<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 1, 1997
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. 5 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 7 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH UTILITY INCOME FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
PHILIP L. KIRSTEIN, ESQ.
COUNSEL FOR THE FUND: THOMAS D. JONES, III, ESQ.
JOEL H. GOLDBERG, ESQ. MERRILL LYNCH ASSET MANAGEMENT, L.P.
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP P.O. BOX 9011
919 THIRD AVENUE, 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)(i), or
[ ] on (date) pursuant to paragraph (b), or
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph
(a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of
rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
================================================================================
<PAGE> 2
MERRILL LYNCH UTILITY INCOME FUND, INC.
POST-EFFECTIVE AMENDMENT NO. 5 ON FORM N-1A
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(a))
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- ---------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page............................... Cover Page
Item 2. Synopsis................................. Fee Table
Item 3. Condensed Financial Information.......... Financial Highlights
Item 4. General Description of Registrant........ Cover Page; Investment Objective and
Policies; Additional Information
Item 5. Management of the Fund................... Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion of Fund
Performance............................ Not Applicable
Item 6. Capital Stock and Other Securities....... Cover Page; Merrill Lynch Select
Pricing(SM) System; Purchase of Shares;
Additional Information
Item 7. Purchase of Securities Being Offered..... Fee Table; Merrill Lynch Select
Pricing(SM) System; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or Repurchase................. Fee Table; 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
</TABLE>
PART C
Information required to be included is set forth under the appropriate
Item, so numbered, in Part C to this Post-Effective Amendment to the
Registration Statement.
<PAGE> 3
PROSPECTUS
DECEMBER 1, 1997
MERRILL LYNCH UTILITY INCOME FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Utility Income Fund, Inc. (the "Fund") is a diversified
mutual fund seeking high current income through investment of at least 65% of
its total assets in equity and debt securities issued by companies which are, in
the opinion of Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"),
primarily engaged in the ownership or operation of facilities used to generate,
transmit or distribute electricity, telecommunications, gas or water. There can
be no assurance that the Fund's investment objective will be achieved. The Fund
may employ a variety of instruments and techniques to enhance income and hedge
against market and currency risk. For more information on the Fund's investment
objective and policies, please see "Investment Objective and Policies" on page
10.
------------------------
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares, and other relevant circumstances. See
"Merrill Lynch Select Pricing(SM) System" on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081, (609)
282-2800, or from other securities dealers that have entered into dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100 and the minimum subsequent purchase is $1 and for
participants in certain fee-based programs the minimum initial purchase is $500
and the minimum subsequent purchase is $50. Merrill Lynch may charge its
customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and redemptions made directly through Merrill Lynch
Financial Data Services, Inc. (the "Transfer Agent") are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated December 1, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, without charge, by calling or by writing the
Fund at the above telephone number or address. The Commission maintains a Web
site (http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund. 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 shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- -------------------------- ------------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).......... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments................................ None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)................ None(d) 4.0% during the first 1.0% for one None(d)
year, decreasing 1.0% year(f)
annually thereafter to
0.0% after the fourth
year(e)
Exchange Fee................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Investment Advisory Fees(g).................... 0.55% 0.55% 0.55% 0.55%
12b-1 Fees(h)
Account Maintenance Fees..................... None 0.25% 0.25% 0.25%
Distribution Fees............................ None 0.50% 0.55% None
(Class B shares convert to
Class D shares
automatically after
approximately ten years
and cease being subject to
distribution fees)
Other Expenses:
Custodian Fees............................. 0.02% 0.02% 0.02% 0.02%
Shareholder Servicing Fees(i).............. 0.14% 0.16% 0.16% 0.14%
Other...................................... 0.80% 0.80% 0.77% 0.80%
----- ----- ----- -----
Total Other Expenses................... 0.96% 0.98% 0.95% 0.96%
----- ----- ----- -----
1.51% 2.28% 2.30% 1.76%
Total Fund Operating Expenses(j)............... ===== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"-- page 23 and "Shareholder
Services--Fee-Based Programs"--page 35.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares-- Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 25 and "Shareholder
Services--Fee-Based Programs"-- page 35.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A or Class D purchases of $1,000,000 or
more may not be subject to an initial sales charge. See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"--page
23.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 35.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"-- page 35.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"-- page 35.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page 19.
(h) See "Purchase of Shares--Distribution Plans"--page 29.
(i) See "Management of the Fund--Transfer Agency Services"--page 20.
(j) As of August 31, 1997, the Manager was voluntarily waiving all of its
management fees due from the Fund and voluntarily reimbursing the Fund for a
portion of other expenses (excluding Rule 12b-1 Fees). The Fee Table has
been restated to assume the absence of any waiver or reimbursement because
the Manager may discontinue or reduce such waiver of fees and assumption of
expenses at any time without notice. During the fiscal year ended August 31,
1997, the Manager waived management fees and reimbursed expenses totaling
0.92% for Class A shares, 0.92% for Class B shares, 0.88% for Class C shares
and 0.92% for Class D shares after which the Fund's total expense ratio was
0.59% for Class A shares, 1.36% for Class B shares, 1.42% for Class C shares
and 0.84% for Class D shares.
2
<PAGE> 5
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD
OF:
----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $40.00 initial sales
charge (Class A and Class D shares only) and assuming
(1) the Total Fund Operating Expenses for each class
set forth on page 2, (2) a 5% annual return throughout
the periods and (3) redemption at the end of the
period:
Class A............................................ $ 55 $86 $ 119 $213
Class B............................................ $ 63 $91 $ 122 $262
Class C............................................ $ 33 $72 $ 123 $264
Class D............................................ $ 57 $93 $ 132 $239
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A............................................ $ 55 $86 $ 119 $213
Class B............................................ $ 23 $71 $ 122 $262
Class C............................................ $ 23 $72 $ 123 $264
Class D............................................ $ 57 $93 $ 132 $239
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly.
The example set forth above assumes reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by the
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who own their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charge permitted under the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$5.35) for confirming purchases and repurchases. Purchases and redemptions made
directly through the Fund's transfer agent are not subject to the processing
fee. See "Purchase of Shares" and "Redemption of Shares."
3
<PAGE> 6
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 registered investment companies advised by Merrill Lynch Asset Management,
L.P., doing business as Merrill Lynch Asset Management ("MLAM") or an affiliate
of MLAM, Fund Asset Management, L.P. ("FAM"). Funds advised by MLAM or FAM that
utilize The Merrill Lynch Select Pricing(SM) System are referred to herein as
"MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on the
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
4
<PAGE> 7
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is the most beneficial under his particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares."
<TABLE>
<CAPTION>
===============================================================================================
Account
Maintenance Distribution
CLASS SALES CHARGE(1) Fee Fee Conversion Feature
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales
charge(2)(3) No No No
-----------------------------------------------------------------------------------------------
B CDSC for a period of four years,
at a rate of 4.0% during the B shares convert to D shares
first year, decreasing 1.0% automatically after
annually to 0.0%(4) 0.25% 0.50% approximately ten years(5)
-----------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.55% No
-----------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales
charge(3) 0.25% No No
===============================================================================================
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares-- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but, if the
initial sales charge is waived, may be subject to a 1.0% CDSC if redeemed
within one year. Such CDSC may be waived in connection with certain
fee-based programs. A .75% sales charge for 401(k) purchases over
$100,000,000 will apply. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have an eight-year conversion period. If Class B shares of the Fund
are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors who currently own Class A shares of the Fund in a shareholder
account are entitled to purchase additional Class A shares of the Fund
in that account. Other eligible investors include certain retirement
plans and participants in certain fee-based programs. In addition,
Class A shares will be offered at net asset value to Merrill Lynch &
Co., Inc. ("ML & Co.") and its subsidiaries (the term "subsidiaries",
when used herein with respect to ML & Co., includes MLAM, FAM and
certain other entities directly or indirectly wholly owned and
controlled by ML & Co.) and their directors and employees, and to
members of the Boards of MLAM-advised mutual funds. The maximum initial
sales charge of 4.00% is reduced for purchases of $25,000 and over, and
waived for purchases by certain retirement plans and participants in
connection with certain fee-based programs. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is
5
<PAGE> 8
waived such purchases may be subject to a CDSC of 1.0% if the shares
are redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. Sales charges also are
reduced under a right of accumulation that takes into account the
investor's holdings of all classes of all MLAM-advised mutual funds.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25%, an
ongoing distribution fee of 0.50% of the Fund's average net assets
attributable to Class B shares, and a CDSC if they are redeemed within
four years of purchase. Such CDSC may be modified in connection with
certain fee-based programs. Approximately ten years after issuance,
Class B shares will convert automatically to Class D shares of the
Fund, which are subject to an account maintenance fee of 0.25% but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert to Class D shares
automatically after approximately eight years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, as will the Class D account maintenance fee
of the acquired fund upon the conversion, and the holding period for
the shares exchanged will be tacked onto the holding period for the
shares acquired. Automatic conversion of Class B shares to Class D
shares will occur at least once a month on the basis of the relative
net asset values of the shares of the two classes on the conversion
date, without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also will
convert automatically to Class D shares. The conversion period for
dividend reinvestment shares, and the conversion and holding periods
for certain retirement plans, were modified as described under
"Purchase of Shares-- Deferred Sales Charge Alternatives--Class B and
Class C Shares--Conversion of Class B Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.55% of the Fund's average net assets
attributable to the Class C shares. Class C shares are also subject to
a 1.0% CDSC if they are redeemed within one year of purchase. Such CDSC
may be waived in connection with certain fee-based programs. Although
Class C shares are subject to a CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature and,
accordingly, an investor who purchases Class C shares will be subject
to higher distribution fees that will be imposed on Class C shares for
an indefinite period subject to annual approval by the Fund's Board of
Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to the Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 5.25% is reduced
for purchases of $25,000 and over. Purchases of $1,000,000 or more may
not be subject to an initial sales charge but if the initial sales
charge is waived such purchases may be subject to a CDSC of 1.0% if the
shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with certain fee-based programs. The schedule of
initial sales charges and reductions for Class D shares is the same as
the schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D shares
also will be issued upon conversion of Class B shares as described
above under "Class B." See "Purchase of Shares--Initial Sales Charge
Alternatives-- Class A and Class D Shares."
6
<PAGE> 9
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee imposed
on Class D shares. Investors qualifying for significantly reduced initial sales
charges may find the initial sales charge alternative particularly attractive
because similar sales charge reductions are not available with respect to the
deferred sales charges imposed in connection with purchases of Class B or Class
C shares. Investors not qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors who previously purchased Class A shares
may no longer be eligible to purchase Class A shares of other MLAM-advised
mutual funds, those previously purchased Class A shares, together with Class B,
Class C and Class D share holdings, will count toward a right of accumulation
which may qualify the investor for reduced initial sales charges on new initial
sales charge purchases. In addition, the ongoing Class B and Class C account
maintenance and distribution fees will cause Class B and Class C shares to have
higher expense ratios, pay lower dividends and have lower total returns than the
initial sales charge shares. The ongoing Class D account maintenance fees will
cause Class D shares to have a higher expense ratio, pay lower dividends and
have a lower total return than Class A shares.
Deferred Sales Charge Alternatives Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately ten years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forego the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares--Limitations on the Payment of Deferred
Sales Charges."
7
<PAGE> 10
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial statements for the fiscal
year ended August 31, 1997 and the independent auditors' report thereon are
included in the Statement of Additional Information. Further information about
the performance of the Fund is contained in the Fund's most recent annual report
to shareholders which may be obtained, without charge, by calling or by writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------- -------------------------------------------------------
FOR THE FOR THE
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED OCTOBER 29, YEAR ENDED OCTOBER 29,
AUGUST 31, 1993+ TO AUGUST 31, 1993+ TO
-------------------------- AUGUST 31, ----------------------------------------- AUGUST 31,
1997++ 1996 1995 1994 1997++ 1996 1995 1994
------ ------ ------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of
period................... $9.17 $9.15 $8.44 $10.00 $9.17 $9.15 $8.44 $10.00
------ ------ ------ ------- ------- ------- ------- -------
Investment income--net... .55 .60 .60 .40 .47 .46 .49 .35
Realized and unrealized
gain (loss) on
investments and foreign
currency
transactions--net...... .29 .02 .59 (1.57) .28 .09 .63 (1.57)
------ ------ ------ ------- ------- ------- ------- -------
Total from investment
operations............... .84 .62 1.19 (1.17) .75 .55 1.12 (1.22)
------ ------ ------ ------- ------- ------- ------- -------
Less dividends from
investment
income--net.............. (.55) (.60) (.48) (.39) (.47) (.53) (.41) (.34)
------ ------ ------ ------- ------- ------- ------- -------
Net asset value, end of
period................... $9.46 $9.17 $9.15 $8.44 $9.45 $9.17 $9.15 $8.44
====== ====== ====== ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share.............. 9.36% 6.61% 14.68% (11.84)%# 8.39% 5.86% 13.72% (12.34)%#
====== ====== ====== ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement............ .59% .56% .49% .44%* 1.36% 1.34% 1.27% 1.21%*
====== ====== ====== ======= ======= ======= ======= =======
Expenses................... 1.51% 1.52% 1.87% 1.58%* 2.28% 2.29% 2.66% 2.35%*
====== ====== ====== ======= ======= ======= ======= =======
Investment income--net..... 5.79% 5.56% 6.60% 5.92%* 5.00% 4.79% 5.75% 5.22%*
====== ====== ====== ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $1,376 $2,108 $3,253 $4,238 $27,259 $35,702 $37,498 $27,395
====== ====== ====== ======= ======= ======= ======= =======
Portfolio turnover......... 5.50% 25.98% 12.59% 8.50% 5.50% 25.98% 12.59% 8.50%
====== ====== ====== ======= ======= ======= ======= =======
Average Commissions rate
paid##................... $.0595 $.0395 -- -- $.0595 $.0395 -- --
====== ====== ====== ======= ======= ======= ======= =======
</TABLE>
- ---------------
+ Commencement of operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
* Annualized.
