeem the
Class A shares so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an Investment Account
at the Transfer Agent for those Class A shares. Shareholders interested in
transferring their Class B shares from Merrill Lynch and who do not wish to have
an Investment Account maintained for such shares at the Transfer Agent may
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder.
If the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he be issued certificates for his
shares, and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an individual retirement
account from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable contingent deferred sales
charge) so that the cash proceeds can be transferred to the account at the new
firm, or such shareholder must continue to maintain a retirement account at
Merrill Lynch for those shares.

Exchange Privilege. Shareholders of the Fund each have an exchange
privilege with certain other mutual funds sponsored by Merrill Lynch. There is
currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated at any
time in accordance with the rules of the Securities and Exchange Commission.
Class A shareholders of the Fund may exchange their shares ("outstanding Class A
shares") for Class A shares of another fund ("new Class A shares") on the basis
of relative net asset value per Class A share, plus an amount equal to the
difference, if any, between the sales charge previously paid on the outstanding
Class A shares and the sales charge payable at the time of the exchange on the
new Class A shares. The Fund's exchange privilege is modified with respect to
purchases of Class A shares under the Merrill Lynch Mutual Fund Adviser program.
First, the initial allocation of assets is made under the program. Then, any
subsequent exchange under the program of Class A shares of a fund for Class A
shares of the Fund will be made solely on the basis of the

25
<PAGE> 28

relative net asset values of the shares being exchanged. Therefore, there will
not be a charge for any difference between the sales charge previously paid on
the shares of the other fund and the sales charge payable on the shares of the
Fund being acquired in the exchange under this program.

Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the outstanding Class B shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's contingent deferred
sales charge schedule if such schedule is higher than the contingent deferred
sales charge schedule of the fund into which the exchange has been made. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will continue to be subject to the contingent deferred sales charge
schedule relating to the Class B shares of the fund from which the exchange has
been made if such schedule is higher than the Fund's contingent deferred sales
charge schedule. For purposes of computing the contingent deferred sales charge
that may be payable upon a disposition of the new Class B shares, the period of
time that the outstanding Class B shares were held will count toward
satisfaction of the holding period of the new Class B shares. Class A and Class
B shareholders of the Fund may also exchange their shares for shares of certain
money market funds, but in the case of an exchange from Class B shares the
period of time that shares are held in a money market fund will not count toward
satisfaction of the holding period requirement for purposes of reducing the
contingent deferred sales charge. Exercise of the exchange privilege is treated
as a sale for Federal income tax purposes. The exchange privilege is available
only in states where the exchange legally may be made. For further information,
see "Shareholder Services--Exchange Privilege" in the Statement of Additional
Information.

Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are 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.
No contingent deferred sales charge will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.

Systematic Withdrawal and Automatic Investment Plans. A Class A
shareholder may elect to receive systematic withdrawal payments from his
Investment Account in the form of payments by check or through automatic payment
by direct deposit to his bank account on either a monthly or quarterly basis. A
Class A shareholder whose shares are held within a CMA(R), CBA(R) or Retirement
Account may elect to have shares redeemed on a monthly, bi-monthly, quarterly,
semiannual or annual basis through the Systematic Redemption Program, subject to
certain conditions. Regular additions of both Class A and Class B shares may be
made in an investor's Investment Account by prearranged charges of $100 or more
to such investor's regular bank account. Investors who maintain CMA(R) accounts
may arrange to have periodic investments made in the Fund in their CMA(R)
account or in certain related accounts in amounts of $100 or more through the
CMA(R) Automated Investment Program. The Automated Investment Program is not
available to shareholders whose shares are held in a brokerage account with
Merrill Lynch (other than a CMA(R) account).

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

26
<PAGE> 29

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 $250 and
the minimum subsequent purchase is $1.

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 and Class B shares in accordance
with formulas specified by the Securities and Exchange Commission.

Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge in the case of Class A shares and the
contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares. Dividends paid by the Fund with respect to Class A and Class B
shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that distribution charges and any incremental transfer agency costs relating to
Class B shares will be borne exclusively by that class. The Fund will include
performance data for both Class A and Class B shares of the Fund in any
advertisement or information including performance data of the Fund.

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 reduced
sales charges in the case of Class A shares or waiver of the contingent deferred
sales charge in the case of Class B shares (such as investors in certain
retirement plans), performance data may take into account the reduced, and not
the maximum, sales charge or may not take into account the contingent deferred
sales charge and therefore may reflect greater total return since, due to the
reduced sales charges or waiver of the contingent deferred sales charge, a lower
amount of expenses may be deducted. See "Purchase of Shares." The Fund's total
return may be expressed either as a percentage or as a dollar amount in order to
illustrate the effect of such total return on a hypothetical $1,000 investment
in the Fund at the beginning of each specified period.

27
<PAGE> 30

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.

The Fund's annual report will contain additional performance information
and will be available upon request and without charge.

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.

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"),

28
<PAGE> 31

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 reportable 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 he is not
otherwise subject to backup withholding.

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

It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income are paid monthly. All net
realized long-or short-term capital gains, if any, are distributed to the Fund's
shareholders at least annually. The per share dividends and distributions on
Class B shares will be lower than the per share dividends and distributions on
Class A shares as a result of the account maintenance, distribution and transfer
agency fees applicable to the Class B shares. 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 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.

29
<PAGE> 32

The per share dividends and distributions on Class B shares will be lower
than the per share dividends and distributions on Class A shares as a result of
the higher distribution and transfer agency fees applicable with respect to the
Class B shares. See "Additional Information -- Determination of Net Asset
Value."

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 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 per share net asset value of the Class B shares generally will be lower
than the per share net asset value of the Class A shares reflecting the daily
expense accruals of the account maintenance, distribution and transfer agency
fees applicable with respect to the Class B shares. It is expected, however,
that the per share net asset value of the two classes will tend to converge
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differential between the
classes.

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.

30
<PAGE> 33

ORGANIZATION OF THE FUND

The Fund was incorporated under Maryland law on July 14, 1993. It has an
authorized capital of 200,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A and Class B Common Stock,
each of which consists of 100,000,000 shares. Both Class A and Class B Common
Stock represent an interest in the same assets of the Fund and are identical in
all respects except that the Class B shares bear certain expenses related to the
distribution of such shares and an ongoing account maintenance fee and have
exclusive voting rights with respect to matters relating to such distribution
expenditures and account maintenance fee. See "Purchase of Shares." The Fund has
received an order from the Securities and Exchange Commission permitting the
issuance and sale of two 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. The creation of additional classes would
require an additional order from the Securities and Exchange Commission. There
is no assurance that such an additional order would be issued.

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 of 1940 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, expenses related to the
distribution of the shares of a class and the account maintenance fee relating
to a class will be borne solely by such class. Shares issued are fully-paid and
non-assessable by the Fund.

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: Document Evaluation Unit
P.O. Box 45290
Jacksonville, Florida 32232-5290

The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
financial consultant or Financial Data Services, Inc. at 800-637-3863.

31
<PAGE> 34

(This page intentionally left blank)

32
<PAGE> 35

MERRILL LYNCH UTILITY INCOME FUND, INC.--AUTHORIZATION FORM

- --------------------------------------------------------------------------------

NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
APPLICATION BY CALLING TOLL FREE (800) 637-3766.

- --------------------------------------------------------------------------------

1. SHARE PURCHASE APPLICATION

I, being of legal age, wish to purchase ........................ Class A
shares or ........................ Class B shares (choose one) of Merrill Lynch
Utility Income Fund, Inc. and establish an Investment Account as described in
the Prospectus.

Basis for establishing an Investment Account:

A. I enclose a check for $............ payable to Financial Data Services,
Inc., as an initial investment (minimum $1,000) (subsequent investments $50
or more). I understand that this purchase will be executed at the applicable
offering price next to be determined after this Application is received by
you.

B. I already own shares of the following Merrill Lynch Mutual Funds that
would qualify for the cumulative quantity discount as outlined in the
Prospectus:

1.
2...............................................................................
3...............................................................................
4...............................................................................
5...............................................................................
6...............................................................................
(Please list all Funds. Use a separate sheet of paper if necessary.)

Until you are notified by me in writing, the following options with respect
to dividends and distributions are elected:
<TABLE>
<S> <C> <C> <C>
------------------------------------------ -------------
Distribution ELECT / / reinvest dividends ELECT / /
Options ONE / / pay dividends in cash ONE / /
------------------------------------------ -------------

<S> <C>
Distribution reinvest capital gains
Options pay capital gains in cash
------------------------------------------
</TABLE>

If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.

<TABLE>
<S> <C>
(PLEASE PRINT) ---------------------------
Name.............................................................................................
---------------------------
First Name Initial Last Name Social Security No.
Name of Co-Owner (if any)........................................................................ or Taxpayer Identification
No.
First Name Initial Last Name
Address..........................................................................................
................................................................................................. ...............19 ....
(Zip Code) Date

</TABLE>

Occupation ........................... Name and Address of Employer

.......................................

Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security No. or Taxpayer Identification No. and (2) that I am not
subject to backup withholding (as discussed under "Additional
Information--Taxes" in the Prospectus) either because I have not been notified
that I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am no
longer subject thereto.

INSTRUCTION: You must strike out the language in (2) above if you have been
notified that you are subject to backup withholding due to under reporting, and
if you have not received a notice from the IRS that backup withholding has been
terminated. The undersigned authorizes the furnishing of this certification to
other Merrill Lynch-sponsored mutual funds.

SIGNATURE OF OWNER ............................................................

SIGNATURE OF CO-OWNER (IF ANY).................................................

In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- --------------------------------------------------------------------------------
2. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)

...................., 19........
Date of initial purchase

Gentlemen:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch 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 a distributor over the next 13-month period which will equal or
exceed:

/ / $10,000 / / $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 prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Common Stock of Merrill Lynch Utility Income Fund, Inc. held as
security.
<TABLE>
<S> <C>
By ...........................................................................
Signature of Owner

..............................................................................
Signature of Owner Signature (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 .................................................................
</TABLE>
- --------------------------------------------------------------------------------

33
<PAGE> 36

MERRILL LYNCH UTILITY INCOME FUND, INC.--AUTHORIZATION FORM

- --------------------------------------------------------------------------------
3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)

Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of shares in Merrill Lynch Utility Income Fund, Inc. at cost or
current offering price.
<TABLE>
<S> <C>
Begin a systematic withdrawal on ............, 19..
[date]

<CAPTION>
Begin a systematic withdrawal on ............, 19.. Withdrawals to be made either (check one) / / Monthly / / Quarterly. Quarte
rly withdrawals are made on the

<CAPTION>
[date] 24th day of March, June, September and December.
</TABLE>

Specify withdrawal amount (check one): / / $........ or / / ....% of the
current value of Class A shares in the account.
Specify withdrawal method: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):

(a) I hereby authorize Payment by Check

Draw checks payable
(check one)
/ / as indicated in Item 1.
/ / to the order of..........................................................

Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (Please Print)......................................................

Address.........................................................................

Signature of Owner..............................................................

Signature of Co-Owner (if any)..................................................

(b) I hereby authorize Payment by Direct Deposit to Bank Account and (if
necessary) debit entries and adjustments for any credit entries made in error to
my account.

Specify type of account (check one): / / checking / / savings
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.

Name on your Account............................................................

Bank............................................................................

Bank #.................... Account #............................................

Bank address....................................................................

Signature of Depositor.................................... Date ................

Signature of Depositor (if joint account).......................................
Note: If Automatic Direct Deposit is elected, your blank, unsigned check marked
"VOID" or a deposit slip from your savings account should accompany this
Application.

4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN

I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase ............ Class A shares or ............ Class B
shares (choose one) of Merrill Lynch Utility Income Fund, Inc., subject to the
terms set forth below.

FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw checks or an ACH debit each month on my bank
account for investment in Merrill Lynch Utility Income Fund, Inc. as indicated
below:

Amount of each check or ACH debit $..........................................

Account No. .................................................................
Please date and invest checks or draw ACH debits on the 20th of each month
beginning

.................... or as soon thereafter as possible.
(Month)

I agree that you are preparing these checks or drawing these debits
voluntarily at my request and that you shall not be liable for any loss arising
from any delay in preparing or failure to prepare any such check or debit. If I
change banks or desire to terminate or suspend this program, I agree to notify
you promptly in writing.

I further agree that if a check or debit is not honored upon presentation,
Financial Data Services, Inc. is authorized to discontinue immediately the
Automatic Investment Plan and to liquidate sufficient shares held in my account
to offset the purchase made with the returned check or dishonored debit.

<TABLE>
<S> <C>
............................. ....................................................
Date Signature of Depositor
....................................................
Signature of Depositor
(If joint account, both must sign)
</TABLE>

AUTHORIZATION TO HONOR CHECKS OR ACH
DEBITS DRAWN BY FINANCIAL DATA
SERVICES, INC.
To .........................................................................Bank
(Investor's Bank)
Bank Address ...................................................................

City .............................State ................Zip Code................

As a convenience to me, I hereby request and authorize you to pay and charge to
my account checks or ACH debits drawn on my account by and payable to Financial
Data Services, Inc., Transfer Agency Mutual Fund Operations, Jacksonville,
Florida 32232-5289. I agree that your rights in respect to each such check or
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
check or debit. I further agree that if any such check or debit be dishonored,
whether with or without cause and whether intentionally or inadvertently, you
shall be under no liability.

<TABLE>
<S> <C>
............................... ..................................................
Date Signature of Depositor
............................... ..................................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)
</TABLE>

NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.

5. FOR DEALER ONLY

---- Branch Office, Address, Stamp ----
| |
| |

| |
| |
---- ----

Merrill Lynch Utility Income Fund, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Operations Department
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

<TABLE>
<S> <C> <C>
- -------- -----------
| | | | | ..........................
- -------- ----------- F/C Last Name
Branch-Code F/C No.
- -------- --------------
| | | | | |
- -------- --------------
Dealer's Customer A/C No.
</TABLE>

34
<PAGE> 37

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 put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on

A-1
<PAGE> 38

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

A-2
<PAGE> 39

intends to purchase. It is anticipated that, in a substantial majority of these
transactions, the Fund will purchase securities upon termination of the futures
contract.

The Fund 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

A-3
<PAGE> 40

amount where it is believed that the U.S. dollar value of the currency to be
sold or bought pursuant to the forward contract will fall or rise, as the case
may be, whenever there is a decline or increase, respectively, in the U.S.
dollar value of the currency in which portfolio securities of the Fund are
denominated (this practice being referred to as a "cross-hedge").

The Fund will not speculate in forward foreign exchange. Hedging against a
decline in the value of a currency does not eliminate fluctuations in the prices
of portfolio securities or prevent losses if the prices of such securities
decline. Such transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be possible for the
Fund to hedge against a devaluation that is so generally anticipated that the
Fund is not able to contract to sell the currency at a price above the
devaluation level it anticipates.

The Fund is also authorized to purchase or sell listed or 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

A-4
<PAGE> 41

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 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 Securities and Exchange 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

A-5
<PAGE> 42

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 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> 43

MANAGER

Merrill Lynch Asset Management

Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey

Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011

DISTRIBUTOR

Merrill Lynch Funds Distributor, Inc.

Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey

Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011

CUSTODIAN

State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101

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
117 Campus Drive
Princeton, New Jersey 08540

COUNSEL

Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, New York 10022
<PAGE> 44

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
Alternative Sales Arrangements........ 3
Financial Highlights.................. 5
Investment Objective and Policies..... 6
Management of the Fund................ 14
Purchase of Shares.................... 16
Alternative Sales Arrangements...... 17
Initial Sales Charge Alternative --
Class A Shares................... 18
Deferred Sales Charge Alternative --
Class B Shares................... 20
Redemption of Shares.................. 23
Redemption.......................... 23
Repurchase.......................... 24
Reinstatement Privilege -- Class A Shares.. 24
Shareholder Services.................. 25
Performance Data...................... 27
Taxes................................. 28
Additional Information................ 29
Dividends and Distributions......... 29
Determination of Net Asset Value.... 30
Organization of the Fund............ 31
Shareholder Inquiries............... 31
Authorization Form.................... 33
Appendix.............................. A-1
</TABLE>

Code # 16855

Prospectus

[Graphic design of a house with utilities

(i.e., telephone lines, satellite

dish and sprinker system)]

- ------------------------------------------------------
MERRILL LYNCH
UTILITY INCOME
FUND, INC.

March 3, 1994

Distributor:
Merrill Lynch Funds
Distributor, Inc.

This Prospectus should be
retained for future reference.
<PAGE> 45

STATEMENT OF ADDITIONAL INFORMATION

MERRILL LYNCH UTILITY INCOME FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800

------------------------

The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus a sales charge
which, at the election of the purchaser, may be imposed (i) at the time of
purchase (the "Class A shares"), or (ii) on a deferred basis (the "Class B
shares"). These alternatives permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other circumstances.
Investors should understand that the purpose and function of the deferred sales
charges with respect to the Class B shares are the same as those of the initial
sales charge with respect to the Class A shares. Each Class A share and Class B
share represents identical interests in the investment portfolio of the Fund and
has the same rights, except that Class B shares bear the expenses of the account
maintenance fee and the distribution fee and certain other costs resulting from
the deferred sales charge arrangement and have exclusive voting rights with
respect to the account maintenance fee and the distribution fee. The two classes
also have different exchange privileges.

------------------------

This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated March
3, 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 MARCH 3, 1994

<PAGE> 46

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.
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

2
<PAGE> 47

option expires unexercised, the writer realizes a gain in the amount of the
premium. Such a gain, of course, may be offset by a decline in the market value
of the underlying security during the option period. If a call option is
exercised, the writer realizes a gain or loss from the sale of the underlying
security.

The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt 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

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<PAGE> 48

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 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 of 1940 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 of 1940
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 of 1940.

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

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<PAGE> 49

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% 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

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<PAGE> 50

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 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 Factor 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.

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<PAGE> 51

order the liquidation of positions found to be in violation of these limits and
it may impose other sanctions or restrictions. The Manager does not believe that
these trading and position limits will have any adverse impact on the portfolio
strategies for hedging the Fund's portfolio.

OTHER INVESTMENT POLICIES AND PRACTICES

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

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<PAGE> 52

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.

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.

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<PAGE> 53

and incur costs or possible losses in connection with the disposition of the
collateral. A purchase and sale contract differs from a repurchase agreement in
that the contract arrangements stipulate that the securities are owned by the
Fund. In the event of a default under such a repurchase agreement or under a
purchase and sale contract, instead of the contractual fixed rate of return, the
rate of 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 on purchase and sale contracts maturing in more than
seven days. While the substance of purchase and sale contracts is similar to
repurchase agreements, because of the different treatment with respect to
accrued interest and additional collateral, management believes that purchase
and sale contracts are not repurchase agreements as such term is understood in
the banking and brokerage community.

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 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. 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

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<PAGE> 54

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."

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 of 1940 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.

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<PAGE> 55

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.

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.

Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Manager or its affiliates or any of their directors, officers
or employees, acting as principal, unless pursuant to a rule or exemptive order
under the Investment Company Act of 1940.

Notwithstanding the provisions of Investment Restriction (4) above, the
Fund does not currently intend to engage in short sales.

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 of 1940 involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act of
1940. See "Portfolio Transactions and Brokerage." Without such an exemptive
order, the Fund is prohibited from engaging in portfolio transactions with
Merrill Lynch or its

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<PAGE> 56

affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act of 1933 in which
such firms or any of their affiliates participate as an underwriter or dealer.

MANAGEMENT OF THE FUND

DIRECTORS AND OFFICERS

The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is Box 9011,
Princeton, New Jersey 08543-9011.

ARTHUR ZEIKEL--President and Director(1)(2)--President of the Manager since
1977 and Director and Chief Investment Officer since 1976; President, Director
and Chief Investment Officer of Fund Asset Management, L.P. ("FAM") 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, and Associate
Professor prior thereto. Member, Task Force on Municipal Securities Markets,
Twentieth Century Fund.

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; Professor of Finance at the
Amos Tuck School of Business Administration from 1976 to 1984 and Dean from 1976
to 1983; Director of Vornado, Inc. (real estate 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 from 1982
until 1990.

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<PAGE> 57

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 1940, 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 the date of this Statement of Additional Information, 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 Merrill Lynch & Co.,
Inc. 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 period October 29, 1993 (commencement of operations) to
December 31, 1993, fees and expenses paid to the unaffiliated Directors
aggregated $5,630.

MANAGEMENT AND ADVISORY ARRANGEMENTS

The Manager is a Delaware limited partnership and is owned and controlled
by Merrill Lynch & Co., Inc., 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. Merrill Lynch & Co., Inc., Merrill Lynch Investment Management, Inc.
and Princeton Services, Inc. may be deemed "controlling persons" of the Manager
as defined under the Investment Company Act because of their power to exercise a
controlling influence over its management policies.

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 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 period

13
<PAGE> 58

October 29, 1993 (commencement of operations) to December 31, 1993, the total
management fee earned by the Manager aggregated $28,913 (based on average net
assets of approximately $30.0 million), 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 December 31, 1993, 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 Fund's distribution agreement, the Distributor will pay the promotional
expenses of the Fund incurred in connection with the offering of shares of the
Fund. Certain expenses in connection with the distribution of Class B shares and
an account maintenance fee will be financed by the Fund pursuant to the
Distribution Plan in compliance with Rule 12b-1 under the Investment Company Act
of 1940. See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares."

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
1940) 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.

14
<PAGE> 59

PURCHASE OF SHARES

Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.

ALTERNATIVE SALES ARRANGEMENTS

The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of Class A and Class B
shares of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of the Class A and Class B shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to the
same renewal requirements and termination provisions as the Management Agreement
described above.

INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES

The Fund commenced the public offering of its Class A shares on October 29,
1993. The gross sales charges for the sale of Class A shares for the period
October 29, 1993 to December 31, 1993 were $391,908 of which the Distributor
received $7,014 and Merrill Lynch received $384,894.

The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A shares of the
Fund, refers to a single purchase by an individual, or to concurrent purchases,
which in the aggregate are at least equal to the prescribed amounts, by an
individual, his spouse and their children under the age of 21 years purchasing
shares for his or their own account and to single purchases by a trustee or
other fiduciary purchasing shares for a single trust estate or single fiduciary
account 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--CLASS A SHARES

Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
Class A shares of the Fund at the offering price applicable

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<PAGE> 60

to the total of (a) the dollar amount then being purchased plus (b) an amount
equal to the then current net asset value or cost, whichever is higher, of the
purchaser's combined holdings of the Class A shares and Class B shares of the
Fund and of any other investment company with an initial sales charge or a
deferred sales charge for which the Distributor acts as the distributor. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's securities
dealer, with sufficient information to permit confirmation of qualification.
Acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time.

Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $10,000 or more of the Class A shares of the Fund or any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor made within a thirteen-month
period starting with the first purchase pursuant to a Letter of Intention in the
form provided in the Prospectus. The Letter of Intention is available only to
investors whose accounts are maintained at the Fund's Transfer Agent. The Letter
of Intention is not available to employee benefit plans for which Merrill Lynch
provides plan participant record-keeping services. The Letter of Intention is
not a binding obligation to purchase any amount of Class A shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A shares of
the Fund and of other investment companies with an initial sales charge or a
deferred sales charge for which the Distributor acts as the distributor
presently held, at cost or maximum offering price (whichever is higher), on the
date of the first purchase under the Letter of Intention, may be included as a
credit toward 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 $10,000), the investor will be notified and must
pay, within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A shares purchased at the reduced rate and the sales
charge applicable to the shares actually purchased through the Letter. Class A
shares equal to at least five percent of the intended amount will be held in
escrow during the thirteen-month period (while remaining registered in the name
of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar amount of such Letter. If
a purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to the reduced
percentage sales charge which would be applicable to a single purchase equal to
the total dollar value of the Class A shares then being purchased under such
Letter, but there will be no retroactive reduction of the sales charges on any
previous purchase. The value of any shares redeemed or otherwise disposed of by
the purchaser prior to termination or completion of the Letter of Intention will
be deducted from the total purchases made under such Letter. An exchange from
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund,
Merrill Lynch U.S.A. Government Reserves or Merrill Lynch U.S. Treasury Money
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 BlueprintSM Program. Class A shares of the Fund are offered
to participants in the Merrill Lynch BlueprintSM Program ("Blueprint").
Blueprint is directed to small investors, group IRAs and participants in certain
affinity groups such as credit unions and trade associations. Investors placing
orders to purchase Class A shares of the Fund through Blueprint will acquire the
Class A shares at net asset value plus a sales charge calculated in accordance
with the Blueprint sales charge schedule (i.e., up to $300 at 5.5%, $300.01 up
to $5,000 at 4.5% plus $3, and $5,000.01 or more at the standard sales charge
rates disclosed in the

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<PAGE> 61

Prospectus). In addition, Class A 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 shares through Blueprint. Services,
including the exchange privilege, available to Class A investors through
Blueprint, however, may differ from those available to other investors in Class
A shares.

Class A shares are offered at net asset value, with a waiver of the
front-end sales charge, 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 to custodian rollover assets from
Eligible Retirement Plans (see definition below) whose Trustee and/or Plan
Sponsor has entered into a Merrill Lynch Directed IRA Rollover Program Service
Agreement. Eligible Retirement Plans include: (a) plans qualified under Section
401(k) of the Internal Revenue Code of 1986, as amended (the "Code") with a
salary reduction feature offering a menu of investments to plan participants,
provided such plan initially has 1,000 or more employees eligible to participate
in the plan (employees eligible to participate in retirement plans of the same
sponsoring employer or its affiliates may be aggregated); or (b) tax qualified
retirement plans within the meaning of Section 401(a) of the Code or deferred
compensation plans within the meaning of Section 403(b) or 457 of the Code,
provided the plan (i) initially invested $5 million or more in existing plan
assets in portfolios, mutual funds or trusts advised by MLAM or its subsidiaries
or (ii) has accumulated $5 million or more in existing plan assets invested in
mutual funds advised by MLAM or its subsidiaries, which charge a front-end sales
charge or contingent deferred sales charge (assets of retirement plans with the
same sponsor or an affiliated sponsor may be aggregated).

Orders for purchases and redemptions of Class A 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 BlueprintSM Program, P.O. Box
30441, New Brunswick, New Jersey 08989-0441.

Employer Sponsored Retirement and Savings Plans. Class A shares are
offered at net asset value to employer sponsored retirement or savings plans,
such as tax qualified retirement plans within the meaning of Section 401(a) of
the Code, deferred compensation plans within the meaning of Sections 403(b) and
457 of the Code, other deferred compensation arrangements, VEBA plans, and
non-qualified After Tax Savings and Investment programs, maintained on the
Merrill Lynch Group Employee Services system, herein referred to as "Employer
Sponsored Retirement or Savings Plans," provided the plan has $5 million or more
in existing plan assets initially invested in portfolios, mutual funds or trusts
advised by the Manager either directly or through an affiliate. Class A shares
may also be offered at net asset value to Employer Sponsored Retirement or
Savings Plans, provided the plan has accumulated $5 million or more in existing
plan assets invested in mutual funds advised by the Manager charging a front-end
sales charge or contingent deferred sales charge. Assets of Employer Sponsored
Retirement or Savings Plans sponsored by the same sponsor or an affiliated
sponsor may be aggregated. The Class A share reduced load breakpoints also apply
to these aggregated assets. Class A shares may be offered at net asset value to
multiple plans sponsored by the same sponsor or an affiliated sponsor provided
that the addition of one or more of the multiple plans results in aggregate
assets of $5 million or more invested in portfolios, mutual funds or trusts
advised by the Manager either directly or through an affiliate. Employer
Sponsored Retirement or Savings Plans are also offered Class A shares at net

17
<PAGE> 62

asset value, provided such plan initially has 1,000 or more employees eligible
to participate in the plan. Employees eligible to participate in Employer
Sponsored Retirement or Savings Plans of the same sponsoring employer or its
affiliates may be aggregated. Tax qualified retirement plans within the meaning
of Section 401(a) of the Code meeting any of the foregoing requirements and
which are provided specialized services (e.g., plans whose participants may
direct on a daily basis their plan allocations among a wide range of investments
including individual corporate equities and other securities in addition to
mutual fund shares) by the Merrill Lynch BlueprintSM Program, are offered Class
A shares at a price equal to net asset value per share plus a reduced sales
charge of 0.50%. Any Employer Sponsored Retirement or Savings Plan which does
not meet the above described qualifications to purchase Class A shares at net
asset value has the option of purchasing Class A shares at the sales charge
schedule disclosed in the Prospectus, or if the Employer Sponsored Retirement or
Savings Plan is a qualified retirement plan and meets the specified
requirements, then it may purchase Class B shares with a waiver of the
contingent deferred sales charge upon redemption. The minimum initial and
subsequent purchase requirements are waived in connection with all the above
referenced Employer Sponsored Retirement or Savings Plans.

Purchase Privileges of Certain Persons. Directors of the Fund, directors
and trustees of certain other Merrill Lynch-sponsored investment companies,
Directors of Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc.
and its subsidiaries and any trust, pension, profit-sharing or other benefit
plan for such persons, may purchase Class A shares of the Fund at net asset
value. Under such programs, the Fund realizes economies of scale and reduction
of sales related expenses by virtue of familiarity with the Fund.

Class A 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 purchase Class A shares of
the Fund with proceeds from a redemption of shares of a mutual fund that was
sponsored by the financial consultant's previous firm and imposed a sales charge
either at the time of purchase or on a deferred basis. Second, such redemption
must have 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 A shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class A shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund
imposed a sales charge either at the time of purchase or on a deferred basis.
Second, such purchase of Class A shares must be made within 90 days after
notice.

Employees and directors wishing to purchase shares of the Fund must satisfy
the Fund's suitability standards.

Closed-End Fund Option. Class A shares of the Fund and certain other
mutual funds advised by the Manager (the "Eligible Class A shares") are offered
at net asset value to shareholders of certain closed-end funds advised by the
Manager who 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. 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 shares. Second, the closed-end fund shares must
have either been

18
<PAGE> 63

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 (formerly Merrill Lynch
Prime Fund, Inc.) ("Senior Floating Rate Fund") who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock of Senior
Floating Rate Fund in shares of the Fund. In order to exercise this investment
option, Senior Floating Rate Fund shareholders must sell their Senior Floating
Rate Fund shares to the Senior Floating Rate Fund in connection with a tender
offer conducted by the Senior Floating Rate Fund and reinvest the proceeds
immediately in the Fund. This investment option is available only with respect
to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day.

Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A share in
connection with the acquisition of the assets of or merger or consolidation with
a 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.

TMASM Managed Trusts. Class A shares are also offered to TMASM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value plus a reduced sales charge of .75% of the offering
price, which is .76% of the net amount invested.

DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES

Distribution Plan. Reference is made to "Purchase of Shares--Deferred
Sales Charge Alternative-- Class B Shares--Distribution Plan" in the Prospectus
for certain information with respect to the Distribution Plan of the Fund (the
"Distribution Plan").

The payment of the distribution fee and account maintenance fee is subject
to the provisions of Rule 12b-1 under the Investment Company Act of 1940. Among
other things, the Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and distribution fees paid to the Distributor. In their
consideration of the 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 Class B shareholders. The 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 the Distribution Plan in accordance with Rule 12b-1, the
Independent Directors concluded that there is reasonable likelihood that the
Distribution Plan will benefit the Fund and its Class B shareholders. The
Distribution Plan can be terminated at any time, without penalty, by the vote of
a majority of the Independent Directors or by the vote of the holders of a
majority of the outstanding Class B voting securities of the Fund. The
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without Class B shareholder approval, and all material
amendments are required to be approved by the

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<PAGE> 64

vote of Directors, including a majority of the Independent Directors who have no
direct or indirect financial interest in the Distribution Plan, cast in person
at a meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of the Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of the Distribution
Plan or such report, the first two years in an easily accessible place. During
the period October 29, 1993 (commencement of operations) to December 31, 1993,
the Fund paid $33,724 under the Distribution Plan, an amount equal to 0.75% of
the average daily net assets of the Class B shares for such fiscal period. 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.

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.

CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES

As discussed in the Prospectus under "Purchase of Shares--Alternative Sale
Arrangements--Deferred Sales Charge Alternative--Class B Shares," while Class B
shares redeemed within four years of purchase are subject to a contingent
deferred sales charge 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 any redemption resulting from the tax-free return of an
excess contribution to an IRA; or (b) any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with his
or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability. For the period October 29, 1993
(commencement of operations) through December 31, 1993, the Distributor received
contingent deferred sales charges of $1,572, all of which was paid to Merrill
Lynch.

Merrill Lynch BlueprintSM Program. Class B shares are offered to
participants in the Merrill Lynch BlueprintSM Program ("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 contingent
deferred sales charge is waived in connection with purchase orders placed
through Blueprint. Services, including the exchange privilege, available to
Class B

20
<PAGE> 65

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 BlueprintSM Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.

Retirement Plans. Any Employer Sponsored Retirement or Savings Plan which
does not meet the above-described qualifications to purchase Class A shares at
net asset value has the option of purchasing Class A shares at the sales charge
schedule disclosed in the Prospectus, or if the Employer Sponsored Retirement or
Savings Plan meets the following requirements, then it may purchase Class B
shares with a waiver of the contingent deferred sales charge upon redemption.
The contingent deferred sales charge is waived for any Eligible 401(k) Plan
redeeming Class B shares. The contingent deferred sales charge is also waived
for redemptions from 401(a) plans qualified under the Code, provided however,
such plan has the same or an affiliated sponsoring employer as an Eligible
401(k) Plan purchasing MLAM or FAM advised mutual fund Class B shares ("Eligible
401(a) Plan"). The contingent deferred sales charge is waived for any Class B
shares which are purchased by an Eligible 401(k) Plan or Eligible 401(a) Plan
and are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied IRA and held in such account at the time of redemption. The minimum
initial and subsequent purchase requirements are waived in connection with all
the above-referenced Retirement Plans.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to policies established by the Board of Directors of the Fund, the
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
National Association of Securities Dealers, Inc. 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

21
<PAGE> 66

information in servicing its other accounts. For the period October 29, 1993
(commencement of operations) to December 31, 1993, the Fund did not acquire any
securities of brokers or dealers which executed its portfolio transactions
during that period.

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 of 1940,
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
recently 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 period October 29, 1993 (commencement of operations) to December
31, 1993, the Fund paid no brokerage commissions. 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

22
<PAGE> 67

portfolio transactions through affiliated entities. For example, brokerage
commissions received by affiliated brokers could be offset against the advisory
fee paid by the Fund. After considering all factors deemed relevant, the
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 period October 29,
1993 (commencement of operations) to December 31, 1993, the portfolio turnover
rate for the Fund was 0%.