** Total investment returns exclude the effects of sales loads.
8
<PAGE> 11
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS C CLASS D
------------------------------ ----------------------------------------
FOR THE FOR THE
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED OCTOBER 21, YEAR ENDED OCTOBER 21,
AUGUST 31, 1994+ TO AUGUST 31, 1994+ TO
---------------- AUGUST 31, -------------------------- AUGUST 31,
1997++ 1996 1995 1997++ 1996 1995
------ ------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $9.15 $9.14 $8.17 $9.18 $9.15 $8.17
------ ------ ------- ------- ------- -------
Investment income--net............................ .47 .43 .42 .52 .47 .51
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net.......... .29 .10 .90 .29 .13 .85
------ ------ ------- ------- ------- -------
Total from investment operations.................... .76 .53 1.32 .81 .60 1.36
------ ------ ------- ------- ------- -------
Less dividends from investment
income--net....................................... (.47) (.52) (.35) (.52) (.57) (.38)
------ ------ ------- ------- ------- -------
Net asset value, end of period...................... $9.44 $9.15 $9.14 $9.47 $9.18 $9.15
====== ====== ======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................ 8.48% 5.65% 16.50%# 9.08% 6.46% 17.03%#
====== ====== ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement...................... 1.42% 1.40% 1.32%* .84% .82% .74%*
====== ====== ======= ======= ======= =======
Expenses............................................ 2.30% 2.34% 2.77%* 1.76% 1.75% 2.10%*
====== ====== ======= ======= ======= =======
Investment income--net.............................. 4.79% 4.75% 5.56%* 5.47% 5.37% 6.14%*
====== ====== ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $4,104 $2,107 $1,377 $1,633 $1,416 $558
====== ====== ======= ======= ======= =======
Portfolio turnover.................................. 5.50% 25.98% 12.59% 5.50% 25.98% 12.59%
====== ====== ======= ======= ======= =======
Average Commissions rate paid##..................... $.0595 $.0395 -- $.0595 $.0395 --
====== ====== ======= ======= ======= =======
</TABLE>
- ---------------
+ Commencement of operations.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
* Annualized.
** Total investment returns exclude the effects of sales loads.
9
<PAGE> 12
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a diversified, open-end management investment company. The
Fund's investment objective is to seek high current income through investment of
at least 65% of its total assets in equity and debt securities issued by
companies which are, in the opinion of the Manager, primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water. This objective is a fundamental
policy which the Fund may not change without a vote of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the "Investment Company Act"). There can be no assurance that the
Fund's investment objective will be achieved. The Fund may employ a variety of
instruments and techniques to enhance income and to hedge against market and
currency risk, as described below under "Other Investment Policies and
Practices-- Portfolio Strategies Involving Options and Futures."
The Fund at all times, except during temporary defensive periods, will
maintain at least 65% of its total assets invested in equity and debt securities
issued by companies in the utilities industries. The Fund is permitted to invest
up to 35% of its assets in the securities of issuers that are outside the
utilities 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 Ratings Group
("S&P") or Moody's Investors Service, Inc. ("Moody's") (i.e., securities rated
at least BBB by S&P or Baa by Moody's), or deemed to be of equivalent quality 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
10
<PAGE> 13
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, 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.
11
<PAGE> 14
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 exceeded those of
industrial companies' common stocks. For certain periods, the total return of
utility companies' securities has underperformed that of industrial companies'
securities. There can be no assurance that positive relative returns on utility
securities will occur in the future.
The utility companies in which the Fund will invest include companies which
are, in the opinion of the Manager, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute electricity,
telecommunications, gas or water.
Risks that are intrinsic to the utility industries include difficulty in
obtaining an adequate return on invested capital, difficulty in financing large
construction programs during an inflationary period, restrictions on operations
and increased cost and delays attributable to environmental considerations and
regulation, difficulty in raising capital in adequate amounts on reasonable
terms in periods of high inflation and unsettled capital markets, technological
innovations which may render existing plants, equipment or products obsolete,
the potential impact of natural or man-made disasters, increased costs and
reduced availability of certain types of fuel, occasionally reduced availability
and high costs of natural gas for resale, the effects of energy conservation,
the effects of a national energy policy and lengthy delays and greatly increased
costs and other problems associated with the design, construction, licensing,
regulation and operation of nuclear facilities for electric generation,
including, among other considerations, the problems associated with the use of
radioactive materials and the disposal of radioactive wastes. There are
substantial differences between the regulatory practices and policies of various
jurisdictions, and any given regulatory agency may make major shifts in policy
from time to time. There is no assurance that regulatory authorities will, in
the future, grant rate increases or that such increases will be adequate to
permit the payment of dividends on common stocks. Additionally, existing and
possible future regulatory legislation may make it even more difficult for these
utilities to obtain adequate relief. Certain of the issuers of securities held
in the Fund's 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
12
<PAGE> 15
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.
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 the past, 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 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 declined, many utilities refinanced
high cost debt and in doing so improved their fixed charges coverage.
Regulators, however, lowered allowed rates of return as interest rates declined
and thereby caused the benefits of the rate declines to be shared wholly or in
part with customers.
The construction and operation of nuclear power facilities is subject to
increased scrutiny by, and evolving regulations of, the Nuclear Regulatory
Commission and state agencies having comparable jurisdiction. Increased scrutiny
might result in higher operating costs and higher capital expenditures, with the
risk that the regulators may disallow inclusion of these costs in rate
authorizations or the risk that a company may not be permitted to operate or
complete construction of a facility. In addition, operators of nuclear power
plants may be subject to significant costs for disposal of nuclear fuel and for
decommissioning 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. Subsequent to that time, these rating agencies have noted
that, as a whole, electric utility companies have been taking positive steps to
reduce costs through operational efficiencies, limits on capital expenditures
and the use of excess cash flow to reduce debt. Nevertheless, both agencies
indicate that the changes occurring in the industry present pressures on credit
quality from the uncertainties that exist or are increasing.
Currently, several states are considering deregulation proposals. The
introduction of competition into the industry as a result of deregulation may
result in lower revenue, lower credit ratings, increased default risk, and lower
electric utility security prices. Such increased competition may also cause
long-term contracts, which
13
<PAGE> 16
electric utilities previously entered into to buy power, to become "stranded
assets" which have no economic value. Any loss associated with such contracts
must be absorbed by ratepayers and investors. In addition, in anticipation of
increasing competition, some electric utilities have acquired electric utilities
overseas to diversify, enhance earnings and gain experience in operating in a
deregulated environment. In some instances, such acquisitions have involved
significant borrowings which have burdened the acquirer's balance sheet. There
is no assurance that current deregulation proposals will be adopted. However,
deregulation in any form could significantly impact the electric utilities
industry.
Telecommunications. The telecommunications industry today includes both
traditional telephone companies, with a history of broad market coverage and
highly regulated businesses, and cable companies, which began as small, lightly
regulated businesses focused on limited markets. Today these two historically
different businesses are converging in an industry which is trending toward
larger, competitive, national and international markets with an emphasis on
deregulation. Companies that distribute telephone services and provide access to
the telephone networks still comprise the greatest portion of this segment, but
non-regulated activities such as cellular telephone services, paging, data
processing, equipment retailing, computer software and hardware services are
becoming increasingly significant components as well. The presence of
unregulated companies in this industry and the entry of traditional telephone
companies into unregulated or less regulated businesses provide significant
investment opportunities with companies which may increase their earnings at
faster rates than had been allowed in traditional regulated businesses. Still,
increasing competition, technological innovations and other structural changes
could adversely affect the profitability of such utilities and the growth rate
of their dividends. Given mergers, certain marketing tests currently underway
and proposed legislation and enforcement changes, 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 to both residential, corporate and governmental customers.
In February 1996, the Telecommunications Act of 1996 became law. The Act
will eventually remove regulatory restrictions on entry that have prevented
local and long-distance telephone companies and cable television companies from
competing against one another. The Act will also remove most cable rate controls
and allow broadcasters to own more radio and television stations.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. Interstate transmission companies are regulated
by the Federal Energy Regulatory Commission, which is reducing its regulation of
the industry. Many companies have diversified into oil and gas exploration and
development, making returns more sensitive to energy prices. In the recent
decade, gas utility companies have been adversely affected by disruptions in the
oil industry and have also been affected by increased concentration and
competition. In the opinion of the Manager, however, environmental
considerations could improve the gas industry outlook in the future. For
example, natural gas is the cleanest of the hydrocarbon fuels, and this may
result in incremental shifts in fuel consumption toward natural gas and away
from oil and coal, even for electricity generation.
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.
14
<PAGE> 17
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, Futures and Foreign Exchange
Transactions. The Fund may use certain derivative instruments, including options
and futures and may purchase and sell foreign exchange. Transactions involving
such instruments expose the Fund to certain risks. The Fund's use of these
instruments and the associated risks are described in detail in the Appendix
attached to this Prospectus.
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 Conduct Rules of the
NASD, the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
It is expected that the majority of the shares of the Fund will be sold by
Merrill Lynch.
15
<PAGE> 18
Portfolio Turnover. While the Fund generally does not expect to engage in
trading for short-term gains, the Manager will effect portfolio transactions
without regard to a holding period, if, in its judgment, such transactions are
advisable in light of a change in circumstance in general market, economic or
financial conditions. As a result of its investment policies, the Fund may
engage in a substantial number of portfolio transactions. Accordingly, while the
Fund anticipates that its annual turnover rate should not exceed 100% under
normal conditions, it is impossible to predict portfolio turnover rates. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year or
less) by the monthly average value of the securities in the portfolio during the
year. High portfolio turnover involves correspondingly greater transaction costs
in the form of dealer spreads and brokerage commissions, which are borne
directly by the Fund. For the fiscal years ended August 31, 1996 and 1997, the
portfolio turnover rates of the Fund were 25.98% and 5.50%, respectively.
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 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 total assets in
illiquid securities. Pursuant to this 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 total 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 "Additional Risk Factors
of OTC Transactions; Limitations on the Use of OTC Strategic Instruments" in the
Appendix herein) in calculating the amount of its total assets subject to the
limitation on illiquid securities. The Fund will not change or modify this
policy prior to the change or modification by the Commission staff of its
position regarding OTC options.
The Fund may purchase, without regard to the above limitation, securities
that are not registered under the Securities Act of 1933, as amended (the
"Securities Act"), but that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the Securities Act, provided that the Fund's Board
of Directors, 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 retains oversight and is
ultimately responsible for the determinations. The Board of Directors carefully
monitors 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.
16
<PAGE> 19
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
total assets taken at the time of acquisition of such commitment or security.
The Fund will at all times maintain a segregated account with its custodian of
cash, cash equivalents, U.S. Government Securities or other high grade liquid
debt or equity securities denominated in U.S. dollars or non-U.S. currencies in
an aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer in U.S. Government
Securities or an affiliate thereof. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price in a specified
currency, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during such
period although it may be affected by currency fluctuations. In the case of
repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligation. Such agreements usually
cover short periods, such as under one week. Repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with disposition of the collateral. In the event of a
default under such a repurchase agreement, instead of the contractual fixed
rate, the rate of return to the Fund shall be dependent upon intervening
fluctuations of the market value of such security and the accrued interest on
the security. In such
17
<PAGE> 20
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 total assets
in repurchase agreements maturing in more than seven days.
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. During the period of 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 securities, because of
insolvency or otherwise, the Fund could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent that the value of
the collateral falls below the market value of the borrowed securities.
Presently, the Fund does not intend to lend portfolio securities representing in
excess of 33 1/3% of its total assets.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (a) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among the Fund's more significant investment policies, the
Fund may not make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
Non-fundamental policies of the Fund (which may be changed by vote of the
Board of Directors) include policies which (i) notwithstanding a more lenient
fundamental investment restriction concerning borrowing, prohibit the Fund from
borrowing amounts in excess of 10% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary measure
for extraordinary or emergency purposes, such as redemption of Fund shares, and
further prohibit purchases of securities while borrowings exceed 5% of its total
assets; and (ii) limit investment in securities which cannot be readily resold
because of legal or contractual restrictions, or which cannot otherwise be
marketed, redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. Securities purchased in accordance with Rule 144A under the
Securities Act and determined to be liquid by the Board of Directors are not
subject to the 15% limitation set forth in clause (ii).
In addition, although not a fundamental policy, the Fund will include OTC
options and the securities underlying such options (to the extent provided under
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Strategic Instruments" in the Appendix to this Prospectus) in calculating the
amount of its assets subject to the limitation set forth in clause (ii) above.
However, as discussed in the Appendix, 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 limitation, provided the Fund follows a specified
procedure. The Fund will not change or modify this policy prior to the change or
modification by the Commission staff of its position regarding OTC options, as
discussed above.
18
<PAGE> 21
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL*--President of the Manager and its affiliate FAM; President
and Director of Princeton Services, Inc.("Princeton Services"); Executive Vice
President of ML & Co.
RONALD W. FORBES--Professor of Finance, School of Business, State
University of New York at Albany.
CYNTHIA A. MONTGOMERY--Professor of Competition and Strategy, Harvard
Business School.
CHARLES C. REILLY--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President of
Arnhold and S. Bleichroeder, Inc.
KEVIN A. RYAN--Professor of Education, Boston University; Founder and
current Director of the Boston University Center for the Advancement of Ethics
and Character.
RICHARD R. WEST--Dean Emeritus, New York University Leonard N. Stern School
of Business Administration.
- ---------------
* Interested person, as defined by the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey
(mailing address: P.O. Box 9011, Princeton, New Jersey 08543-9011) acts as the
manager for the Fund and provides the Fund with management and investment
advisory services. The Manager is owned and controlled by ML & Co., a financial
services holding company and the parent of Merrill Lynch. The Manager or an
affiliate of the Manager, FAM, acts as the investment adviser for more than 140
other registered investment companies. The Manager also offers portfolio
management and portfolio analysis services to individuals and institutional
accounts. As of October 31, 1997, the Manager and FAM had a total of
approximately $271.9 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager.
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 is
currently a First Vice President of the Manager and has been employed by the
Manager as a Vice President since 1987. For the past five years,
19
<PAGE> 22
Mr. Rogers has acted as portfolio manager of one or more other registered
investment companies sponsored by the Manager, including Merrill Lynch Global
Utility Fund, Inc., and continues to act in such capacity with respect to
certain of these companies.
The Manager is also obligated to perform certain administrative and
management services for the Fund and is obligated to provide all of the office
space, facilities, equipment and personnel necessary to perform its duties under
the Management Agreement.
The Fund pays the Manager a monthly fee at the annual rate of 0.55% of the
average daily net assets of the Fund. In addition, the Management Agreement
obligates the Fund to pay certain expenses incurred in its operations including,
among other things, the investment advisory fee, legal and audit fees,
registration fees, unaffiliated Directors' fees and expenses, custodian and
transfer agency fees, accounting costs, the costs of issuing and redeeming
shares and certain of the costs of printing proxies, shareholder reports,
prospectuses and statements of additional information. For the fiscal year ended
August 31, 1997, the Manager earned fees of $207,552 (based upon average net
assets of approximately $37.8 million). For the fiscal year ended August 31,
1997, the ratio of total expenses to average net assets was 1.51%, 2.28%, 2.30%
and 1.76% for Class A, Class B, Class C and Class D shares, respectively.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML & Co. and
an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a fee
for providing investment advisory services to the Manager with respect to the
Fund in an amount to be determined from time to time by the Manager and MLAM
U.K., but in no event in excess of the amount that the Manager actually receives
for providing services to the Fund pursuant to the Management Agreement.
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of up to $11.00 per Class A and Class D account and
up to $14.00 per Class B and Class C account and is entitled to reimbursement
for certain transaction charges and out-of-pocket expenses incurred by the
Transfer Agent under the Transfer Agency Agreement. Additionally, a $.20 monthly
closed account charge will be assessed on all accounts which close during the
calendar year. Application of this fee will commence the month following the
month the account is closed. At the end of the calendar year, no further fees
will be due. For purposes of the Transfer Agency Agreement, the term "account"
includes a shareholder account maintained directly by the Transfer Agent and any
other account representing the beneficial interest of a person in the relevant
share class on a recordkeeping system, provided the recordkeeping system is
maintained by a subsidiary of ML & Co. For the fiscal year ended August 31,
1997, the total fee paid by the Fund to the Transfer Agent was $60,245 pursuant
to the Transfer Agency Agreement.
20
<PAGE> 23
REIMBURSEMENT FOR PORTFOLIO ACCOUNTING SERVICES
Accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services on a
semi-annual basis. For the fiscal year ended August 31, 1997, the amount of such
reimbursement was $52,946.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Act which incorporates the Code of Ethics of the Manager (together,
the "Codes"). The Codes significantly restrict the personal investing activities
of all employees of the Manager and, as described below, impose additional, more
onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibitions or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
PURCHASE OF SHARES
The Distributor, an affiliate of both the Manager and Merrill Lynch, acts
as the distributor of the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000, and the minimum subsequent purchase is $50,
except that for retirement plans, the minimum initial purchase is $100 and the
minimum subsequent purchase is $1 and except for participants in certain
fee-based programs, the minimum initial purchase is $500 and the minimum
subsequent purchase is $50.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
Pricing(SM) System as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange ("NYSE") (generally 4:00 p.m., New York time), which includes
orders received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the NYSE on that day, provided the Distributor in
turn receives orders from the securities dealer prior to 30 minutes after the
close of business on the NYSE on that day. If the purchase orders are not
received prior to 30 minutes after the close of business on the NYSE on that
day, such orders shall be deemed received on the next business day. The Fund or
the Distributor may suspend the continuous offering of the
21
<PAGE> 24
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Distributor or the Fund. Neither
the Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $5.35) to confirm a sale of shares to such customers.
Purchases made directly through the Fund's transfer agent are not subject to the
processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees. A discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(SM) System is set forth
under "Merrill Lynch Select Pricing(SM) System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, will be imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund for
each class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted
with respect to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan). See
"Distribution Plans" below. Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs and distribution fees with respect to Class B and Class C shares in
that the sales charges and distribution fees applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are eligible
to sell shares.
22
<PAGE> 25
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<CAPTION>
=======================================================================================================
Account
Maintenance Distribution
CLASS SALES CHARGE(1) Fee Fee Conversion Feature
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(2)(3)
-------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at a 0.25% 0.50%
rate of 4.0% during the first year, B shares convert to D shares
decreasing 1.0% annually to 0.0%(4) automatically after
approximately ten years(5)
-------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.55% No
-------------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales charge(3) 0.25% No No
=======================================================================================================
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternative--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A .75% sales charge
for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have an eight-year conversion period. If Class B shares of the Fund
are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
DISCOUNT TO
SALES LOAD SALES LOAD AS SELECTED DEALERS
AS PERCENTAGE* OF PERCENTAGE* OF THE AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE NET AMOUNT INVESTED THE OFFERING PRICE
- ------------------------------------------------ ----------------- ------------------- ------------------
<S> <C> <C> <C>
Less than $25,000............................... 4.00% 4.17% 3.75%
$25,000 but less than $50,000................... 3.75 3.90 3.50
$50,000 but less than $100,000.................. 3.25 3.36 3.00
$100,000 but less than $250,000................. 2.50 2.56 2.25
$250,000 but less than $1,000,000............... 1.50 1.52 1.25
$1,000,000 and over**........................... 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases by certain retirement plan
investors and participants in certain fee-based programs. If the sales charge
is waived in connection with a purchase of $1,000,000 or more, such purchases
may be subject to a 1.0% CDSC if the shares are redeemed within one year
after purchase. Such CDSC may be waived in connection with certain fee-based
programs. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. A sales
charge of 0.75% will be charged on purchases of $1,000,000 or more of Class A
or Class D shares by certain Employer Sponsored Retirement or Savings Plans.
23
<PAGE> 26
The Distributor may reallow discounts to such dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. The
proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities. During the fiscal year ended August
31, 1997, the Fund sold 20,399 Class A shares for aggregate net proceeds of
$187,890. The gross sales charges for the sale of Class A shares of the Fund for
that year were $1,730, of which $119 and $1,611 were received by the Distributor
and Merrill Lynch, respectively. During such year, no CDSCs were received with
respect to Class A shares for which the initial sales charge was waived.
During the fiscal year ended August 31, 1997, the Fund sold 124,751 Class D
shares for aggregate net proceeds of $1,173,521. The gross sales charges for the
sale of Class D shares of the Fund for that year were $6,613, of which $446 and
$6,167 were received by the Distributor and Merrill Lynch, respectively. For the
same year, no CDSCs were received with respect to Class D shares for which the
initial sales charge was waived.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account, including participants in the Merrill Lynch
Blueprint(SM) Program, are entitled to purchase additional Class A shares of the
Fund in that account. Certain Employer Sponsored Retirement or Savings Plans,
including eligible 401(k) plans, may purchase Class A shares at net asset value
provided such plans meet the required minimum number of eligible employees or
required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment programs including
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and certain purchases made in connection
with certain fee-based programs. In addition, Class A shares are offered at net
asset value to ML & Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM-advised investment companies, including the
Fund. Certain persons who acquired shares of certain MLAM-advised closed-end
funds in their initial offerings who wish to reinvest the net proceeds from a
sale of their closed-end fund shares of common stock in shares of the Fund also
may purchase Class A shares of the Fund if certain conditions set forth in the
Statement of Additional Information are met (for closed-end funds that commenced
operations prior to October 21, 1994). In addition, Class A shares of the Fund
and certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior Floating
Rate Fund") and, if certain conditions set forth in the Statement of Additional
Information are met, to shareholders of Merrill Lynch Municipal Strategy Fund,
Inc. ("Municipal Strategy Fund") and Merrill Lynch High Income Municipal Bond
Fund, Inc. ("High Income Fund") who wish to reinvest the net proceeds from a
sale of certain of their shares of common stock pursuant to a tender offer
conducted by such fund in shares of the Fund and certain other MLAM-advised
mutual funds.
Shareholders already owning Class A shares who wish to reinvest the net
proceeds from a tender of the High Income Fund or Municipal Strategy Fund may
purchase Class A shares at net asset value rather than
24
<PAGE> 27
Class D shares provided that (i) the shares to be purchased are held in the same
account as the Class A shares that the shareholder already owns, and (ii) all
other requirements pertaining to the reinvestment privilege are met.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges may
also be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are also offered at net asset value to certain eligible Class A investors
as set forth above under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Subject to certain conditions, Class A
and Class D shares are offered at net asset value to shareholders of Municipal
Strategy Fund and High Income Fund, and Class A shares are offered at net asset
value to shareholders of Senior Floating Rate Fund who wish to reinvest in
shares of the Fund the net proceeds from a sale of certain of their shares of
common stock, pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC
which declines each year, while Class C shares are subject only to a one year
1.0% CDSC. On the other hand, approximately ten years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted to Class
D shares of the Fund and thereafter will be subject to lower continuing fees.
See "Conversion of Class B Shares to Class D Shares" below. Both Class B and
Class C shares are subject to an account maintenance fee of 0.25% of net assets
as discussed below under "Distribution Plans." The proceeds from the account
maintenance fees are used to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing continuing account maintenance
activities. In addition, Class B and Class C shares are subject to distribution
fees of 0.50% and 0.55%, respectively.
25
<PAGE> 28
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the ongoing distribution fees are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of the
Class B and Class C shares, such as the payment of compensation to financial
consultants for selling Class B and Class C shares, from its own funds. The
combination of the CDSC and the ongoing distribution fee facilitates the ability
of the Fund to sell the Class B and Class C shares without a sales charge being
deducted at the time of purchase. Approximately ten years after issuance, Class
B shares will convert automatically to Class D shares of the Fund, which are
subject to an account maintenance fee but no distribution fee; Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made convert
to Class D shares automatically after approximately eight years. If Class B
shares of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares acquired in
the exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment Deferred Sales Charges" below. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities.
Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services--Exchange Privilege" will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares that are
redeemed within four years of purchase may be subject to a CDSC at the rates set
forth below charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------------------------------------------- -------------------------
<S> <C>
0-1............................................. 4.00%
1-2............................................. 3.00%
2-3............................................. 2.00%
3-4............................................. 1.00%
4 and thereafter................................ 0.00%
</TABLE>
For the fiscal year ended August 31, 1997, the Distributor received CDSCs
of $109,154 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. Additional CDSCs payable to the
26
<PAGE> 29
Distributor may have been waived or converted to a contingent obligation in
connection with a shareholder's participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from the shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
shareholder. The Class B CDSC also is waived on redemptions of shares by certain
eligible 401(a) and eligible 401(k) plans and in connection with certain group
plans placing orders through the Merrill Lynch Blueprint(SM) Program. The CDSC
also is waived for any Class B shares that are purchased by eligible 401(k) or
eligible 401(a) plans that are rolled over into a Merrill Lynch or Merrill Lynch
Trust Company custodied IRA and held in such account at the time of redemption
and for any Class B shares that were acquired and held at the time of the
redemption in an Employee Access Account(SM) available through employers
providing eligible 401(k) plans. The Class B CDSC also is waived for any Class B
shares that are purchased by a Merrill Lynch rollover IRA that was funded by a
rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
Group and held in such account at the time of redemption. The Class B CDSC also
is waived for any Class B shares that are purchased within qualifying Employee
Access(SM) Accounts. Additional information concerning the waiver of the Class B
CDSC is set forth in the Statement of Additional Information. The terms of the
CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs."
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a
percentage of the dollar amount subject thereto. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases
in net asset value above the initial purchase price. In addition, no Class C
CDSC will be assessed on shares derived from reinvestment of dividends or
capital gains distributions. The Class C CDSC may be waived in connection with
certain fee-based programs. See "Shareholder Services -- Fee-Based Programs."
For the fiscal year ended August 31, 1997, the Distributor received CDSCs of
$669 with respect to the redemption of Class C shares, all of which were paid to
Merrill Lynch.
27
<PAGE> 30
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
to Class D shares of the Fund. Class D shares are subject to an ongoing account
maintenance fee of 0.25% of net assets but are not subject to the distribution
fee that is borne by Class B shares. Automatic conversion of Class B shares to
Class D shares will occur at least once each month (on the "Conversion Date") on
the basis of the relative net asset values of the shares of the two classes on
the Conversion Date, without the imposition of any sales load, fee or other
charge. Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be "tacked" onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value per
share.
28
<PAGE> 31
The Conversion Period also may be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholders
Services--Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.50% and
0.55%, respectively, of the average daily net assets of the Fund attributable to
the shares of the relevant class in order to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) for providing shareholder and
distribution services, and bearing certain distribution-related expenses of the
Fund, including payments to financial consultants for selling Class B and Class
C shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended August 31, 1997, the Fund paid the Distributor
$239,434 pursuant to the Class B Distribution Plan (based on average net assets
subject to such Class B Distribution Plan of approximately $32.0 million), all
of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended August 31, 1997, the Fund paid the Distributor $18,216
pursuant to the Class C Distribution Plan (based on average net assets subject
to such Class C Distribution Plan of approximately $2.3 million), all of which
was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended August 31, 1997, the Fund paid the Distributor $4,108
pursuant to the Class D Distribution Plan (based on average net assets subject
to such Class D Distribution Plan of approximately $1.6 million), all of which
was paid to Merrill Lynch for providing account maintenance activities in
connection with Class D shares.