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,
are accrued daily. The per share net asset value of the Class B shares generally
will be lower than the per share net asset value of the Class A shares
reflecting the daily expense accruals of the account maintenance, distribution
and transfer agency fees applicable with respect to the Class B shares. It is
expected, however, that the per share net asset value of the two classes will
tend to converge immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differential between the classes.

Securities traded in the over-the-counter market are valued at the last
available bid price 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

23
<PAGE> 68

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 quarterly statements from the Transfer Agent
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Shareholders also
will receive separate confirmations for each purchase or sale transaction other
than reinvestment of dividends and capital gains distributions. A shareholder
may make additions to his Investment Account at any time by mailing a check
directly to the Transfer Agent.

Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent. Shareholders considering
transferring their Class A shares from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the Class A
shares are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A shares so that the cash proceeds can
be transferred to the account at the new firm or such shareholder must continue
to maintain an Investment Account at the Transfer Agent for those Class A
shares. Shareholders interested in transferring their Class B shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that he
be issued certificates for his shares, and then must turn the certificates over
to the new firm for re-registration as described in the preceding sentence.

AUTOMATIC INVESTMENT PLAN

A shareholder may make additions to the Investment Account at any time by
purchasing Class A or Class B shares at the applicable public offering price
either through the shareholder's securities dealer or by mail directly to the
Transfer Agent, acting as agent for such securities dealer. Voluntary
accumulation can also be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks of
$100 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
BlueprintSM Program, no minimum charge to the investors bank account is
required. Investors who maintain CMA(R) accounts may arrange to have periodic
investments made in the Fund, in the CMA(R) accounts or in certain related
accounts in amounts of $100 or more through the CMA Automatic Investment
Program.

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<PAGE> 69

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 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 SHARES

A Class A 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 shares of the Fund having a value, based on cost or the current
offering price, of $5,000 or more, and monthly withdrawals for shareholders with
Class A shares with such a value of $10,000 or more.

At the time of each withdrawal payment, sufficient Class A shares are
redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A shares.
Redemptions will be made at net asset value as determined at the close of
business 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 shares will be
redeemed at the close of business on the following business day. The check for
the withdrawal payment will be mailed or the direct deposit for withdrawal
payment will be made on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on all
Class A shares in the Investment Account are reinvested automatically in Fund
Class A shares. A shareholder's Systematic Withdrawal Plan may be terminated at
any time, without charge or penalty, by the shareholder, the Fund, the Transfer
Agent or the Distributor. Withdrawal payments should not be considered as
dividends, yield or income. Each withdrawal is a taxable event. If periodic
withdrawals continuously exceed reinvested dividends, the shareholder's original
investment may be reduced correspondingly. Purchases of additional Class A
shares concurrent with withdrawals are ordinarily disadvantageous to the
shareholder because of sales charges and tax liabilities. The Fund will not
knowingly accept purchase orders for Class A shares of the Fund from investors
who maintain a Systematic Withdrawal Plan unless such purchase is equal to at
least one year's scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account in which the shareholder
has elected to make systematic withdrawals.

A Class A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, 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

25
<PAGE> 70

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 $250 (except that the minimum initial purchase
through the Merrill Lynch BlueprintSM Program 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 the Fund may exchange their Class A or Class B shares of
the Fund for shares of the same class of Merrill Lynch Adjustable Rate
Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch
Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch Arizona Municipal
Bond Fund, Merrill Lynch Balanced Fund for Investment and Retirement, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Limited Maturity
Municipal Bond Fund, Merrill Lynch California Municipal Bond Fund, Merrill Lynch
California Insured Municipal Bond Fund, Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Colorado Municipal Bond Fund, Merrill Lynch Corporate Bond Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Federal Securities Trust,
Merrill Lynch Florida Limited Maturity Municipal Bond Fund, Merrill Lynch
Florida Municipal Bond Fund, Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Holdings (residents of
Arizona must meet investor suitability standards), Merrill Lynch Global
Resources Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Healthcare Fund, Inc. (residents of Wisconsin must meet investor suitability
standards), Merrill Lynch Growth Fund for Investment and Retirement, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Maryland Municipal Bond Fund, Merrill Lynch Massachusetts Limited Maturity
Municipal Bond Fund, Merrill Lynch Massachusetts Municipal Bond Fund, Merrill
Lynch Michigan Limited Maturity Municipal Bond Fund, Merrill Lynch Michigan
Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Municipal Intermediate Term Fund,
Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund, Merrill Lynch New
Jersey Municipal Bond Fund, Merrill Lynch New York Limited Maturity Municipal
Bond Fund, Merrill Lynch New York Municipal Bond Fund, Merrill Lynch North
Carolina Municipal Bond Fund, Merrill Lynch Ohio Municipal Bond Fund, Merrill
Lynch Oregon Municipal Bond Fund, Inc., Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund, Merrill Lynch
Pennsylvania Municipal Bond Fund, Merrill Lynch

26
<PAGE> 71

Phoenix Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch Texas Municipal Bond Fund and Merrill
Lynch World Income Fund, Inc., on the basis described below. In addition, Class
A shareholders of the Fund may exchange their Class A shares for shares of
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money Fund
and Merrill Lynch Ready Assets Trust (or Merrill Lynch Retirement Reserves Money
Fund if the exchange occurs within certain retirement plans) (together the
"Class A money market funds"), and Class B shareholders of the Fund may exchange
their Class B shares for shares of Merrill Lynch Government Fund, Merrill Lynch
Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund and Merrill
Lynch Treasury Fund (together the "Class B money market funds") on the basis
described below. It is contemplated that the exchange privilege may be
applicable to other new mutual funds whose shares may be distributed by the
Distributor. The exchange privilege available to participants in the Merrill
Lynch BlueprintSM Program may be different from that available to other
investors.

Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on the
basis of relative net asset value per Class A share, plus an amount equal to the
difference, if any, between the sales charge previously paid on the outstanding
Class A shares and the sales charge payable at the time of the exchange on the
new Class A shares. With respect to outstanding Class A shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A
shares in the initial purchase and any subsequent exchange. Class A shares
issued pursuant to dividend reinvestment are sold on a no-load basis in each of
the funds offering Class A shares. For purposes of the exchange privilege,
dividend reinvestment Class A shares shall be exchanged into the Class A shares
of the other funds or into shares of the Class A money market funds without a
sales charge.

The Fund's exchange privilege is modified with respect to purchases of
Class A shares under the Merrill Lynch Mutual Fund Adviser program. First, the
initial allocation of assets is made under the program. Then, any subsequent
exchange under the program of Class A shares of a fund for Class A shares of the
Fund will be made solely on the basis of the relative net asset values of the
shares being exchanged. Therefore, there will not be a charge for any difference
between the sales charge previously paid on the shares of the other fund and the
sales charge payable on the shares of the Fund being acquired in the exchange
under this program.

In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the outstanding shares. Class B shareholders of the Fund exercising the exchange
privilege will continue to be subject to the Fund's contingent deferred sales
charge schedule if such schedule is higher than the deferred sales charge
schedule relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's contingent deferred sales
charge schedule if such schedule is higher than the deferred sales charge
schedule relating to the Class B shares of the fund from which the exchange has
been made. For purposes of computing the sales load that may be payable on a
disposition of the new Class B shares, the period of time that the outstanding
Class B shares were held will count toward satisfaction of the holding period of
the new Class B shares. For example, an investor may exchange Class B shares of
the Fund for those of Merrill Lynch Global Resources Trust (formerly Merrill
Lynch Natural Resources Trust) 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 would not apply to the exchange. Three years later the investor may

27
<PAGE> 72

decide to redeem the Class B shares of Merrill Lynch Global Resources Trust 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
Global Resources Trust Class B shares, the investor will be deemed to have held
the new Class B shares for more than five years.

Shareholders also may exchange Class A shares and Class B shares from any
of the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that Class B shares are held
in a Class B money market fund will not count toward satisfaction of the holding
period requirement for purposes of reducing the contingent deferred sales load.
However, shares of a Class B money market fund which were acquired as a result
of an exchange for Class B shares of a fund may, in turn, be exchanged back into
Class B shares of any fund offering such shares, in which event the holding
period for Class B shares of such fund will be aggregated with previous holding
periods for purposes of reducing the contingent deferred sales load. Thus, for
example, an investor may exchange Class B shares of the Fund for shares of
Merrill Lynch 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 Merrill
Lynch Institutional Fund for cash. At the time of this redemption, the 2%
contingent deferred sales load that would have been due had the Class B shares
of the Fund been redeemed for cash rather than exchanged for shares of Merrill
Lynch Institutional Fund will be payable. If, instead of such redemption, the
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continues to hold for an additional two and a half years, any
subsequent redemption will not incur a contingent deferred sales load.

The investment objectives of the other funds into which exchanges can be
made are as follows:

<TABLE>
<S> <C>
MERRILL LYNCH ADJUSTABLE RATE SECURITIES
FUND, INC. ................................ High current income consistent with a policy
of limiting the degree of fluctuation in net
asset value by investing primarily in a
portfolio of adjustable rate securities,
consisting principally of mortgage-backed
and asset-backed securities.
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
primarily of intermediate-term investment
grade Arizona Municipal Bonds.
</TABLE>

28
<PAGE> 73

<TABLE>
<S> <C>
MERRILL LYNCH ARIZONA MUNICIPAL BOND FUND.... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide investors with as
high a level of income exempt from Federal
and Arizona income taxes as is consistent
with prudent investment management.
MERRILL LYNCH BALANCED FUND FOR INVESTMENT
AND RETIREMENT............................. As high a level of total investment return as
is consistent with a relatively low level of
risk through investment in common stocks and
other types of securities, including fixed
income securities and convertible
securities.
MERRILL LYNCH BASIC VALUE FUND, INC. ........ Capital appreciation and, secondarily, income
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 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
investment management through investment 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 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.
</TABLE>

29
<PAGE> 74

<TABLE>
<S> <C>
MERRILL LYNCH COLORADO MUNICIPAL
BOND FUND ................................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and Colorado income
taxes as is consistent with prudent
investment management.
MERRILL LYNCH CORPORATE BOND
FUND, INC. ................................ Current income from three separate diversified
portfolios of fixed income securities.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS
FUND, INC. ................................ Long-term appreciation through investment in
securities, principally equities, of issuers
in countries having smaller capital markets.
MERRILL LYNCH DRAGON FUND, INC. ............. Capital appreciation primarily through
investment in equity and debt securities of
companies 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.
MERRILL LYNCH FLORIDA LIMITED
MATURITY MUNICIPAL BOND FUND .............. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal income
taxes as is consistent with prudent
investment management while 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 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.
</TABLE>

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<PAGE> 75

<TABLE>
<S> <C>
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 "synthetic" convertible
securities consisting of a combination of
debt securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS (residents of
Arizona must meet investor suitability
standards)................................. The highest total investment return consistent
with prudent risk through worldwide investment
in an internationally diversified portfolio
of securities.
MERRILL LYNCH GLOBAL RESOURCES TRUST......... Long-term growth and protection of capital
from investment in securities of domestic and
foreign companies that possess substantial
natural resource assets.
</TABLE>

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<PAGE> 76

<TABLE>
<S> <C>
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 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
and its agencies and in repurchase
agreements secured by such obligations.
MERRILL LYNCH GROWTH FUND FOR INVESTMENT AND
RETIREMENT................................. Growth of capital and, secondarily, income
from investment in a diversified portfolio of
equity securities placing principal emphasis
on those securities which management of the
fund believes to be undervalued.
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents of Wisconsin must meet investor
suitability standards)..................... Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
MERRILL LYNCH INSTITUTIONAL FUND............. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current
income consistent with liquidity and the
maintenance of a high-quality portfolio of
money market securities.
MERRILL LYNCH INSTITUTIONAL TAX-EXEMPT
FUND....................................... Current income exempt from Federal income
taxes, preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term, high quality
municipal bonds.
MERRILL LYNCH INTERNATIONAL EQUITY FUND...... Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity 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>