29
<PAGE> 32
The payments under the Distribution Plans are based upon a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, the distribution fees, CDSC and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, the distribution fees and
CDSCs and the expenses consist of financial consultant compensation. With
respect to Class B shares, as of December 31, 1996, the last date at which fully
allocated accrual data is available, the fully allocated accrual expenses
received by the Distributor and Merrill Lynch exceeded fully allocated accrual
revenues for the period since the Fund commenced operations on October 29, 1993
by approximately $701,000 (2.02% of Class B net assets at that date). For the
Class C shares, as of December 31, 1996, the fully allocated accrual expenses
incurred by the Distributor and Merrill Lynch since the Class C shares commenced
operations on October 21, 1994 exceeded fully allocated accrual revenues for
such period by $11,000 (.56% of Class C assets at that date). With respect to
Class B shares, as of August 31, 1997, direct cash revenues for the period since
October 29, 1993 (commencement of operations) exceeded direct cash expenses by
$584,170 (2.14% of Class B net assets at that date). With respect to Class C
shares, as of August 31, 1997, direct cash revenues for the period since October
21, 1994 (commencement of operations) exceeded direct cash expenses by $16,919
(0.41% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Board of Directors of the Fund will approve the continuance of the
Distribution Plans from year to year. However, the Distributor intends to seek
annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each class of shares separately. The initial sales charges, the account
maintenance fee, the distribution fee and/or the CDSCs received with respect to
one class will not be used to subsidize the sale of shares of another class.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares to Class D shares as set forth under
"Deferred Sales Charge Alternatives--Class B and Class C Shares--Conversion of
Class B Shares to Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the NASD Conduct Rules imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC, borne by the Class B and Class C shares but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and contingent deferred sales charges
payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares and
Class C shares computed separately (defined to exclude shares issued pursuant to
dividend reinvestments and exchanges), plus (2) interest on the unpaid balance
for the respective class, computed separately, at the prime
30
<PAGE> 33
rate plus 1% (the unpaid balance being the maximum amount payable minus amounts
received from the payment of the distribution fee and the contingent deferred
sales charge). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in excess of
0.50% of eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in connection with the
Class B shares is 6.75% of eligible gross sales. The Distributor retains the
right to stop waiving the interest charges at any time. To the extent payments
would exceed the voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares, and any contingent deferred
sales charges will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
REPURCHASE AND REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable to Class B shares, there
will be no charge for redemption if the redemption request is sent directly to
the Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value of
shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the NYSE
(generally 4:00 p.m., New York time) on the day received, and such request is
received by the Fund from such dealer not later than 30 minutes after the close
of business on the NYSE on the same day.
Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 4:30 p.m., New York time, in order to obtain that day's
closing price. The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares
to such customers. Repurchases made 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.
31
<PAGE> 34
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to Merrill
Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Redemption requests should not be sent to the Fund. Proper
notice of redemption in the case of shares deposited with the Transfer Agent may
be accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. The notice in either event requires the signatures of
all persons in whose names the shares are registered, signed exactly as their
names appear on the Transfer Agent's register or on the certificate, as the case
may be. The signature(s) on the notice must be guaranteed by an "eligible
guarantor institution" as such term is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
"Eligible guarantor institution(s)" include Merrill Lynch branches and certain
banks, brokers, dealers, credit unions, securities exchanges and associations,
clearing agencies and savings associations. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents, such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent, payment
will be mailed within seven days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that good
payment (e.g., cash or certified check drawn on a United States bank) has been
collected for the purchase of such shares. Normally, this delay will not exceed
10 days.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares of
the Fund, as the case may be, at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
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
32
<PAGE> 35
options with respect thereto, can be obtained from the Fund by calling the
telephone number on the cover page hereof or from the Distributor or Merrill
Lynch. Included in such services are the following:
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive, at least quarterly, statements from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gains distributions. Shareholders may
make additions to their Investment Account at any time by mailing a check
directly to the Transfer Agent. Shareholders also may maintain their accounts
through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch
brokerage account, an Investment Account in the transferring shareholder's name
will be opened automatically, without charge, at the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent.
Shareholders considering transferring a tax-deferred retirement account such as
an individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated at any time in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his or her account in which the exchange is made at the time of the exchange or
is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A
33
<PAGE> 36
shares of the second fund in his or her account at the time of the exchange and
is not otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of the
second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable for shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is "tacked" to the holding period for the newly acquired shares of the other
fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a purchase of the acquired
shares and a sale of the exchanged shares for Federal income tax purposes. For
further information, see "Shareholder Services-- Exchange Privilege" in the
Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are 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 may at any time, by written notification to Merrill Lynch if the
shareholder's account is maintained by Merrill Lynch or by written notification
or telephone call (1-800-MER-FUND) to the Transfer Agent if the shareholder's
account is maintained with the Transfer Agent, elect to have subsequent
dividends or capital gains distributions paid in cash, rather than reinvested,
in which event payment will be mailed on or about the payment date. The Fund is
not responsible for any failure of delivery to
34
<PAGE> 37
the shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks. Cash payments can
also be directly deposited to the shareholder's bank account. No CDSC will be
imposed upon redemption of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawal payments from his
or her Investment Account in the form of payments by check or through automatic
payment by direct deposit to his or her bank account on either a monthly or
quarterly basis. A 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 CMA(R) or CBA(R) Systematic
Redemption Program, subject to certain conditions. With respect to redemptions
of Class B and Class C shares pursuant to a systematic withdrawal plan, the
maximum number of Class B or Class C shares that can be redeemed from an account
annually shall not exceed 10% of the value of shares of such class in that
account at the time the election to join the systematic withdrawal plan was
made. Any CDSC that otherwise might be due on such redemption of Class B or
Class C shares will be waived. Shares redeemed pursuant to a systematic
withdrawal plan will be redeemed in the same order as Class B or Class C shares
are otherwise redeemed. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Contingent Deferred Sales
Charges--Class B Shares" and "--Contingent Deferred Sales Charges--Class C
Shares." Where the systematic withdrawal plan is applied to Class B Shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will automatically be applied thereafter to Class D
shares. See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and
Class C Shares--Conversion of Class B Shares to Class D Shares."
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be
made to an investor's Investment Account by prearranged charges of $50 or more
to such investor's regular bank account. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA(R) accounts, or in certain related accounts in amounts of $100 or
more through the CMA(R) or CBA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These
35
<PAGE> 38
Programs also generally prohibit such shares from being transferred to another
account at Merrill Lynch, to another broker-dealer or to the Transfer Agent.
Except in limited circumstances (which may also involve an exchange as described
above), such shares must be redeemed and another class of shares purchased
(which may involve the imposition of initial or deferred sales charges and
distribution and account maintenance fees) in order for the investment not to be
subject to Program fees. Additional information regarding a specific Program
(including charges and limitations on transferability applicable to shares that
may be held in such Program) is available in such Program's client agreement and
from the Transfer Agent at (800) MER-FUND or (800) 637-3863.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and in certain of the other mutual funds sponsored by Merrill Lynch as well
as in other securities. Merrill Lynch charges an initial establishment fee and
an annual custodial fee for each account. In addition, eligible shareholders of
the Fund may participate in a variety of qualified employee benefit plans which
are available from the Distributor. The minimum initial purchase to establish
any such plan is $100 and the minimum subsequent purchase is $1.
Shareholders considering transferring a tax-deferred retirement account
such as an individual retirement account from Merrill Lynch to another brokerage
firm or financial institution should be aware that if the firm to which the
retirement account is being transferred will not take delivery of shares of the
Fund, the shareholder must either redeem the shares (paying any applicable CDSC)
so that the cash proceeds can be transferred to the account at the new firm, or
continue to maintain a retirement account at Merrill Lynch for those shares.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed separately for Class A, Class B, Class C and Class D
shares in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B and
Class C shares and the maximum sales charge in the case of Class A and Class D
shares. Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
fees and distribution charges and any incremental transfer agency costs relating
to each class of shares will be borne exclusively by that class. The Fund will
include performance data for all classes of shares of the Fund in any
advertisement or information including performance data of the Fund.
36
<PAGE> 39
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return generally will be lower than average annual total return data since
the average annual rates of return reflect compounding; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time. In
advertisements directed to investors whose purchases are subject to waiver of
the CDSC in the case of Class B and Class C shares (such as investors in certain
retirement plans) or to reduced sales charges in the case of Class A and Class D
shares, performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
CDSC, a lower amount of expenses may be deducted. See "Purchase of Shares." The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate the effect of such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The value
of an investment in the Fund will fluctuate and an investor's shares, when
redeemed, may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to the Financial
Times--Actuaries Utility Index, 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 indicative of the Fund's relative
performance for any future period.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the 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.
37
<PAGE> 40
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 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. Recent legislation creates additional
categories of capital gains taxable at different rates. Any loss upon the sale
or exchange of Fund shares held for six months or less, however, will be treated
as long-term capital loss to the extent of any capital gain dividends received
by the shareholder.
In the event that the amount of distributions paid or deemed paid for the
Fund's fiscal year exceeds its investment company taxable income plus realized
net capital gains for such year, the amount of such excess may be treated as a
return of capital to all those shareholders who held shares of the Fund during
the year, thereby decreasing a shareholder's capital investment in the Fund. In
such case, each distribution paid or deemed paid for that year would be treated
as a return of capital to all those shareholders who held shares of the Fund
during the year. In such case, each distribution paid or deemed paid for that
year would be treated, in the same proportion, in part as a distribution of
taxable income and in part as a return of capital. Shareholders would incur no
current Federal income tax on the portion of such distributions that are treated
as a return of capital, but each shareholder's basis in its Fund shares would be
reduced by that amount. This reduction of basis would operate to increase the
shareholder's capital gain (or decrease its capital loss) upon redemption of its
shares. Moreover, to the extent that a distribution exceeds both his
proportionate share of earnings and profits of the Fund plus his tax basis in
the shares, the shareholder would recognize capital gain equal to such excess.
If a shareholder buys shares near or on the record date for any upcoming
distribution, the shareholder will receive, in the form of a taxable
distribution, a portion of the money the shareholder just invested.
Dividends and distributions are taxable to shareholders even though they
are reinvested in additional shares of the Fund. Not later than 60 days after
the close of its taxable year, the Fund will provide its shareholders with a
written notice designating the amount of any dividends or capital gains
distributions, and designating the various categories of capital gain income in
such capital gain dividends. 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. If the Fund pays a dividend in
January which was declared in the previous October, November or December to
shareholders of record on a date in such month, then such dividend or
distribution will be treated for tax purposes as being paid by the RIC and
received by its shareholders on December 31 of the year in which the dividend
was declared.
Redemptions and exchanges of Fund shares are taxable events, and,
accordingly, shareholders may realize gains or losses on such transactions.
Under the Code, if a shareholder exercises his exchange privilege within 90 days
of acquiring Class A shares of the Fund to acquire shares in a second fund ("New
Fund"), then the loss he can recognize on the exchange will be reduced (or the
gain increased) to the extent the charge paid to the Fund reduces any charge he
would have owed upon purchase of the New Fund shares in the absence of the
exchange privilege. Instead, such charges will be treated as an amount paid for
the New Fund shares and will be included in the basis of such shares. See
"Shareholder Services--Exchange Privilege."
38
<PAGE> 41
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States withholding tax under existing provisions of the Code applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
Pursuant to the investment objectives of the Fund, the Fund may invest in
foreign securities. Foreign taxes may be paid by the Fund as a result of tax
laws of countries in which the Fund may invest. Because the Fund limits its
investments in foreign securities, shareholders will not be entitled to claim
foreign tax credits with respect to their share of foreign taxes paid by the
Fund on income from investments in foreign securities held by the Fund.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains distributions
and redemption payments ("backup withholding"). Generally, shareholders subject
to backup withholding will be those for whom no certified taxpayer
identification number is on file with the Fund or who, to the Fund's knowledge,
have furnished an incorrect number. When establishing an account, an investor
must certify under penalty of perjury that such number is correct and that he is
not otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
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, as well as gain on the sale of
shares of the Fund, may also be subject to state and local taxes.
Shareholders are urged to consult their advisors as to specific questions
concerning Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
All or a portion of the Fund's net investment income will be declared and
paid as dividends monthly. The Fund may at times pay out less than the entire
amount of net investment income earned in any particular
39
<PAGE> 42
period and may at times pay out such accumulated undistributed income in
addition to net investment income earned in any particular period in order to
permit the Fund to maintain a more stable level of distributions. As a result,
the distribution paid by the Fund for any particular period may be more or less
than the amount of net investment income earned by the Fund during such period.
However, it is the Fund's intention to distribute during any fiscal year all its
net investment income. Shares will accrue dividends as long as they are issued
and outstanding. Shares are issued and outstanding as of the settlement date of
a purchase order to the settlement date of a redemption order. All net realized
long-term or short-term capital gains, if any, will be distributed to the Fund's
shareholders at least annually. The per share dividends and distributions on
each class of shares will be reduced as a result of any account maintenance,
distribution and transfer agency fees applicable to that class. See "Additional
Information--Determination of Net Asset Value." Dividends and distributions may
be reinvested automatically in shares of the Fund, at net asset value without
sales charge. Shareholders may elect in writing to receive any such dividends or
distributions or both, in cash. Dividends and distributions are taxable to
shareholders as described above whether they are reinvested in shares of the
Fund or received in cash. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with a
Federal income tax requirement that certain percentages of its ordinary income
and capital gains be distributed during the calendar year.
Certain gains or losses attributable to foreign currency related gains or
losses from certain of the Fund's investments may increase or decrease the
amount of the Fund's income available for distribution to shareholders. If such
losses exceed other income during a taxable year, (a) the Fund would not be able
to make any ordinary dividend distributions, and (b) distributions made before
the losses were realized would be recharacterized as a return of capital to
shareholders, rather than as an ordinary dividend, reducing each shareholder's
tax basis in his Fund shares for Federal income tax purposes. For a detailed
discussion of the Federal tax considerations relevant to foreign currency
transactions, see "Dividends, Distributions and Taxes" in the Statement of
Additional Information. If in any fiscal year the Fund has net income from
certain foreign currency transactions, such income will be distributed at least
annually.
All net realized long- or short-term capital gains, if any, are declared
and distributed to the Fund's shareholders annually after the close of the
Fund's fiscal year. Capital gains distributions will be automatically reinvested
in shares unless the shareholder elects to receive such distributions in cash.
See "Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information as to how to elect either dividend
reinvestment or cash payments. Dividends and distributions are taxable to
shareholders as described below whether they are reinvested in shares of any
portfolio or received in cash.
DETERMINATION OF NET ASSET VALUE
Net asset value per share of all classes of shares of the Fund is
determined once daily as of 15 minutes after the close of business on the NYSE
(generally 4:00 p.m., New York time) on each day during which the NYSE is open
for trading. Any assets or liabilities initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation. The net
asset value per share is computed by dividing the market value of the securities
held by the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued expenses)
by the total number of shares outstanding at such time. Expenses, including the
fees payable to the Manager and the Distributor, are accrued daily. The Fund
employs
40
<PAGE> 43
Merrill Lynch Securities Pricing(SM) Service ("MLSPS"), an affiliate of the
Manager, to provide certain securities prices for the Fund. During the fiscal
year ended August 31, 1997 the Fund paid $627 to MLSPS for such service.
The per share net asset value of the Class A shares generally will be
higher than the per share net asset value of shares of the other classes,
reflecting the daily expense accruals of the account maintenance, distribution,
and higher transfer agency fees applicable with respect to the Class B and Class
C shares and the daily expense accruals of the account maintenance fees
applicable with respect to Class D shares; moreover, the per share net asset
value of Class D shares generally will be higher than the per share net asset
value of Class B and Class C shares, reflecting the daily expense accruals of
the distribution and higher transfer agency fees applicable with respect to
Class B and Class C shares. It is expected, however, that the per share net
asset value of the classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differential among the
classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. When the
Fund writes an option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Portfolio securities which are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or in the case of options traded in the OTC
market, the last bid price. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets for which
market quotations are not readily available are valued at fair market value, as
determined in good faith by or under the direction of the Board of Directors of
the Fund, including valuations furnished by a pricing service retained by the
Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on July 14, 1993. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent interests in the same assets of the
Fund and are identical in all respects except that Class B, Class C and Class D
shares bear certain expenses related to the account maintenance associated with
such shares, and Class B and Class C shares bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to account maintenance and distribution expenditures, as
applicable. See "Purchase of Shares." The Fund has received an order from the
Securities and Exchange Commission permitting the issuance and sale of multiple
classes of Common Stock. The Board of Directors of the Fund may classify and
reclassify the shares of the Fund into additional classes of Common Stock at a
future date.
41
<PAGE> 44
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Directors (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. All shares of the Fund have equal voting rights, except, as noted
above, a class of shares will have exclusive voting rights with respect to
matters relating to distribution expenses and any account maintenance fee being
borne solely by such class. There normally will be no meeting of shareholders
for the purpose of electing Directors unless and until such time as less than a
majority of the Directors holding office have been elected by the shareholders,
at which time the Directors then in office will call a shareholders' meeting for
the election of Directors. Shareholders may, in accordance with the terms of the
Articles of Incorporation, cause a meeting of shareholders to be held for the
purpose of voting on the removal of Directors. Also, the Fund will be required
to call a special meeting of shareholders in accordance with the requirements of
the Investment Company Act to seek approval of new management and advisory
arrangements, of a material increase in distribution or account maintenance fees
or of a change in fundamental policies, objectives or restrictions. Except as
set forth above, the Directors shall continue to hold office and appoint
successor Directors. Each issued and outstanding share is entitled to
participate equally in dividends and distributions declared and in net assets
upon liquidation or dissolution remaining after satisfaction of outstanding
liabilities except that, as noted above, the Class B, Class C and Class D shares
bear certain additional expenses. Shares issued are fully-paid and
non-assessable and have no pre-emptive rights. Voting rights for Directors are
not cumulative. Shares have the conversion rights described in this Prospectus.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
financial consultant or Merrill Lynch Financial Data Services, Inc. at
800-637-3863.
42
<PAGE> 45
MERRILL LYNCH UTILITY INCOME FUND, INC.--AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) Program. You may request a Merrill Lynch Blueprint(SM)
Program application by calling (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
<TABLE>
<S> <C> <C> <C>
[ ] Class A shares [ ] Class B shares [ ] Class C shares [ ] Class D shares
</TABLE>
of Merrill Lynch Utility Income Fund, Inc. and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. .............................................................................
2. .............................................................................
3. .............................................................................
4. .............................................................................
5. .............................................................................
6. .............................................................................
(PLEASE PRINT)
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
................................................................................
(Zip Code)
Occupation......................................................................
................................................................................
Signature of Owner
Name and Address of Employer....................................................
................................................................................
................................................................................
Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTION
<TABLE>
<S> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] Check
or [ ] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Utility Income Fund, Inc. Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ........................... Account Number..........................
Bank Address....................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor..........................................................
Signature of Depositor ..........................Date...........................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
43
<PAGE> 46
MERRILL LYNCH UTILITY INCOME FUND, INC.--AUTHORIZATION FORM (PART
1)--(CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
--------------------------------------------------------
--------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Taxes") either because I have not been notified that I am subject thereto as a
result of a failure to report all interest or dividends, or the Internal Revenue
Service ("IRS") has notified me that I am no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
<TABLE>
<S> <C>
Dear Sir/Madam:
.................................., 19 . . . .
Date of initial purchase
</TABLE>
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Utility Income Fund, Inc. or any other investment company with an initial
sales charge or deferred sales charge for which Merrill Lynch Funds Distributor,
Inc. acts as distributor over the next 13-month period which will equal or
exceed:
<TABLE>
<S> <C> <C> <C> <C>
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000
</TABLE>
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Utility Income Fund,
Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Utility Income Fund, Inc. held as security.
<TABLE>
<S> <C>
By........................................................... ............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name .................................................. (2) Name.....................................................
Account Number ............................................ Account Number...............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
-------------------------------------
-------------------------------------
This form, when completed, should be mailed to:
Merrill Lynch Utility Income Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
Shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
44
<PAGE> 47
- --------------------------------------------------------------------------------
MERRILL LYNCH UTILITY INCOME FUND, INC.--AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
------------------------------------------------------
Name of Owner..................................................
------------------------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)......................................
Address........................................................ Account Number ............................................
(if existing account)
...............................................................
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A, [ ] Class B*, [ ] Class C*, or [ ] Class D shares
in Merrill Lynch Utility Income Fund, Inc. at cost or current offering price.
Withdrawals to be made either (check one) [ ] Monthly on the 24th day of each
month, or [ ] Quarterly on the 24th day of March, June, September and December.
If the 24th falls on a weekend or holiday, the next succeeding business day will
be utilized. Begin systematic withdrawal on ............. (month), or as soon as
possible thereafter.
SPECIFY THE AMOUNT OF WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE): [
]$............. of [ ] Class A, [ ] Class B*, [ ] Class C*, or [ ] Class D
shares in the account.
SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I HEREBY AUTHORIZE PAYMENT BY CHECK
[ ] as indicated in Item 1.
[ ] to the order of..........................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print)......................................................
Address ...................................................................
...................................................................
Signature of Owner .............................. Date ............
Signature of Co-Owner (if any) ....................................
(b) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of Account (check one): [ ] checking [ ] savings
Name on your account ...........................................................
Bank Name ......................................................................
Bank Number ................................. Account Number ...................
Bank Address ...................................................................
................................................................................
Signature of Depositor ....................................... Date ............
Signature of Depositor..........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
* ANNUAL WITHDRAWAL CANNOT EXCEED 10% OF THE VALUE OF SHARES OF SUCH CLASS HELD
IN THE ACCOUNT AT THE TIME THE ELECTION TO JOIN THE SYSTEMATIC WITHDRAWAL PLAN
IS MADE.
45
<PAGE> 48
MERRILL LYNCH UTILITY INCOME FUND, INC.--AUTHORIZATION FORM
(PART 2)--(CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase (choose one):
[ ] Class A shares [ ] Class B shares [ ] Class C shares [ ] Class D shares
of Merrill Lynch Utility Income Fund, Inc., subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Utility Income Fund, Inc. as indicated below:
Amount of each ACH debit $...................................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month beginning
.............................. or as soon thereafter as possible.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and that
you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO
HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH
FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip Code.......................................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. . I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
.................... .......................................
Date Signature of Depositor
.................... .......................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
46
<PAGE> 49
APPENDIX
OPTIONS, FUTURES AND FOREIGN EXCHANGE TRANSACTIONS
The Fund is authorized to use certain derivative instruments, including
options and futures, and to purchase and sell foreign exchange, as described
below. Such instruments, which may be regarded as derivatives, are referred to
collectively herein as "Strategic Instruments."
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures, and Currency
Instruments"), the Manager believes that, because the Fund will (i) write only
covered options on portfolio securities and (ii) engage in other options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of Fund shares, the Fund's net asset value
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Furthermore, the Fund will only engage in hedging activities
from time to time and may not necessarily be engaging in hedging activities when
movements in the equity, debt or currency markets occur. Reference is made to
the Statement of Additional Information for further information concerning these
Strategic Instruments.
OPTIONS ON SECURITIES AND SECURITIES INDICES
Purchasing Options. The Fund is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of which
is substantially replicated by securities held in its portfolio for hedging
purposes. 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. When the Fund purchases a put option, in consideration for an upfront
payment (the "option premium") the Fund acquires a right to sell to another
party specified securities owned by the Fund at a specified price (the "exercise
price") on or before a specified date (the "expiration date"), in the case of an
option on securities, or to receive from another party a payment based on the
amount a specified securities index declines below a specified level on or
before the expiration date, in the case of an option on a securities index. The
purchase of a put option limits the Fund's risk of loss in the event of a
decline in the market value of the portfolio holdings underlying the put option
prior to the option's expiration date. If the market value of the portfolio
holdings associated with the put option increases rather than decreases,
however, the Fund will lose the option premium and will consequently realize a
lower return on the portfolio holdings than would have been realized without the
purchase of the put. The Fund will not purchase put options on securities or
securities indices if, as a result of such purchase, the aggregate cost of all
outstanding options on securities and securities indices held by the Fund would
exceed 5% of the market value of the Fund's total assets.
The Fund is also authorized to purchase call options on securities held in
its portfolio on which it has written call options, securities it intends to
purchase or securities indices the performance of which substantially replicates
the performance of the types of securities it intends to purchase. When the Fund
purchases a call option, in consideration for the option premium the Fund
acquires a right to purchase from another party specified securities at the
exercise price on or before the expiration date, in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index
A-1
<PAGE> 50
increases beyond a specified level on or before the expiration date, in the case
of an option on a securities index. The purchase of a call option may protect
the Fund from having to pay more for a security as a consequence of increases in
the market value for the security during a period when the Fund is contemplating
its purchase, in the case of an option on a security, or attempting to identify
specific securities in which to invest in a market the Fund believes to be
attractive, in the case of an option on an index (an "anticipatory hedge"). In
the event the Fund determines not to purchase a security underlying a call
option, however, the Fund may lose the entire option premium.
The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.
Writing Covered Options. The Fund is authorized to write (i.e., sell) call
options on securities held in its portfolio or securities indices the
performance of which is substantially correlated to securities held in its
portfolio. When the Fund writes a call option, in return for an option premium
the Fund gives another party the right to buy specified securities owned by the
Fund at the exercise price on or before the expiration date, in the case of an
option on securities, or agrees to pay to another party an amount based on any
gain in a specified securities index beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The Fund may
write call options on securities to earn income, through the receipt of option
premiums; the Fund may write call options on securities indices for hedging
purposes. In the event the party to which the Fund has written an option fails
to exercise its rights under the option because the value of the underlying
securities is less than the exercise price, the Fund will partially offset any
decline in the value of the underlying securities through the receipt of the
option premium. By writing a call option, however, the Fund limits its ability
to sell the underlying securities, and gives up the opportunity to profit from
any increase in the value of the underlying securities beyond the exercise
price, while the option remains outstanding.
The Fund may also write put options on securities or securities indices.
When the Fund writes a put option, in return for an option premium the Fund
gives another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party an amount based on any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write put
options to earn income, through the receipt of option premiums. In the event the
party to which the Fund has written an option fails to exercise its rights under
the option because the value of the underlying securities is greater than the
exercise price, the Fund will profit by the amount of the option premium. By
writing a put option, however, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding, in
the case of an option on a security, or make a cash payment reflecting any
decline in the index, in the case of an option on an index. Accordingly, when
the Fund writes a put option it is exposed to a risk of loss in the event the
value of the underlying securities falls below the exercise price, which loss
potentially may substantially exceed the amount of option premium received by
the Fund for writing the put option. The Fund will write a put option on a
security or a securities index only if the Fund would be willing to purchase the
security at the exercise price for investment purposes (in the case of an option
on a security) or is writing the put in connection with trading strategies
involving combinations of options -- for example, the sale and purchase of
options with identical expiration dates on the same security or index but
different exercise prices (a technique called a "spread"). 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.