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<PAGE> 77

<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 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 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 as high a level of income
exempt from Federal and Minnesota income
taxes as is consistent with prudent
investment management.
</TABLE>

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<PAGE> 78

<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 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 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 YORK LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is as high a
level of income exempt from Federal, New
York State and New York City income taxes as
is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment
grade New York Municipal Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal, New York State and New
York City income taxes as is consistent with
prudent investment management.
</TABLE>

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<PAGE> 79

<TABLE>
<S> <C>
MERRILL LYNCH NORTH CAROLINA MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income
exempt from Federal and North Carolina
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH OHIO MUNICIPAL
BOND FUND.................................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is 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 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 experiencing poor
operating results believed to be undervalued
relative to the current or prospective
condition of such issuer.
</TABLE>

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<PAGE> 80

<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.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
(available only if the exchange occurs
within certain retirement plans)........... Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund,
whose objectives are current income,
preservation of capital and liquidity
available from investing in a diversified
portfolio of short-term money market
securities.
MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND,
INC. ...................................... As high a level of current income as is
consistent with prudent investment management
from a global portfolio of high quality debt
securities 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.
</TABLE>

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<PAGE> 81

<TABLE>
<S> <C>
MERRILL LYNCH TREASURY FUND.................. A portfolio of Merrill Lynch Funds For
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct
obligations of the U.S. Treasury and up to
10% of its total assets in repurchase
agreements secured by such obligations.
MERRILL LYNCH U.S.A. GOVERNMENT RESERVES..... Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY MONEY FUND....... Preservation of capital, liquidity and current
income through investment exclusively in a
diversified portfolio of short-term
marketable securities which are direct
obligations of the U.S Treasury.
MERRILL LYNCH WORLD INCOME FUND, INC. ....... High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies, including
multinational currencies.
</TABLE>

Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes and, depending on the circumstances, a short-or long-term capital
gain or loss may be realized. In addition, a shareholder exchanging shares of
any of the funds may be subject to a backup withholding tax unless such
shareholder certifies under penalty of perjury that the taxpayer identification
number on file with any such fund is correct and that he is not otherwise
subject to backup withholding. See "Dividends, Distributions and Taxes" below.

To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the exchange,
or, if the exchange does not involve a money market fund, the shareholder may
write to the Transfer Agent requesting that the exchange be effected. Such
letter must be signed exactly as the account is registered with signatures
guaranteed by an "eligible guarantor institution" as such term is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. "Eligible guarantor institution(s)" include
Merrill Lynch branches and certain banks, brokers, dealers, credit unions,
securities exchanges and associations, clearing agencies and savings
associations. 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 Securities and Exchange Commission. The Fund reserves the
right to limit the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of their shares to
the general public at any time and may thereafter resume such offering from time
to time. The exchange privilege is available only to U.S. shareholders in states
where the exchange legally may be made.

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<PAGE> 82

DIVIDENDS, DISTRIBUTIONS AND TAXES

DIVIDENDS AND DISTRIBUTIONS

It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income are paid monthly. All net
realized long-or short-term capital gains, if any, are 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 shares
will be lower than the per share dividends and distributions on Class A shares
as a result of the account maintenance, distribution and transfer agency fees
applicable with respect to the Class B shares. See "Determination of Net Asset
Value."

TAXES

The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). 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 and Class B shareholders
("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.

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

38
<PAGE> 83

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 and Class B shareholders
according to a method (which it believes is consistent with the Securities and
Exchange Commission exemptive order permitting the issuance and sale of two
classes of stock) that is based upon the gross income that is allocable to the
Class A and Class B 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.

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.

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.

39
<PAGE> 84

Tax Treatment of Options and Futures Transactions. The Fund may write,
purchase or sell options or futures contracts. Unless the Fund is eligible to
make and makes a special election, such options and futures contracts that are
"Section 1256 contracts" will be "marked to market" for Federal income tax
purposes at the end of each taxable year, i.e., each option or futures contract
will be treated as sold for its fair market value on the last day of the taxable
year. In general, unless the special election referred to in the previous
sentence is made, gain or loss from transactions in options and futures
contracts will be 60% long-term and 40% short-term capital gain or loss.

Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's transactions in options and futures contracts. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures.

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.

40
<PAGE> 85

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 and Class B shares in accordance with a formula specified
by the Securities and Exchange Commission.

Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A shares and
the contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares.

The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment. 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 shares
or the waiver of the contingent deferred sales charge in the case of Class B
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares," respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may not take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a lower
amount of expenses may be deducted.

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.

41
<PAGE> 86

Set forth below is total return and yield information for the Class A and
Class B shares of the Fund for the periods indicated.

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
-------------------------------------------- --------------------------------------------
EXPRESSED AS A REDEEMABLE VALUE EXPRESSED AS A REDEEMABLE VALUE
PERCENTAGE BASED OF A HYPOTHETICAL PERCENTAGE BASED OF A HYPOTHETICAL
ON A HYPOTHETICAL $1,000 INVESTMENT ON A HYPOTHETICAL $1,000 INVESTMENT
PERIOD $1,000 INVESTMENT AT THE END OF THE PERIOD $1,000 INVESTMENT AT THE END OF THE PERIOD
- -------------------------- ----------------- ------------------------ ----------------- ------------------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
October 29, 1993
(commencement of
operations)
to December 31, 1993.... -37.80% $ 921.30 -28.15% $ 944.50
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
October 29, 1993
(commencement of
operations)
to December 31, 1993.... -1.46% $ 985.40 -1.63% $ 983.70
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
October 29, 1993
(commencement of
operations)
to December 31, 1993.... -7.87% $ 921.30 -5.55% $ 944.50
YIELD
30 days ending
December 31, 1993....... 4.09% 3.60%
</TABLE>

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Fund was incorporated under Maryland law on July 14, 1993. It has an
authorized capital of 200,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A and Class B Common Stock,
each of which consists of 100,000,000 shares. Both Class A and Class B Common
Stock represent an interest in the same assets of the Fund and are identical in
all respects except that the Class B 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 distribution expenditures
and account maintenance fee. The Fund has received an order from the Securities
and Exchange Commission permitting the issuance and sale of two 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. The
creation of additional classes would require an additional order from the
Securities and Exchange Commission. There is no assurance that such an
additional order will be issued.

42
<PAGE> 87

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 of
1940 does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent accountants. 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 or conversion rights. Redemption 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 as of December 31, 1993, is calculated as
follows:

<TABLE>
<CAPTION>
CLASS A CLASS B
----------- -----------
<S> <C> <C>
Net Assets................................................ $ 4,569,566 $27,881,448
----------- -----------
----------- -----------
Number of Shares Outstanding.............................. 465,809 2,839,115
----------- -----------
----------- -----------
Net Asset Value Per Share (net assets divided by number of
shares outstanding)..................................... $ 9.81 $ 9.80
Sales Charge (for Class A shares: 6.50% of offering price
(6.95% of net asset value per share))*.................. $ 0.68 $ **
----------- -----------
Offering Price............................................ $ 10.49 $ 9.80
----------- -----------
----------- -----------
</TABLE>

- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.

** Class B shares are not subject to an initial sales charge but may be subject
to a contingent deferred sales charge on redemption of shares within four
years of purchase. See "Purchase of Shares--Deferred Sales Charge
Alternative--Class B Shares" in the Prospectus.

INDEPENDENT AUDITORS

Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540 has been
selected as the independent auditors of the Fund. The selection of independent
auditors is subject to ratification by the Fund's shareholders in years when an
annual meeting of shareholders is held. In addition, employment of such

43
<PAGE> 88

auditors may be terminated without any penalty by vote of a majority of the
outstanding shares of the Fund at a meeting 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, P.O. Box 351, Boston, Massachusetts
02101, 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 December 31, 1993.

44
<PAGE> 89

- --------------------------------------------------------------------------------

MERRILL LYNCH UTILITY INCOME FUND, INC.

SCHEDULE OF INVESTMENTS (UNAUDITED)

- --------------------------------------------------------------------------------

DECEMBER 31, 1993

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRIES SHARES HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Utilities-Electric 17,400 American Electric Power Co. Inc......... $ 668,491 $ 645,975 2.0%

20,100 Commonwealth Edison Co.................. 604,145 567,825 1.8

22,100 Consolidated Edison Co. Of New York
Inc................................... 761,718 709,963 2.2

13,900 Detroit Edison Co....................... 462,227 417,000 1.3

15,800 Dominion Resources Inc., (Virginia)..... 760,437 716,925 2.2

19,300 Duke Power Co........................... 845,934 817,838 2.5

17,700 FPL Group, Inc.......................... 704,236 692,512 2.1

12,300 Houston Industries Inc.................. 594,966 585,787 1.8

13,400 Niagara Mohawk Power Corp............... 294,533 271,350 0.8

12,700 Northeast Utilities..................... 326,516 301,625 0.9

14,400 Ohio Edison Co.......................... 343,633 327,600 1.0

40,800 Pacific Gas & Electric Co............... 1,467,066 1,433,100 4.4

26,300 Pacificorp.............................. 518,704 506,275 1.6

20,900 Philadelphia Electric Co................ 655,356 632,225 2.0

22,900 Public Service Enterprise Group Inc..... 770,179 732,800 2.3

42,200 SCE Corp................................ 887,436 844,000 2.6

30,200 Southern Co............................. 1,362,076 1,332,575 4.1

21,000 Texas Utilities Co...................... 940,962 908,250 2.8

9,600 Union Electric Co....................... 398,688 376,800 1.2
------------ ------------ -----
13,367,303 12,820,425 39.6
- ------------------------------------------------------------------------------------------------------------------

Total Investments in Common Stocks...... 13,367,303 12,820,425 39.6
- ------------------------------------------------------------------------------------------------------------------

<CAPTION>
FACE AMOUNT FIXED-INCOME SECURITIES
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Utilities-Communications $1,000,000 Public Service Co. of Colorado Electric
Utilities 6.375%,
due 11/01/2005........................ 991,300 984,425 3.0

1,000,000 Southwestern Bell 7.00%,
due 07/01/2015........................ 1,034,480 1,006,824 3.1

1,000,000 Tele Communications Inc. 9.80%,
due 02/01/2012........................ 1,263,890 1,238,383 3.8

1,000,000 United Telephone of Florida 6.875%,
due 07/15/2013........................ 1,019,950 1,000,407 3.1
------------ ------------ -----
4,309,620 4,230,039 13.0
- ------------------------------------------------------------------------------------------------------------------
Utilities-Gas 1,000,000 El Paso Natural Gas Co. 7.75%,
due 01/15/2002........................ 1,090,950 1,095,511 3.4
- ------------------------------------------------------------------------------------------------------------------

Total Investments in Fixed-Income
Securities...................... 5,400,570 5,325,550 16.4
- ------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
- ------------------------------------------------------------------------------------------------------------------
Commercial Paper* 766,000 General Electric Capital Corp., 3.22%
Discount due 01/03/1994........................ 765,863 765,863 2.3

1,000,000 Sanwa Business Credit Corp., 3.20%
due 01/25/1994........................ 997,867 997,867 3.1
------------ ------------ -----

Total Commercial Paper.................. 1,763,730 1,763,730 5.4
- ------------------------------------------------------------------------------------------------------------------
U.S. Government, Agency & 6,000,000 Federal National Mortgage Association,
Instrumentality 3.135%
due 01/10/1994........................ 5,995,298 5,995,298 18.5
Obligations Discount 5,000,000 Federal Home Loan Mortgage Corporation,
3.135%
due 01/07/1994........................ 4,997,387 4,997,387 15.4
</TABLE>

45
<PAGE> 90

- --------------------------------------------------------------------------------

MERRILL LYNCH UTILITY INCOME FUND, INC.