A-2
<PAGE> 51
The Fund is also authorized to sell call options in connection with closing
out call options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call options that are "covered." A call option will be considered covered if the
Fund has segregated assets with respect to such option in the manner described
in "Risk Factors in Options, Futures and Currency Instruments" below. A call
option will also be considered covered if the Fund owns the securities it would
be required to deliver upon exercise of the option (or, in the case of option on
a securities index, securities which substantially replicate the performance of
such index) or owns a call option, warrant or convertible instrument which is
immediately exercisable for, or convertible into, such security. The Fund will
not write covered put options or covered call options on any stock index if the
cash, cash equivalents, liquid securities, or other assets used at cover for
such options have an aggregate value of greater than 50% of the Fund's net
assets.
Types of Options. The Fund may engage in transactions in the options on
securities or securities indices described above on U.S. and foreign exchanges
and in the over-the-counter ("OTC") markets. In general, exchange-traded options
have standardized exercise prices and expiration dates and require the parties
to post margin against their obligations, and the performance of the parties'
obligations in connection with such options is guaranteed by the exchange or a
related clearing corporation. OTC options have more flexible terms negotiated
between the buyer and seller, but generally do not require the parties to post
margin and are subject to greater risk of counterparty default. See "Additional
Risk Factors of OTC Transactions" below.
FUTURES
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of a commodity at
a specified future date at a specified price. No price is paid upon entering
into a futures contract. Rather, upon purchasing or selling a futures contract
the Fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 10%) of the contract value. Each day thereafter until the
futures position is closed, the Fund will pay additional margin representing any
loss experienced as a result of the futures position the prior day or be
entitled to a payment representing any profit experienced as a result of the
futures position the prior day.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive. In
the event that such securities decline in value or the Fund determines not to
complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying commodity
is a currency or securities or interest rate index) purchased or sold for
hedging purposes (including anticipatory hedges). The Fund will further limit
transactions in futures
A-3
<PAGE> 52
and options on futures to the extent necessary to prevent the Fund from being
deemed a "commodity pool operator" under regulations of the Commodity Futures
Trading Commission.
FOREIGN EXCHANGE TRANSACTIONS
The Fund may engage in spot and forward foreign exchange transactions,
purchase and sell options on currencies and purchase and sell currency futures
and related options thereon (collectively, "Currency Instruments") for purposes
of hedging 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.
Forward foreign exchange transactions are OTC contracts to purchase or sell
a specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange
transactions are similar but require current, rather than future, settlement.
The Fund will enter into foreign exchange transactions only for purposes of
hedging either a specific transaction or a portfolio position. The Fund may
enter into a foreign exchange transaction for purposes of hedging a specific
transaction by, for example, purchasing a currency needed to settle a security
transaction or selling a currency in which the Fund has received or anticipates
receiving a dividend or distribution. The Fund may enter into a foreign exchange
transaction for purposes of hedging a portfolio position by selling forward a
currency in which a portfolio position of the Fund is denominated or by
purchasing a currency in which the Fund anticipates acquiring a portfolio
position in the near future.
The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except
that futures are standardized, exchange-traded contracts. See "Futures" above.
The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through the use of currency options. Currency options
are similar to options on securities, but in consideration for an option premium
the writer of a currency option is obligated to sell (in the case of a call
option) or purchase (in the case of a put option) a specified amount of a
specified currency on or before the expiration date for a specified amount of
another currency. The Fund may engage in transactions in options on currencies
either on exchanges or OTC markets. See "Types of Options" above and "Additional
Risk Factors of OTC Transactions" below.
The Fund will not speculate in Currency Instruments. Accordingly, the Fund
will not hedge a currency in excess of the aggregate market value of the
securities which it owns (including receivables for unsettled securities sales),
or has committed to or anticipates purchasing, which are denominated in such
currency. The Fund may, however, hedge a currency by entering into a transaction
in a Currency Instrument denominated in a currency other than the currency being
hedged (a "cross-hedge"). The Fund will only enter into a cross-hedge if the
Manager believes that (i) there is a demonstrable high correlation between the
currency in which the cross-hedge is denominated and the currency being hedged,
and (ii) executing a cross-hedge through the currency in which the cross-hedge
is denominated will be significantly more cost-effective or provide
substantially greater liquidity than executing a similar hedging transaction by
means of the currency being hedged. The Fund may not incur potential net
liabilities with respect to currency or securities positions, including net
liabilities with respect to cross-currency hedges, of more than 20% of its total
assets from foreign
A-4
<PAGE> 53
currency options, futures or related options and forward currency transactions.
The Fund will not necessarily attempt to hedge all of its foreign portfolio
positions.
Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated currency
movements will not be accurately predicted and that the Fund's hedging
strategies will be ineffective. To the extent that the Fund hedges against
anticipated currency movements which do not occur, the Fund may realize losses,
and decrease its total return, as the result of its hedging transactions.
Furthermore, the Fund will only engage in hedging activities from time to time
and may not be engaging in hedging activities when movements in currency
exchange rates occur. It may not be possible for the Fund to hedge against
currency exchange rate movements, even if correctly anticipated, in the event
that (i) the currency exchange rate movement is so generally anticipated that
the Fund is not able to enter into a hedging transaction at an effective price,
or (ii) the currency exchange rate movement relates to a market with respect to
which Currency Instruments are not available (such as certain developing
markets) and it is not possible to engage in effective foreign currency hedging.
RISK FACTORS IN OPTIONS, FUTURES AND CURRENCY INSTRUMENTS
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments and
the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments the Fund
will experience a gain or loss which will not be completely offset by movements
in the value of the hedged instruments. 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 Fund intends to enter into transactions involving Strategic Instruments
only if there appears to be a liquid secondary market for such instruments or,
in the case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions." However, there can be no assurance that, at any specific time,
either a liquid secondary market will exist for a Strategic Instrument or the
Fund will otherwise be able to sell such instrument at an acceptable price. It
may therefore not be possible to close a position in a Strategic Instrument
without incurring substantial losses, if at all.
Certain transactions in Strategic Instruments (e.g., forward foreign
exchange transactions, futures transactions, sales of put options) may expose
the Fund to potential losses which exceed the amount originally invested by the
Fund in such instruments. When the Fund engages in such a transaction, the Fund
will deposit in a segregated account at its custodian liquid securities with a
value at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Securities and
Exchange Commission). Such segregation will ensure that the Fund has assets
available to satisfy its obligations with respect to the transaction, but will
not limit the Fund's exposure to loss.
A-5
<PAGE> 54
ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
STRATEGIC INSTRUMENTS
Certain Strategic Instruments traded in OTC markets, including indexed
securities and OTC options, may be substantially less liquid than other
instruments in which the Fund may invest. The absence of liquidity may make it
difficult or impossible for the Fund to sell such instruments promptly at an
acceptable price. The absence of liquidity may also make it more difficult for
the Fund to ascertain a market value for such instruments. The Fund will
therefore acquire illiquid OTC instruments (i) if the agreement pursuant to
which the instrument is purchased contains a formula price at which the
instrument may be terminated or sold, or (ii) for which the Manager anticipates
the Fund can receive on each business day at least two independent bids or
offers, unless a quotation from only one dealer is available, in which case that
dealer's quotation may be used.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore 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 transactions, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the securities underlying OTC call options currently
outstanding which have been sold by the Fund and margin deposits on the Fund's
outstanding OTC options exceeds 15% of the total assets of the Fund, taken at
market value, together with all other assets of the Fund which are deemed to be
illiquid or are otherwise not readily marketable. However, if an OTC option is
sold by the Fund to a dealer in U.S. government securities recognized as a
"primary dealer" by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option 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 exercise price).
Because Strategic Instruments traded in OTC markets are not guaranteed by
an exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty, the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in Strategic Instruments traded in OTC markets only with financial institutions
which have substantial capital or which have provided the Fund with a
third-party guaranty or other credit enhancement.
ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS
The Fund may not use any Strategic Instrument to gain exposure to an asset
or class of assets that it would be prohibited by its investment restrictions
from purchasing directly.
A-6
<PAGE> 55
MANAGER
Merrill Lynch Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive P2N
North Quincy, Massachusetts 02171
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
<PAGE> 56
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE STATEMENT
OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE MANAGER, OR
THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table........................................ 2
Merrill Lynch Select Pricing(SM) System.......... 4
Financial Highlights............................. 8
Investment Objective and Policies................ 10
Utility Industries -- Description and Risks.... 12
Investment Outside Utility Industries.......... 15
Other Investment Policies and Practices........ 15
Investment Restrictions........................ 18
Management of the Fund........................... 19
Board of Directors............................. 19
Management and Advisory Arrangements........... 19
Transfer Agency Services....................... 20
Reimbursement for Portfolio Accounting
Services..................................... 21
Code of Ethics................................. 21
Purchase of Shares............................... 21
Initial Sales Charge Alternatives--
Class A and Class D Shares................... 23
Deferred Sales Charge Alternatives--
Class B and Class C Shares................... 25
Distribution Plans............................. 29
Limitations on the Payment of Deferred Sales
Charges...................................... 30
Repurchase and Redemption of Shares.............. 31
Repurchase..................................... 31
Redemption..................................... 32
Reinstatement Privilege--Class A and Class D
Shares....................................... 32
Shareholder Services............................. 32
Investment Account............................. 33
Exchange Privilege............................. 33
Automatic Reinvestment of Dividends and Capital
Gains Distributions.......................... 34
Systematic Withdrawal Plans.................... 35
Automatic Investment Plans..................... 35
Fee-Based Programs............................. 35
Retirement Plans............................... 36
Performance Data................................. 36
Taxes............................................ 37
Additional Information........................... 39
Dividends and Distributions.................... 39
Determination of Net Asset Value............... 40
Organization of the Fund....................... 41
Shareholder Inquiries.......................... 42
Shareholder Reports............................ 42
Authorization Form............................... 43
Appendix -- Options, Futures and Foreign Exchange
Transactions................................... A-1
Code #16855-1297
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
UTILITY INCOME FUND, INC.
PROSPECTUS
December 1, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
[MERRILL LYNCH COMPASS]
<PAGE> 57
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH UTILITY INCOME FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Utility Income Fund, Inc. (the "Fund") is a diversified
mutual fund seeking high current
income through investment of at least 65% of its total assets in equity and debt
securities issued by companies which are, in the opinion of Merrill Lynch Asset
Management, L.P. (the "Manager" or "MLAM"), primarily engaged in the ownership
or operation of facilities used to generate, transmit or distribute electricity,
telecommunications, gas or water. There can be no assurance that the Fund's
investment objective will be achieved. The Fund may employ a variety of
instruments and techniques to enhance income and to hedge against market and
currency risk.
Pursuant to Merrill Lynch Select Pricing(SM) System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing(SM) System permits an
investor to choose the method of purchasing shares that the investor believes is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated
December 1, 1997 (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 December 1, 1997.
<PAGE> 58
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a diversified, open-end management investment company. The
Fund's investment objective is to seek high current income through investment of
at least 65% of its total assets in equity and debt securities issued by
companies which are, in the opinion of the Manager, primarily engaged in the
ownership or operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water. This objective is a fundamental
policy which the Fund may not change without a vote of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the "Investment Company Act"). There can be no assurance that the
Fund's investment objective will be achieved. The Fund may employ a variety of
instruments and techniques to enhance income and to hedge against market and
currency risk, as described under "Portfolio Strategies Involving Options and
Futures" below.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion in the Appendix to the Prospectus for
information with respect to various portfolio strategies involving options and
futures. The following is further information relating to portfolio strategies
the Fund may utilize involving options and futures.
Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the equity securities held in its portfolio or on
securities indices the performance of which is substantially correlated to
securities held in its portfolio. These transactions are described more fully in
the Appendix to the Prospectus. The following is additional information about
covered call options.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer realizes a gain or loss from the sale of the underlying security.
As discussed in the Appendix to the Prospectus, the Fund also may write put
options on securities or securities indices. 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, liquid securities or other assets with a value equal to or greater
than the exercise price of the underlying securities. The Fund may engage in
closing transactions in order to terminate put or call 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
2
<PAGE> 59
underlying security upon exercise. Reasons for the absence of a liquid secondary
market on an exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be imposed by an
exchange on opening transactions or closing transactions or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Clearing Corporation may not at all times
be adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that class
or series of options) would cease to exist, although outstanding options on that
exchange that had been issued by the Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
The Fund may also enter into over-the-counter option transactions ("OTC
options"), which are two-party contracts with price and terms negotiated between
the buyer and seller. The Fund will only enter into over-the-counter option
transactions with respect to portfolio securities for which management believes
the Fund can receive on each business day at least two independent bids or
offers (one of which will be from an entity other than a party to the option).
The staff of the Securities and Exchange Commission has taken the position that
OTC options and the assets used as cover for written OTC options are illiquid
securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put option expires. The amount of any appreciation in the value of the
underlying security will be offset partially by the amount of the premium paid
for the put option and any related transaction costs. Prior to its expiration, a
put option may be sold in a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction cost. A closing sale
transaction 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
Appendix to the Prospectus, the Fund will limit transactions in futures and
options on futures to financial futures contracts (i.e., contracts for which the
underlying commodity is a currency or securities or interest rate index)
purchased or sold for hedging purposes (including anticipatory hedges). See the
Appendix to the Prospectus. 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
3
<PAGE> 60
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 less than 10% of the contract amount,
must be deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called "variation margin," are required to be made on a daily basis as
the price of the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market." At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
An order has been obtained from the Securities and Exchange Commission
exempting the Fund from the provisions of Section 17(f) and Section 18(f) of the
Investment Company Act in connection with its strategy of investing in futures
contracts. Section 17(f) relates to the custody of securities and other assets
of an investment company and may be deemed to prohibit certain arrangements
between the Fund and commodities brokers with respect to initial and variation
margin. Section 18(f) of the Investment Company Act prohibits an open-end
investment company such as the Fund from issuing a "senior security" other than
a borrowing from a bank. The staff of the Securities and Exchange Commission has
in the past indicated that a futures contract may be a "senior security" under
the Investment Company Act.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund permit the Fund's futures and options on futures
transactions to include (i) bona fide hedging transactions without regard to the
percentage of the Fund's assets committed to margin and option premiums, and
(ii) non-hedging transactions, provided that the Fund not enter into such
non-hedging transactions if, immediately thereafter, the sum of the amount of
initial margin deposits on the Fund's existing futures positions and option
premiums would exceed 5% 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 liquid 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 Exchange Transactions. 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
4
<PAGE> 61
different countries in which it will invest as a hedge against possible
variations in the foreign exchange rate among these currencies. This is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the contract.
The Fund's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities, the sale and redemption of shares
of the Fund or the payment of dividends and distributions by the Fund. Position
hedging is the sale of forward foreign currency with respect to portfolio
security positions denominated or quoted in such foreign currency. The Fund will
not speculate in forward foreign exchange. The Fund may not position hedge with
respect to the currency of a particular country to an extent greater than the
aggregate market value (at the time of making such sale) of the securities held
in its portfolio denominated or quoted in that particular foreign currency. If
the Fund enters into a position hedging transaction, its custodian bank will
place cash or liquid equity or debt securities in a separate account of the Fund
in an amount equal to the value of the Fund's total assets committed to the
consummation of such forward contract. If the value of the securities placed in
the separate account declines, additional cash or securities will be placed in
the account so that the value of the account will equal the amount of the Fund's
commitment with respect to such contracts. The Fund will enter into such
transactions only to the extent, if any, deemed appropriate by the Manager. The
Fund will not enter into a forward contract with a term of more than one year.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to hedges
on non-U.S. dollar-denominated securities owned by the Fund, sold by the Fund
but not yet delivered, or committed or anticipated to be purchased by the Fund.
As an illustration, the Fund may use such techniques to hedge the stated value
in United States dollars of an investment in a yen-denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of Japanese yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or part, the cost
of acquiring such a put option, the Fund may also sell a call option which, if
exercised, requires it to sell a specified amount of yen for dollars at a
specified price by a future date (a technique called a "straddle"). By selling
such call option in this illustration, the Fund gives up the opportunity to
profit without limit from 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.
5
<PAGE> 62
Risk Factors in Options, Futures and Currency Transactions. Utilization of
futures transactions involves the risk of imperfect correlation in movements in
the price of options and futures and movements in the price of the securities or
currencies which is the subject of the hedge. If the price of the options and
futures moves more or less than the price of the hedged securities or currency,
the Fund will experience a gain or loss which will not be completely offset by
movements in the price of the subject of the hedge. This risk particularly
applies to the Fund's use of cross-hedging, which means that the security which
is the subject of the hedged transaction is different from the security being
hedged. The successful use of options and futures also depends on the Manager's
ability to correctly predict price movements in the market involved in a
particular options or futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into an option or futures
transaction on an exchange only if there appears to be a liquid secondary market
for such options or futures. However, there can be no assurance that a liquid
secondary market will exist for any particular call or put option or futures
contract at any specific time. Thus, it may not be possible to close an option
or futures position. The Fund will acquire only over-the-counter options for
which management believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option). In the case of a futures position or an option on a
futures position written by the Fund in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the security underlying futures contracts it holds.
The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to hedge its portfolio effectively. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option.
The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. 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,
6
<PAGE> 63
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 total assets in
illiquid securities. However, the Fund may purchase, without regard to that
limitation, securities that are not registered under the Securities Act of 1933,
as amended (the "Securities Act"), but that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act ("Rule
144A Securities"), provided that the Fund's Board of Directors, or the Manager
pursuant to guidelines adopted by the Board, continuously determines, based on
the trading markets for the specific Rule 144A Security, that it is liquid. The
Board of Directors, however, will retain oversight and is ultimately responsible
for the determinations. Since it is not possible to predict with assurance
exactly how this market for restricted securities sold and offered under Rule
144A will develop, the Board of Directors will carefully monitor the Fund's
investments in these securities, focusing on such factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of decreasing the level of liquidity in the Fund to the
extent that the qualified institutional buyers become for a time uninterested in
purchasing these securities.
The staff of the Securities and Exchange Commission has taken the position
that purchased over-the-counter options ("OTC options") and the assets used as
cover for written OTC options are illiquid securities. Therefore, the Fund has
adopted an investment policy pursuant to which it will not purchase or sell OTC
options if, as a result of such transaction, the sum of the market value of OTC
options currently outstanding which are held by the Fund, the market value of
the underlying securities covered by OTC call options currently outstanding
which were sold by the Fund and margin deposits on the Fund's existing OTC
options on futures contracts exceed 15% of the total assets of the Fund, taken
at market value, together with all other assets of the Fund which are illiquid
or are not otherwise readily marketable. However, if the OTC option is sold by
the Fund to a primary U.S. Government securities dealer recognized by the
Federal Reserve Bank of New York and the Fund has the unconditional contractual
right to repurchase such OTC option from the dealer at a predetermined price,
then the Fund will treat as illiquid such amount of the underlying securities as
is equal to the repurchase price less the amount by which the option is
"in-the-money" (i.e., current market value of the underlying security minus the
option's strike price). The repurchase price with the primary dealers is
typically a formula price which is generally based on a multiple of the premium
received for the option, plus the amount by which the option is "in-the-money."
This policy as to OTC options is not a fundamental policy of the Fund and may be
amended by the Directors of the Fund without the approval of the Fund's
shareholders. However, the Fund will not change or 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
7
<PAGE> 64
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 total assets taken at
the time of acquisition of such commitment or security. The Fund will at all
times maintain a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer (or an affiliate
thereof) in U.S. Government securities (or an affiliate thereof). Under such
agreements, the bank or primary dealer agrees, upon entering into the contract,
to repurchase the security at a mutually agreed upon time and price in a
specified currency, thereby determining the yield during the term of the
agreement. This results in a fixed rate of return insulated from market
fluctuations during such period although it may be affected by currency
fluctuations. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect the accrued interest on the underlying
obligations. Such agreements usually cover short periods, often under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, as a purchaser, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but constitute only collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur costs
or possible losses in connection with the disposition of the collateral. In the
event of a default under such a repurchase agreement, instead of the contractual
fixed rate of return, the rate of 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 total assets in repurchase agreements maturing in more than
seven days.
Lending of Portfolio Securities. Subject to investment restriction (5)
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
8
<PAGE> 65
received by the Fund, it is invested in short-term money market securities, and
a portion of the yield received in respect of such investment is retained by the
Fund. Alternatively, if securities are delivered to the Fund as collateral, the
Fund and the borrower negotiate a rate for the loan premium to be received by
the Fund for lending its portfolio securities. In either event, the total yield
on the Fund's portfolio is increased by loans of its portfolio securities. The
Fund will have the right to regain record ownership of loaned securities to
exercise beneficial rights such as voting rights, subscription rights and rights
to dividends, interest or other distributions. Such loans are terminable at any
time. The Fund may pay reasonable finder's, administrative and custodial fees in
connection with such loans. With respect to the lending of portfolio securities,
there is the risk of failure by the borrower to return the securities involved
in such transactions.
High Yield-High Risk Bonds. Fixed income securities in which the Fund will
invest generally will be limited to those rated investment grade; that is, rated
in one of the four highest rating categories by Standard & Poor's Ratings Group
("S&P") or Moody's Investors Service, Inc. ("Moody's") (i.e., securities rated
at least BBB by S&P or Baa by Moody's), or deemed to be of equivalent quality in
the judgment of the Manager. The Fund is authorized to invest up to 5% of its
total assets at the time of purchase in fixed income securities having a minimum
rating no lower than Caa by Moody's or CCC by S&P ("high yield-high risk
bonds"). Investment in high yield-high risk bonds involves substantial risk.
Investments in high yield-high risk bonds will be made only when, in the
judgment of the Manager, such securities provide attractive total return
potential, relative to the risk of such securities, as compared to higher
quality debt securities. Securities rated BB or lower by S&P or Ba or lower by
Moody's are considered by those rating agencies to have varying degrees of
speculative characteristics. Consequently, although high yield-high risk bonds
can be expected to provide higher yields, such securities may be subject to
greater market price fluctuations and risk of loss of principal than lower
yielding, higher rated fixed income securities. The Fund will not invest in debt
securities in the lowest rating categories (CC or lower for S&P or Ca or lower
for Moody's) unless the Manager believes that the financial condition of the
issuer or the protection afforded the particular securities is stronger than
would otherwise be indicated by such low ratings.
High yield-high risk bonds may be issued by less creditworthy companies or
by larger, highly leveraged companies, and are frequently issued in corporate
restructurings such as mergers and leveraged buy-outs. Such securities are
particularly vulnerable to adverse changes in the issuer's industry and in
general economic conditions. High yield-high risk bonds frequently are junior
obligations of their issuers, so that in the event of the issuer's bankruptcy,
claims of the holders of high yield-high risk bonds will be satisfied only after
satisfaction of the claims of senior securityholders. While the high yield-high
risk bonds in which the Fund may invest normally do not include securities
which, at the time of investment, are in default or the issuers of which are in
bankruptcy, there can be no assurance that such events will not occur after the
Fund purchases a particular security, in which case the Fund may experience
losses and incur costs. The terms "high yield-high risk bonds" and "below
investment grade bonds" are commonly known as "junk bonds."
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to
the investment of its assets and its activities, which are fundamental policies
and may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). The Fund may not:
9
<PAGE> 66
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities) except that, under
normal circumstances, the Fund will invest more than 25% of its total
assets in the securities of issuers in the utilities industry.
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by law, the Fund may invest in securities directly or indirectly secured by
real estate or interests therein or issued by companies which invest in
real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act, as
amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
10
<PAGE> 67
The Fund has also adopted certain non-fundamental investment restrictions,
which may be changed by the Directors without approval by the shareholders.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of
the Investment Company Act, at any time the Fund's shares are owned by
another investment company that is part of the same group of investment
companies as the Fund.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law.
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the Securities Act
(a "Rule 144A security") and determined to be liquid by the Fund's Board of
Directors are not subject to the limitations set forth in this investment
restriction.
d. Notwithstanding fundamental restriction (7) above, borrow amounts
in excess of 10% of its total assets, taken at market value (including the
amount borrowed), and then only from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares.
In addition, the Fund will not purchase securities while borrowings exceed
5% of its total assets.
Notwithstanding the provisions of Investment Restriction (b) 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 involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions and Brokerage." Without such an exemptive order, the
Fund is prohibited from engaging in portfolio transactions with Merrill Lynch or
its affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act in which such firms
or any of their affiliates participate as an underwriter or dealer.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each executive officer and Director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
11
<PAGE> 68
ARTHUR ZEIKEL (65)--President and Director (1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Fund Asset Management, L.P. ("FAM") (which term, as used herein,
includes its corporate predecessors) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990.
RONALD W. FORBES (57)--Director (2)--1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany, since 1989.
CYNTHIA A. MONTGOMERY (45)--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 from 1985 to 1989; Assistant Professor, Graduate School
of Business Administration, The University of Michigan from 1979 to 1985;
Director, UNUM Corporation since 1990 and Director of Newell Co. since 1995.
CHARLES C. REILLY (66)--Director (2)--9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business, from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
KEVIN A. RYAN (65)--Director (2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and Character; Professor of Education at
Boston University since 1982; formerly taught on the faculties of The University
of Chicago, Stanford University and Ohio State University.
RICHARD R. WEST(59)--Director (2)--Box 604, Genoa, Nevada 89411. Professor
of Finance since 1984, and Dean from 1984 to 1993, and currently Dean Emeritus
of New York University, Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate
holding company) and Alexander's Inc. (real estate company).
TERRY K. GLENN (57)--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 Merrill Lynch Funds
Distributor, Inc. (the "Distributor") since 1986 and Director thereof since
1991; President of Princeton Administrators, L.P. since 1988.
NORMAN R. HARVEY (64)--Senior Vice President (1)(2)--Senior Vice President
of the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.
WALTER D. ROGERS (54)--Vice President (1)(2)--First Vice President of the
Manager since 1997; Vice President of the Manager since 1987.
DONALD C. BURKE (37)--Vice President (1)(2)--First Vice President of the
Manager since 1997 and Director of Taxation of the Manager since 1990.
GERALD M. RICHARD (48)--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;
Treasurer since 1984.
12
<PAGE> 69
THOMAS D. JONES, III (32)--Secretary (1)--Attorney with the Manager since
1992; Lawyer in private practice from 1990 to 1992.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of other
investment companies for which the Manager or FAM acts as investment
adviser.
As of November 1, 1997, the officers and Directors of the Fund as a group
(12 persons) owned an aggregate of less than 1% of the outstanding shares of
Common Stock of ML & Co., and owned an aggregate of less than 1% of the
outstanding shares of the Fund.