SCHEDULE OF INVESTMENTS (UNAUDITED) (CONCLUDED)

- --------------------------------------------------------------------------------

DECEMBER 31, 1993

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRIES FACE AMOUNT COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------

$1,000,000 United States Treasury Bill, 8.120%
due 02/17/1994........................ $ 995,926 $ 995,926 3.1%
------------ ------------ -----

Total U.S. Government, Agency &
Instrumentality Obligations..... 11,988,611 11,988,611 37.0
- ------------------------------------------------------------------------------------------------------------------

Total Investments in Short-Term
Securities...................... 13,752,341 13,752,341 42.4
- ------------------------------------------------------------------------------------------------------------------
Total Investments..................................................................... $ 32,520,214 31,898,316 98.4
------------
------------
Other Assets Less Liabilities....................................................................... 502,698 1.6
------------ -----
Net Assets.......................................................................................... $ 32,401,014 100.0%
------------ -----
------------ -----
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

- ------------------

*Commercial Paper, and certain U.S. Government, Agency & Instrumentality
Obligations are traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund. Other Securities bear
interest at the rates shown, payable at fixed dates or upon maturity.

The Interest rates shown are those in effect at December 31, 1993.

See Notes to Financial Statements.

46
<PAGE> 91

- --------------------------------------------------------------------------------

MERRILL LYNCH UTILITY INCOME FUND, INC.

STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)

- --------------------------------------------------------------------------------

AS OF DECEMBER 31, 1993

- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
ASSETS:
Investment, at value (identified cost -- $32,520,214) (Note 1a)..... $31,898,316
Cash................................................................ 356
Receivables:
Securities sold.................................................. $721,000
Capital shares sold.............................................. 254,694
Interest......................................................... 154,072
Dividends........................................................ 84,595
Investment adviser (Note 2)...................................... 32,593 1,246,954
--------
Deferred organization expenses (Note 1e)............................ 49,833
Prepaid registration fees and other assets (Note 1e)................ 12,278
-----------
Total assets................................................ 33,207,737
-----------
- ----------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased............................................. 765,794
Capital shares redeemed.......................................... 23,660
Distributor (Note 2)............................................. 17,269 806,723
--------
Total liabilities........................................... 806,723
-----------
- ----------------------------------------------------------------------------------------------
NET ASSETS:
Net assets.......................................................... $32,401,014
-----------
-----------
- ----------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized....................................................... $ 46,581
Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized....................................................... 283,912
Paid-in capital in excess of par.................................... 32,584,389
Undistributed investment income -- net............................. 108,245
Accumulated realized capital losses on investments and foreign
currency transactions -- net..................................... (215)
Unrealized depreciation on investments and foreign currency
transactions -- net.............................................. (621,898)
-----------
Net assets.......................................................... $32,401,014
-----------
-----------
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A -- Based on net assets of $4,569,566 and 465,809 shares
outstanding...................................................... $ 9.81
-----------
-----------
Class B -- Based on net assets of $27,831,448 and 2,839,115 shares
outstanding...................................................... $ 9.80
-----------
-----------
- ----------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements.

47
<PAGE> 92

- --------------------------------------------------------------------------------

MERRILL LYNCH UTILITY INCOME FUND, INC.

STATEMENT OF OPERATIONS (UNAUDITED)

- --------------------------------------------------------------------------------

FOR THE PERIOD OCTOBER 29, 1993+ TO DECEMBER 31, 1993

- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTE 1D &1E):
Dividends............................................................ $ 146,973
Interest and amortization of premium and discount earned............. 135,118
---------
Total income................................................. 282,091
---------
---------
- ----------------------------------------------------------------------------------------------
EXPENSES:
Distribution and account maintenance fees -- Class B (Note 2)........ 33,724
Investment advisory fees (Note 2).................................... 28,913
Registration fees (Note 1e).......................................... 16,814
Printing and shareholder reports..................................... 13,446
Accounting services (Note 2)......................................... 6,109
Directors' fees and expenses......................................... 5,630
Professional fees.................................................... 4,376
Transfer agent fees -- Class B (Note 2).............................. 3,896
Amortization of organization expenses (Note 1e)...................... 2,081
Custodian fees....................................................... 1,657
Transfer agent fees -- Class A (Note 2).............................. 535
Other................................................................ 496
---------
Total expenses before reimbursement.................................. 117,677
Reimbursement of expenses (Note 2)................................... (61,506)
---------
Total expenses after reimbursement................................... 56,171
---------
Investment income, net............................................... 225,920
---------
- ----------------------------------------------------------------------------------------------
REALIZED & UNREALIZED LOSS ON INVESTMENTS & FOREIGN CURRENCY
TRANSACTIONS -- NET (NOTES 1B, 1D & 3):
Realized loss from:
Investments -- net................................................... (215)
Unrealized depreciation on:
Investments -- net................................................... (621,898)
Net realized and unrealized loss on investments and foreign currency
transactions......................................................... (622,113)
---------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................... $(396,193)
---------
---------
- ----------------------------------------------------------------------------------------------
</TABLE>

+ Commencement of Operations.

See Notes to Financial Statements.

48
<PAGE> 93

- --------------------------------------------------------------------------------

MERRILL LYNCH UTILITY INCOME FUND, INC.

STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)

- --------------------------------------------------------------------------------

FOR THE PERIOD OCTOBER 29, 1993+ TO DECEMBER 31, 1993

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS:
<S> <C>
- ------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income -- net................................................ $ 225,920
Realized loss on investments and foreign currency transactions-net...... (215)
Unrealized depreciation on investments and foreign currency
transactions-net..................................................... (621,898)
--------------------
Net decrease in net assets resulting from operations...................... (396,193)
--------------------
- ------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1F):
Investment income -- net:
Class A.............................................................. (19,023)
Class B.............................................................. (98,652)
--------------------
Net decrease in net assets resulting from dividends to shareholders....... (117,675)
--------------------
- ------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net increase in net assets derived from capital shares transactions..... 32,814,882
--------------------
- ------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets............................................ 32,301,014
Beginning of period..................................................... 100,000
--------------------
End of period*.......................................................... $ 32,401,014
--------------------
--------------------
- ------------------------------------------------------------------------------------------------
* Undistributed investment income -- net.................................. $ 108,245
--------------------
- ------------------------------------------------------------------------------------------------
</TABLE>

+ Commencement of Operations.

See Notes to Financial Statements.

49
<PAGE> 94

- --------------------------------------------------------------------------------

MERRILL LYNCH UTILITY INCOME FUND, INC.

- --------------------------------------------------------------------------------

FINANCIAL HIGHLIGHTS (UNAUDITED)

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED IN THE
FINANCIAL STATEMENTS
INCREASE (DECREASE) IN NET ASSET VALUE: CLASS A CLASS B
-------------------- --------------------
FOR THE PERIOD FOR THE PERIOD
OCTOBER 29, 1993+ TO OCTOBER 29, 1993+ TO
DECEMBER 31, 1993 DECEMBER 31, 1993
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
PER SHARE
OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 10.00 $ 10.00
---------- ----------
Investment income -- net.................... .08 .07
Realized and unrealized loss on investments
and
foreign currency transactions -- net..... (.23) (.23)
---------- ----------
Total from investment operations.............. (.15) (.16)
---------- ----------
Less dividends and distributions:
Investment income -- net.................... (.04) (.04)
Realized gain on investments -- net......... -- --
---------- ----------
Total dividends and distributions............. (.04) (.04)
---------- ----------
Net asset value, end of period................ $ 9.81 $ 9.80
---------- ----------
---------- ----------
- -----------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............ (1.46%)++ (1.63%)++
---------- ----------
---------- ----------
- -----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fee and net
of reimbursement............................ 0.41%* .43%*
---------- ----------
---------- ----------
Expenses, net of reimbursement................ 0.41%* 1.18%*
---------- ----------
---------- ----------
Expense....................................... 1.58%* 2.35%*
---------- ----------
---------- ----------
Investment income -- net...................... 4.96%* 4.19%*
---------- ----------
---------- ----------
- -----------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...... $ 4,570 $27,831
---------- ----------
Portfolio turnover............................ 0% 0%
---------- ----------
- -----------------------------------------------------------------------
</TABLE>

+ Commencement of Operations.

++ Aggregate total investment returns.

* Annualized.

** Total investment returns exclude the effects of sales loads.

See Notes to Financial Statements.

50
<PAGE> 95

- --------------------------------------------------------------------------------

MERRILL LYNCH UTILITY INCOME FUND, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

- --------------------------------------------------------------------------------

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
investment 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 ("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 distribution of such shares and have exclusive
voting rights with respect to matters relating to such distribution
expenditures. The following is a summary of significant accounting policies
followed by the Fund.

(a) Valuation of Securities -- Securities traded in the over-the-counter
market are valued at the last available bid price or yield equivalents obtained
from one or more dealers in the over-the-counter market prior to the time of
valuation. Portfolio securities which are traded on stock exchanges are valued
at the last sale price on the principal market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price.

Options written are valued based upon the last asked price in the case of
exchange-traded options or, in the case of options traded in the over-the-
counter market, the average of the last asked price as obtained from one or more
dealers. Options purchased by the Fund are valued at their last bid price in the
case of exchange-traded options, or in the case of options traded in the
over-the-counter market, the average of the last bid price as obtained from two
or more dealers. Other investments, including futures contracts and related
options, are stated at market value. 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
settling (realized) or valuing (unrealized) receivables or payables expressed in
foreign currencies into U.S. dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.

The Fund is authorized to enter into forward foreign exchange contracts as
a hedge against either specific transactions or portfolio positions. Such
contracts are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.

(c) Options -- When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium paid (or
received) is added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds

51
<PAGE> 96

- --------------------------------------------------------------------------------
MERRILL LYNCH UTILITY INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
- --------------------------------------------------------------------------------

of the security sold. When an option expires (or the
Fund enters into a closing transaction), the Fund realizes a gain or loss on the
option to the extent of the premiums received or paid (or gain or loss to the
extent the cost of the closing transaction is less than or exceeds the premiums
paid or received).

Written and purchased options are non-income producing investments.

(d) Income Taxes -- It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no Federal
income tax provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest and capital gains at various rates.

(e) Security Transactions and Investment Income -- Security transactions
are recorded on the dates the transactions are entered into (the trade dates).
Interest income (including amortization of discount) is recognized on the
accrual basis. Realized gains and losses on security transactions are determined
on the identified cost basis.

(f) Deferred Organization Expenses and Prepaid Registration
Fees -- Deferred organization expenses and expenses relating to the organization
of the second class of shares are charged to expense over a five-year period.
Prepaid registration fees are charged to expense as the related shares are
issued.

(g) Dividends and Distributions -- Dividends from net investment income,
excluding transaction gains (losses), are declared daily and paid monthly.
Distribution 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 margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time is was closed.

2. MANAGEMENT AGREEMENT AND TRANSACTIONS WITH AFFILIATES:

The Fund has entered into a Management Agreement with Merrill Lynch Asset
Management ("MLAM"). MLAM is the name under which Merrill Lynch Investment
Management, Inc. ("MLIM") does business. MLIM is an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. The Fund has also entered into a
Distribution Agreement and a Distribution Plan with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of MLIM.

Effective January 1, 1994, the investment advisory business of MLAM
reorganized from a corporation to a limited partnership. The general partner of
MLAM is Princeton Services, Inc., an indirect wholly-owned subsidiary of Merrill
Lynch & Co.

MLAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operation of the Fund. For such services, the Fund pays a
monthly fee of 0.55%, on an annual basis, of the average daily value of the
Fund's net assets. The most restrictive annual

52
<PAGE> 97

expense limitation requires that the Manager reimburse the Fund to the extent
the Fund's expenses (excluding interest, taxes, distribution fees, brokerage
fees and commissions, and extraordinary items) exceed 2.5% of the Fund's first
$30 million of average daily net assets, 2.0% of the next $70 million of average
daily net assets, and 1.5% of the average daily net assets in excess thereof.
The Manager's obligation to reimburse the Fund is limited to the amount of the
investment advisory fee. No fee payment will be made to the Manager during any
fiscal year which will cause such expenses to exceed the most restrictive
expense limitation at the time of such payment. For the period October 29, 1993
to December 31, 1993, MLAM earned fees of $28,913, all of which was voluntarily
waived. In addition, MLAM reimbursed the Fund $32,593 for additional expenses.

The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940 pursuant to which MLFD receives a
fee from the Fund at the end of each month at the annual rate of 0.50% and
0.25%, respectively, of average daily net assets of the Fund attributable to
Class B shares. This fee is to compensate the Distributor for the services it
provides and the expenses borne by the Distributor under the Distribution
Agreement. As authorized by the Plan, the Distributor has entered into an
agreement with Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") which
provides for the compensation of MLPF&S for providing account maintenance and
distribution-related services to the Fund. For the period October 29, 1993 to
December 31, 1993, MLFD earned $33,724 under the Plan, all of which was paid to
MLPF&S pursuant to the agreement.

For the period October 29, 1993 to December 31, 1993, MLFD earned
underwriting discounts of $7,014 and MLPF&S earned dealer concessions of
$384,894 on sales of Class A Shares. MLPF&S also received contingent deferred
sales charges of $1,572 relating to Class B Share transactions.

53
<PAGE> 98

- --------------------------------------------------------------------------------

MERRILL LYNCH UTILITY INCOME FUND, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONCLUDED)

- --------------------------------------------------------------------------------

Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of Merrill
Lynch & Co., Inc., is the Fund's transfer agent.

Accounting services are provided to the Fund by MLAM at cost.

Certain officers and/or directors of the Fund are officers and/or directors
of MLIM, MLPF&S, MLFD, FDS and/or Merrill Lynch & Co., Inc.

3. INVESTMENTS:

Purchases of investments, excluding short-term securities, for the period
ended December 31, 1993, was $18,767,873. There were no sales of investments for
the period.

Realized and unrealized gains (losses) as of December 31, 1993, were as
follows:

- ------------------------------------------------------

<TABLE>
<CAPTION>
REALIZED UNREALIZED
LOSSES LOSSES
<S> <C> <C>
- ----------------------------------------------------
Long-term investments........ $ -- $ (621,898)
Short-term investments....... (215) --
-------- ----------
Total............... $ (215) $ (621,898)
-------- ----------
-------- ----------
- ----------------------------------------------------
</TABLE>

As of December 31, 1993, net unrealized depreciation for Federal income tax
purposes aggregated $621,898, of which $4,561 related to appreciated securities
and $626,459 related to depreciated securities. At February 28, 1994, the
aggregate cost of investments, including options purchased less premiums
received for options written, for Federal income tax purposes was $32,520,214.

4. COMMON STOCK TRANSACTIONS:

Net increase in net assets derived from common stock transactions was
$32,814,882 for the period ended December 31, 1993.

Transactions in shares of common stock were as follows:

- ------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A SHARES FOR THE PERIOD
OCTOBER 29, 1993+ TO DOLLAR
DECEMBER 31, 1993 SHARES AMOUNT
<S> <C> <C>
- ---------------------------------------------------
Shares sold.................. 470,499 $4,693,235
Shares issued to shareholders
in reinvestment of
dividends.................. 1,374 13,337
------- ----------
Total issued................. 471,873 4,706,572
Shares redeemed.............. (11,064) (108,699)
------- ----------
Net increase................. 460,809 $4,597,873
------- ----------
------- ----------
- ---------------------------------------------------
</TABLE>

+ Prior to October 29, 1993 (commencement of operations), the Fund issued 5,000
Class A Shares to MLAM for $50,000.

- ------------------------------------------------------

<TABLE>
<CAPTION>
CLASS B SHARES FOR THE
PERIOD OCTOBER 29, 1993+ DOLLAR
TO DECEMBER 31, 1993 SHARES AMOUNT
<S> <C> <C>
- ---------------------------------------------------
Shares sold............... 2,896,316 $28,825,761
Shares issued to
shareholders in
reinvestment of
dividends............... 6,124 59,469
--------- -----------
Total issued.............. 2,902,440 28,885,230
Shares redeemed........... (68,325) (668,221)
--------- -----------
Net increase.............. 2,834,115 $28,217,009
--------- -----------
--------- -----------
- ---------------------------------------------------
</TABLE>

+ Prior to October 29, 1993 (commencement of operations), the Fund issued 5,000
Class B Shares to MLAM for $50,000.

54
<PAGE> 99

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholder,
Merrill Lynch Utility Income Fund, Inc.;

We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Utility Income Fund, Inc. as of September 3, 1993. This financial
statement is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 statement of assets and liabilities presents fairly, in all
material respects, the financial position of Merrill Lynch Utility Income Fund,
Inc. as of September 3, 1993 in conformity with generally accepted accounting
principles.

Deloitte & Touche
Princeton, New Jersey
September 7, 1993

55
<PAGE> 100

MERRILL LYNCH UTILITY INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 3, 1993

<TABLE>
<S> <C>
Assets
Cash in bank.................................................................. $100,000
Prepaid registration fees (Note 3)............................................ 31,500
Deferred organization expenses (Note 4)....................................... 120,800
--------
Total Assets.................................................................... 252,300
Liabilities -- accrued expenses................................................. 152,300
--------
Net Assets (equivalent to $10.00 per share on 10,000 shares
of common stock (par value $0.10) outstanding with
an unlimited number of shares authorized) (Note 1)............................ $100,000
--------
--------
</TABLE>

NOTES TO STATEMENT OF ASSETS AND LIABILITIES
(1) Merrill Lynch Utility Income Fund, Inc. (the "Fund") was organized as a
Maryland corporation on July 14, 1993. The Fund is registered under the
Investment Company Act of 1940 as an open-end investment company.

(2) The Fund intends to enter into a Management Agreement (the "Management
Agreement") with Merrill Lynch Asset Management (the "Manager"), and
distribution agreements (the "Distribution Agreements") with Merrill Lynch
Funds Distributor, Inc. (the "Distributor"). (See "Management and Advisory
Arrangements" in the Statement of Additional Information.) Certain officers
and/or directors of the Fund are officers and/or directors of the Manager
and the Distributor.

(3) Prepaid registration fees are charged to income as the related shares are
issued.

(4) Deferred organization expenses will be amortized over a period from the date
the Fund commences operations not exceeding five years. In the event that
the Manager (or any subsequent holder) redeems any of its original shares
prior to the end of the five-year period, the proceeds of the redemption
payable in respect of such shares shall be reduced by the pro rata share
(based on the proportionate share of the original shares redeemed to the
total number of original shares outstanding at the time of redemption) of
the unamortized deferred organization expenses as of the date of such
redemption. In the event that the Fund is liquidated prior to the end of the
five-year period, the Manager (or any subsequent holder) shall bear the
unamortized deferred organization expenses.

56
<PAGE> 101

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 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.

57
<PAGE> 102

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.

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.

58
<PAGE> 103

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.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S
("STANDARD & POOR'S") CORPORATE DEBT RATINGS

A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.

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.

59
<PAGE> 104

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.
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.
</TABLE>

60
<PAGE> 105

<TABLE>
<S> <C>
C The rating C is typically applied to debt subordinated to senior debt which is
assigned an actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed but debt service payments are
continued.
CI The rating CI is reserved for income bonds on which no interest is being paid.
D Debt rated D is in default. The D rating 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 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.
</TABLE>

61
<PAGE> 106

<TABLE>
<S> <C>
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.
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.
</TABLE>

62
<PAGE> 107

<TABLE>
<S> <C>
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, as predominantly
B speculative with respect to the issuer's capacity to pay preferred stock obligations.
CCC "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.

63
<PAGE> 108

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
IN THIS
STATEMENT
---------
<S> <C>
Investment Objective and Policies...... 2
Portfolio Strategies Involving
Options and Futures................ 2
Other Investment Policies and
Practices.......................... 7
Investment Restrictions.............. 10
Management of the Fund................. 12
Directors and Officers............... 12
Management and Advisory
Arrangements....................... 13
Purchase of Shares..................... 15
Alternative Sales Arrangements....... 15
Initial Sales Charge
Alternative--Class A Shares........ 15
Reduced Initial Sales Charges--Class
A Shares........................... 15
Deferred Sales Charge Alternative--
Class B Shares..................... 19
Redemption of Shares................... 20
Contingent Deferred Sales Charge--
Class B Shares..................... 20
Portfolio Transactions and Brokerage... 21
Determination of Net Asset Value....... 23
Shareholder Services................... 24
Investment Account................... 24
Automatic Investment Plan............ 24
Automatic Reinvestment of Dividends
and Capital Gains Distributions.... 25
Systematic Withdrawal Plans--Class A
Shares............................. 25
Retirement Plans..................... 26
Exchange Privilege................... 26
Dividends, Distributions and Taxes..... 38
Dividends and Distributions.......... 38
Taxes................................ 38
Performance Data....................... 41
General Information.................... 42
Description of Shares................ 42
Computation of Offering Price per
Share.............................. 43
Independent Auditors................. 43
Custodian............................ 44
Transfer Agent....................... 44
Legal Counsel........................ 44
Reports to Shareholders.............. 44
Additional Information............... 44
Unaudited Financial Statements......... 45
Independent Auditors' Report........... 55
Audited Financial Statements........... 56
Appendix............................... 57
</TABLE>

Code #
16857

Statement of
Additional Information

[Graphic design of a house with utilities

(i.e., telephone lines, satellite

dish and sprinkler system)]

- ------------------------------------------------------
MERRILL LYNCH
UTILITY INCOME
FUND, INC.

March 3, 1994

Distributor:
Merrill Lynch Funds
Distributor, Inc.
<PAGE> 109

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 December 31, 1993
(unaudited).

Contained in Part B, the Statement of Additional Information:

Schedule of Investments, December 31, 1993 (unaudited).

Statement of Assets and Liabilities as of December 31, 1993
(unaudited).

Statement of Operations for the period October 29, 1993 (commencement
of operations) to December 31, 1993 (unaudited).

Statement of Changes in Net Assets for the period October 29, 1993
(commencement of operations) to December 31, 1993 (unaudited).

Financial Highlights for the period October 29, 1993 (commencement of
operations) to December 31, 1993 (unaudited).

Statement of Assets and Liabilities as of September 3, 1993 (audited).

Independent Auditors' Report.

(B) EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------------------------------------------------------------------------------------------
<S> <C> <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) -- Class A Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.**
</TABLE>

<TABLE>
<S> <C> <C>
(b) -- Class B Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.**
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, independent auditors for the Registrant.
</TABLE>

C-1
<PAGE> 110

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
12 -- None.
13 -- Certificate of Merrill Lynch Investment Management, Inc.***
14 -- None.
15 -- Distribution Plan of the Registrant and 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 -- 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).

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
TITLE OF CLASS JANUARY 31, 1994
--------------------------------------------------------------- ----------------
<S> <C>
Class A Common Stock, par value $.10 per share................. 12
Class B Common Stock, par value $.10 per share................. 42
</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.

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

C-2
<PAGE> 111

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

C-3
<PAGE> 112

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
Balanced Fund for Investment and Retirement, Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund,
Inc., Merrill Lynch EuroFund, Merrill Lynch 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 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.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and
Worldwide DollarVest Fund, Inc. The address of each of these investment
companies is Box 9011, Princeton, New Jersey 08543-9011, except that the address
of Merrill Lynch Institutional Intermediate Fund, Merrill Lynch Institutional
Tax-Exempt Fund and Merrill Lynch Funds for

C-4
<PAGE> 113

Institutions Series is One Financial Center, 15th Floor, Boston, Massachusetts
02111-2665. The address of the Manager and FAM is also 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.

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 December 31,
1991 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, Kirstein
and Monagle are directors or officers of one or more of such companies.

Officers and partners of MLAM are set forth as follows:

<TABLE>
<S> <C> <C>
Princeton Services,
Inc....................
("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 of FAM; Senior Vice President,
Secretary General Counsel, Director and Secretary
of Princeton Services; Director of MLFD
</TABLE>

C-5
<PAGE> 114

<TABLE>
<CAPTION>
POSITION WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISOR PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Ronald M. Kloss.......... Senior Vice President and Senior Vice President and Controller of
Controller FAM; Senior Vice President and Controller
of Princeton Services
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 of FAM;
Treasurer 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>

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.,
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 Box 9011, Princeton,
New Jersey 08543-9011, except that the address of

C-6
<PAGE> 115

Messrs. Crook, Aldrich, Graczyk, Fatseas and Wasel is One Financial Center,
Boston, Massachusetts 02111-2665.

<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH THE DISTRIBUTOR WITH REGISTRANT
- ----------------------------- ----------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn............... President Executive Vice President
Arthur Zeikel................ Director President and Director
Philip L. Kirstein........... Director None
William E. Aldrich........... Senior Vice President None
Robert W. Crook.............. Senior Vice President None
Michael J. Brady............. Vice President None
Sharon Creveling............. Vice President and Assistant None
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
Robert Harris................ Secretary None
</TABLE>

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder are
maintained at the offices of the Registrant and its Custodian and Transfer
Agent.

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> 116

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 of this Registration Statement for effectiveness 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 28th day of February, 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
- --------------------------------------------- ------------------------------- -------------------
<S> <C> <C>
/s/ Arthur Zeikel President (Chief Executive February 28, 1994
- --------------------------------------------- Officer) and Director
(Arthur Zeikel)

/s/ Gerald M. Richard Treasurer (Principal Financial February 28, 1994
- --------------------------------------------- and Accounting Officer)
(Gerald M. Richard)

* Director February 28, 1994
- ---------------------------------------------
(Ronald W. Forbes)

* Director February 28, 1994
- ---------------------------------------------
(Cynthia A. Montgomery)

* Director February 28, 1994
- ---------------------------------------------
(Charles C. Reilly)

* Director February 28, 1994
- ---------------------------------------------
(Kevin A. Ryan)

* Director February 28, 1994
- ---------------------------------------------
(Richard R. West)

*By /s/ Arthur Zeikel
- ---------------------------------------------
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>

<PAGE> 117

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ---------------------------------------------------------------------- -------------
<S> <C> <C>
(11) Consent of Deloitte & Touche, Independent Auditors for Registrant.....
(16)(a) Schedule for computation of each performance quotation relating to
Class A shares provided in the Registration Statement in response to
Item 22...............................................................
(16)(b) Schedule for computation of each performance quotation relating to
Class B shares provided in the Registration Statement in response to
Item 22...............................................................
(17) Other Exhibits
Powers of Attorney
Arthur Zeikel
Gerald M. Richard
Ronald W. Forbes
Cynthia A. Montgomery
Charles C. Reilly
Kevin A. Ryan
Richard R. West
</TABLE>

<PAGE> 1

INDEPENDENT AUDITORS' CONSENT

MERRILL LYNCH UTILITY INCOME FUND, INC.

We consent to the use in Post-Effective Amendment No. 1 to Registration
Statement No. 33-49787 of our report dated September 7, 1993 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement.

Deloitte & Touche

Princeton, New Jersey

March 2, 1994

<PAGE> 1

EXHIBIT 16(a)

Merrill Lynch Utility Income Fund, Inc. - Class A Shares
Period from 10/29/93 (commencement of operations) - 12/31/93

<TABLE>
<CAPTION>
Since Since
Inception Inception
Avg Annual Total
Return Return*
------------- ------------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00

Divided by Initial Maximum Offering Price 10.70
--------

Divided by Net Asset Value 10.00
--------
Equals Shares Purchased 93.50 100.00

Plus Shares Acquired through Dividend Reinvestment 0.42 0.45
-------- --------

Equals Shares Held at 12/31/93 93.92 100.45

Multiplied by Net Asset Value at 12/31/93 9.81 9.81
-------- --------

Equals Ending Redeemable Value at $1,000
Investment (ERV) at 12/31/93 $921.33 $985.38

Divided by $1,000 (P) 0.9213 0.9854
Subtract 1 -0.0787 -0.0146

Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -7.87%
========

Expressed as a percentage equals the
Aggregate Total Return for the Period -1.46%
========
ERV divided by P 0.9213

Raise to the power of 5.7937

Equals 0.6220
Subtract 1 -0.3780

Expressed as a percentage equals the
Average Annualized Total Return -37.80%
=========

</TABLE>

* Does not include sales charge for the period.
<PAGE> 2
30 DAYS STANDARDIZED YIELD
FOR THE PERIOD ENDING 12-31-93

<TABLE>
<S> <C>
Long term income generally based on yield to maturity
times market value of each security $12,116
Plus short term income accrued for the past thirty days 5,436
-------------

Equals Total Income 17,551

Less expenses for the past thirty days (1,321)
-------------
Equals net monthly income for yield calculation 16,231
-------------

Average shares outstanding for 30 days 457,875

Times the Maximum Offering Price 10.49
-------------
Equals total dollars $4,803,106
=============

Net monthly income divided by total dollars equals 0.003379222

Add 1 1.003379222
Raise to the power of 6 1.020447391

Subtract 1 0.020447391

Times 2 0.040894783

Expressed as a percentage equals the
standardized yield for the 30 day period 4.09%
========

Tax Rate 28.00%

X = 1 minus Tax Rate 72.00%

Standardized Yield divided by X equals
Tax Equivalent Yield for the 30 day period 5.68%
========
</TABLE>

<PAGE> 1

EXHIBIT 16(b)

Merrill Lynch Utility Income Fund, Inc. - Class B Shares
Period from 10/29/93 (commencement of operations) - 12/31/93

<TABLE>
<CAPTION>
Since Since
Inception Inception
Avg Annual Total
Return Return*
------------- ------------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00

Divided by Net Asset Value 10.00 10.00
-------- --------

Equals Shares Purchased 100.00 100.00

Plus Shares Acquired through Dividend Reinvestment 0.38 0.38
-------- --------

Equals Shares Held at 12/31/93 100.38 100.38

Multiplied by Net Asset Value at 12/31/93 9.80 9.80
-------- --------
Equals Ending Value before deduction for
contingent deferred sales charge 983.73 983.73

Less deferred sales charge (39.35) 0.00
-------- --------

Equals Ending Redeemable Value at $1,000
Investment (ERV) at 12/31/93 $944.39 $983.73
-------- --------
Divided by $1,000 (P) 0.9444 0.9837

Subtract 1 -0.0556 -0.0163

Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -5.56%
========
Expressed as a percentage equals the
Aggregate Total Return for the Period -1.63%
========

ERV divided by P 0.9444

Raise to the power of 5.7937

Equals 0.7178

Subtract 1 -0.2822

Expressed as a percentage equals the
Average Annualized Total Return -28.22%
=========
</TABLE>

* Does not include sales charge for the period.
<PAGE> 2
30 DAYS STANDARDIZED YIELD
FOR THE PERIOD ENDING 12-31-93

<TABLE>
<S> <C>
Long term income generally based on yield to maturity
times market value of each security $73,075

Plus short term income accrued for the past thirty days 32,785
-------------

Equals Total Income 105,860

Less expenses for the past thirty days (25,091)
-------------
Equals net monthly income for yield calculation 80,770
-------------

Average shares outstanding for 30 days 2,767,200

Times the Net Asset Value 9.80
-------------
Equals total dollars $27,118,561
==============

Net monthly income divided by total dollars equals 0.002978385

Add 1 1.002978385
Raise to the power of 6 1.018003900

Subtract 1 0.018003900

Times 2 0.036007800
Expressed as a percentage equals the
standardized yield for the 30 day period 3.60%
========

Tax Rate 28.00%

X = 1 minus Tax Rate 72.00%

Standardized Yield divided by X equals
Tax Equivalent Yield for the 30 day period 5.00%
========
</TABLE>

<PAGE> 1

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose name
appears below hereby nominates, constitutes and appoints Arthur Zeikel, Terry
K. Glenn, and Gerald M. Richard (with full power to each of them to act alone)
his true and lawful attorney-in-fact and agent, for him and on his behalf and
in his place and stead in any and all capacities, to make, execute and sign all
amendments and supplements to the Registration Statement on Form N-1A under the
Securities Act of 1933 and the Investment Company Act of 1940 of MERRILL LYNCH
UTILITY INCOME FUND, INC. (the "Fund"), and to file the same with the
Securities and Exchange Commission, and any other regulatory authority having
jurisdiction over the offer and sale of shares of common stock, par value $.10
per share, of the Fund, and any and all exhibits and other documents requisite
in connection therewith, granting unto said attorneys and each of them, full
power and authority to perform each and every act and thing requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as the undersigned officer or Director himself might or could do.

IN WITNESS WHEREOF, each undersigned officer and Director has
hereunto set his hand this 1st day of September, 1993.

<TABLE>
<S> <C>
/s/ Arthur Zeikel /s/ Kevin A. Ryan
---------------------------------------- ---------------------------------------
Arthur Zeikel Kevin A. Ryan
President (Chief Executive Officer) Director
and Director

/s/ Richard R. West
---------------------------------------
/s/ Gerald M. Richard Richard R. West
-------------------------------------- Director
Gerald M. Richard
Treasurer (Principal Financial
and Accounting Officer)
/s/ Marc A. White
---------------------------------------
Marc A. While
/s/ Ronald W. Forbes Director
--------------------------------------
Ronald W. Forbes
Director

/s/ Charles C. Reilly
----------------------------------------
Charles C. Reilly
Director
</TABLE>
<PAGE> 2
POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the person whose name appears
below hereby nominates, constitutes and appoints Arthur Zeikel, Terry K. Glenn,
and Gerald M. Richard (with full power to each of them to act alone) her true
and lawful attorney-in-fact and agent, for her and on her behalf and in her
place and stead in any and all capacities, to make, execute and sign all
amendments and supplements to the Registration Statement on Form N-1A under the
Securities Act of 1933 and the Investment Company Act of 1940 of MERRILL LYNCH
UTILITY INCOME FUND, INC. (the "Fund"), and to file the same with the
Securities and Exchange Commission, and any other regulatory authority having
jurisdiction over the offer and sale of shares of common stock, par value $0.10
per share, of the Fund, and any and all exhibits and other documents requisite
in connection therewith, granting unto said attorneys and each of them, full
power and authority to perform each and every act and thing requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as the undersigned Director herself might or could do.

IN WITNESS WHEREOF, the undersigned Director has hereunto set her hand
this 17th day of February, 1994.

/s/ Cynthia A. Montgomery
-------------------------
Cynthia A. Montgomery
Director