Pursuant to the terms of the management agreement with the Fund, the
Manager pays all compensation of officers of the Fund as well as the fees of all
Directors who are affiliated persons of the Manager. The Fund pays each Director
not affiliated with the Manager (each a "non-affiliated Director") a fee of
$1,000 per year plus $400 per meeting attended, together with such Director's
actual out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit and Nominating Committee (the "Committee"),
which consists of all of the non-affiliated Directors, with a fee of $400 per
year; the Chairman of the Committee receives an additional annual fee of $1,000
per year. For the fiscal year ended August 31, 1997, fees and expenses paid to
the non-affiliated Directors which were allocated to the Fund aggregated
$25,151.
The following table sets forth the compensation paid by the Fund to the
non-affiliated Directors for the fiscal year ended August 31, 1997 and the
aggregate compensation paid by all investment companies advised by MLAM and its
affiliate, FAM ("MLAM/FAM Advised Funds") to the non-affiliated Directors for
the calendar year ended December 31, 1996.
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT FROM FUND AND
COMPENSATION BENEFIT ACCRUED MLAM/FAM ADVISED
FROM THE AS PART OF FUND FUNDS PAID TO
DIRECTOR FUND EXPENSE DIRECTOR(1)
- ---------------------------------------------- ------------ --------------- ----------------
<S> <C> <C> <C>
Ronald W. Forbes.............................. $4,600 None $142,500
Cynthia A. Montgomery......................... $4,600 None $142,500
Charles C. Reilly............................. $5,600 None $293,833
Kevin A. Ryan................................. $4,600 None $142,500
Richard R. West............................... $4,600 None $272,833
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Forbes (28 registered investment companies consisting of 41 portfolios); Ms.
Montgomery (28 registered investment companies consisting of 41 portfolios);
Mr. Reilly (46 registered investment companies consisting of 59 portfolios);
Mr. Ryan (28 registered investment companies consisting of 41 portfolios);
and Mr. West (47 registered investment companies consisting of 69
portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities 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
13
<PAGE> 70
objectives or other factors, a particular security may be bought for one or more
clients when one or more clients are selling the same security. If purchases or
sales of securities by the Manager for the Fund or other funds for which it acts
as investment adviser or for its advisory clients arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold there may be
an adverse effect on price.
The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). As discussed in the Prospectus, the Manager receives
for its services to the Fund monthly compensation at the annual rate of 0.55% of
the average daily net assets of the Fund. For the fiscal years ended August 31,
1995, 1996, and 1997, the total management fees earned by the Manager aggregated
$214,121, $255,399 and $207,552, respectively, all of which were voluntarily
waived.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of the Manager or any of
their affiliates. The Fund pays all other expenses incurred in the operation of
the Fund, including, among other things, taxes; expenses for legal and auditing
services; costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent paid
by the Distributor); charges of the Custodian, any Sub-custodian and Transfer
Agent; expenses of redemption of shares; Securities and Exchange Commission
fees; expenses of registering the shares under Federal, state or foreign laws;
fees and expenses of unaffiliated Directors; accounting and pricing costs
(including the daily calculation of net asset value); insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
and other expenses properly payable by the Fund. Accounting services are
provided to the Fund by the Manager and the Fund reimburses the Manager for its
costs in connection with such services on a semi-annual basis. As required by
the Distribution Agreements, the Distributor will pay certain of the expenses of
the Fund incurred in connection with the offering of its shares. See "Purchase
of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares."
The Manager is a limited partnership, the partners of which are ML & Co.
and Princeton Services. ML & Co. and Princeton Services are "controlling
persons" of the Manager as defined under the Investment Company Act because of
their ownership of its voting securities of their power to exercise a
controlling influence over its management or policies. Similarly, the following
entities may be considered "controlling persons" of MLAM U.K.: Merrill Lynch
Europe Limited (MLAM U.K.'s parent), a subsidiary of ML International Holdings,
a subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML & Co.,
and an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a
fee for providing investment advisory services to the Manager with respect to
the Fund in an amount to be determined from time to time by the Manager and MLAM
U.K. but in no event in excess of the amount that the Manager actually receives
for providing services to the Fund pursuant to the Management Agreement.
14
<PAGE> 71
Duration and Termination. Unless earlier terminated as described below,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the Board of Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties to
such contract or interested persons (as defined in the Investment Company Act)
of any such party. Such contracts are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party thereto
or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D shares are sold to investors
choosing the initial sales charge alternatives and shares of Class B and Class C
are sold to investors choosing the deferred sales charge alternatives. Each
Class A, Class B, Class C and Class D share of the Fund represents identical
interests in the investment portfolio of the Fund, and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the ongoing
account maintenance fees and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
plan adopted with respect to such class pursuant to which the account
maintenance and/or distribution fees are paid (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan). Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by the Manager or its affiliate, FAM.
Funds advised by the Manager or FAM that use the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Management Agreement described
above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal year
ended August 31, 1997 was $1,730, of which the Distributor received $119 and
Merrill Lynch received $1,611. The gross sales charges for the sale of Class A
shares for the fiscal year ended August 31, 1996 was $1,299, of which the
Distributor received $104 and Merrill Lynch received $1,195. The gross sales
charges for the sale of Class A shares for the
15
<PAGE> 72
fiscal year ended August 31, 1995 was $1,367, of which the Distributor received
$84 and Merrill Lynch received $1,283. During the fiscal years ended August 31,
1995, August 31, 1996 and August 31, 1997, the Distributor received no CDSCs
with respect to redemptions within one year after purchase of Class A shares
purchased subject to a front-end sales charge waiver. The gross sales charges
for the sale of Class D shares for the fiscal year ended August 31, 1997 was
$6,613, of which the Distributor received $446 and Merrill Lynch received
$6,167. The gross sales charges for the sale of Class D shares for the fiscal
year ended August 31, 1996 was $13,029, of which the Distributor received $976
and Merrill Lynch received $12,053. The gross sales charges for the sale of
Class D shares for the period October 21, 1994 (commencement of operations) to
August 31, 1995 were $4,564, of which the Distributor received $286 and Merrill
Lynch received $4,278. During the fiscal year ended August 31, 1997, the
Distributor received no CDSCs with respect to redemptions within one year after
purchase of Class D shares purchased subject to a front-end sales charge waiver.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as that
term is defined in the Investment Company Act of 1940, but does not include
purchases of any such company which has not been in existence for at least six
months or which has no purpose other than the purchase of shares of the Fund or
shares of other registered investment companies at a discount; provided,
however, that it shall not include purchases by any group of individuals whose
sole organizational nexus is that the participants therein are credit
cardholders of a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment adviser.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at Merrill Lynch Financial Data Services, Inc., the
Fund's transfer agent (the "Transfer Agent"). The Letter of Intention is not
available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services.
16
<PAGE> 73
The Letter of Intention is not a binding obligation to purchase any amount of
Class A or Class D shares; however, its execution will result in the purchaser
paying a lower sales charge at the appropriate quantity purchase level. A
purchase not originally made pursuant to a Letter of Intention may be included
under a subsequent Letter of Intention executed within 90 days of such purchase
if the Distributor is informed in writing of this intent within such 90-day
period. The value of Class A and Class D shares of the Fund and of other
MLAM-advised mutual funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intention, may be included as a credit toward the completion of such Letter, but
the reduced sales charge applicable to the amount covered by such Letter will be
applied only to new purchases. If the total amount of shares does not equal the
amount stated in the Letter of Intention (minimum of $25,000), the investor will
be notified and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the Class A or Class D shares purchased
at the reduced rate and the sales charge applicable to the shares actually
purchased through the Letter. Class A or Class D shares equal to at least five
percent of the intended amount will be held in escrow during the 13-month period
(while remaining registered in the name of the purchaser) for this purpose. The
first purchase under the Letter of Intention must be at least five percent of
the dollar amount of such Letter. If a purchase during the term of such Letter
would otherwise be subject to a further reduced sales charge based on the right
of accumulation, the purchaser will be entitled on that purchase and subsequent
purchases to the reduced percentage sales charge which would be applicable to a
single purchase equal to the total dollar value of the Class A shares then being
purchased under such Letter, but there will be no retroactive reduction of the
sales charges on any previous purchase. The value of any shares redeemed or
otherwise disposed of by the purchaser prior to termination or completion of the
Letter of Intention will be deducted from the total purchases made under such
Letter. An exchange from a MLAM-advised money market fund into the Fund that
creates a sales charge will count toward completing a new or existing Letter of
Intention from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are
offered to participants in the Merrill Lynch Blueprint(SM) Program
("Blueprint"). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
Blueprint is directed to small investors, group IRAs and participants in certain
affinity groups such as credit unions, trade associations and benefit plans.
Investors placing orders to purchase Class D shares of the Fund through
Blueprint will acquire the Class A or Class D shares at net asset value plus a
sales charge calculated in accordance with the Blueprint sales charge schedule
(i.e., up to $5,000 at 3.5% and $5,000 or more at the standard sales charge
rates disclosed in the Prospectus). In addition, Class A or Class D shares of
the Fund are being offered at net asset value plus a sales charge of 1/2 of 1%
for corporate or group IRA programs placing orders to purchase their Class A or
Class D shares through Blueprint. Services, including the exchange privilege,
available to Class A and Class D investors through Blueprint, however, may
differ from those available to other investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value, 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 rollover assets from Employer
Sponsored Retirement and Savings Plans (see definition below) whose Trustee
and/or Plan Sponsor has entered into a Merrill Lynch Directed IRA Rollover
Program Service Agreement.
17
<PAGE> 74
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases from
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is $50.
Purchase Privileges of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, ML & Co., and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and their directors and employees and
any trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class A shares of the Fund at net asset value. Under such programs, the
Fund realizes economies of scale and reduction of sales-related expenses by
virtue of familiarity with the Fund.
Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, such redemption had been made within 60 days prior to the
investment in the Fund, and the proceeds from the redemption must have been
maintained in the interim in cash or a money market fund.
Class D shares of the Fund 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 for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from a redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than 6 months. Second, such purchase of Class D shares must be
made within 60 days after the redemption and the proceeds from the redemption
must have been maintained in the interim in cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied. First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund was
subject to a sales charge either at
18
<PAGE> 75
the time of purchase or on a deferred basis. Second, such purchase of Class D
shares must be made within 90 days after such notice.
Employees and directors wishing to purchase shares of the Fund must satisfy
the Fund's suitability standards.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other mutual funds advised by the Manager ("Eligible Class A shares") are
offered at net asset value to shareholders of certain closed-end funds advised
by the Manager who purchased such closed-end fund shares prior to October 21,
1994 and wish to reinvest the net proceeds of a sale of their closed-end fund
shares of common stock in Eligible Class A shares, if the conditions set forth
below are satisfied. Alternatively, closed-end fund shareholders who purchased
such shares on or after October 21, 1994 and wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class A shares (if
eligible to buy Class A shares) or Class D shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class D shares"), if the following
conditions are met. First, the sale of closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D shares. Second, the closed-end fund
shares must either have been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the fund in
connection with a tender offer conducted by the eligible fund and reinvest the
proceeds immediately in the designated class of shares of the Fund. This
investment option is available only with respect to eligible shares as to which
no Early Withdrawal Change or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund which
might result from an acquisition of assets having net unrealized appreciation
which is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
19
<PAGE> 76
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
TMA(SM) Managed Trusts. Class A shares are also offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Reductions in or exceptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any
MLAM-advised mutual fund. Minimum purchase requirements may be waived or varied
for such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholder. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act of
1940 (the "Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors or
by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent
20
<PAGE> 77
by the Fund without the approval of the related class of shareholder, and all
material amendments are required to be approved by the vote of Directors,
including a majority of the Independent Directors who have no direct or indirect
financial interest in such Distribution Plan, cast in person at a meeting called
for that purpose. Rule 12b-1 further requires that the Fund preserve copies of
each Distribution Plan and any report made pursuant to such plan for a period of
not less than six years from the date of such Distribution Plan or such report,
the first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in National Association of Securities
Dealers, Inc. ("NASD") Conduct Rules imposes a limitation on certain asset-based
sales charges such as the distribution fee and the CDSC borne by the Class B and
Class C shares, but not the account maintenance fee. The maximum sales charge
rule is applied separately to each class. As applicable to the Fund, the maximum
sales charge rule limits the aggregate of distribution fee payments and CDSCs
payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares and
Class C shares, computed separately (defined to exclude shares issued pursuant
to dividend reinvestments and exchanges), plus (2) interest on the unpaid
balance for the respective class, computed separately, at the prime rate plus 1%
(the unpaid balance being the maximum amount payable minus amounts received from
the payment of the distribution fee and the CDSC). In connection with the Class
B shares, the Distributor has voluntarily agreed to waive interest charges on
the unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges at
any time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance fee.
In certain circumstances the amount payable pursuant to the voluntary maximum
may exceed the amount payable under the NASD formula. In such circumstances
payment in excess of the amount payable under the NASD formula will not be made.
The following table sets forth comparative information as of August 31,
1997 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule, and with respect to Class B shares only, the Distributor's voluntary
maximum. Class C Shares have no Distributor's voluntary maximum.
DATA CALCULATED AS OF AUGUST 31, 1997
CLASS B SHARES
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE DISTRIBUTION
INTEREST AMOUNTS FEE AT
ELIGIBLE AGGREGATE ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted........ $53,883 $ 3,367 $889 $4,256 $1,122 $ 3,134 $136
Under Distributor's Voluntary
Waiver.......................... $53,883 $ 3,367 $270 $3,637 $1,122 $ 2,515 $136
</TABLE>
(Please reference footnotes on following page)
21
<PAGE> 78
CLASS C SHARES
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE DISTRIBUTION
ALLOWABLE INTEREST AMOUNTS FEE AT
ELIGIBLE AGGREGATE ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted........ $5,497 $ 343 $ 34 $ 377 $ 31 $ 346 $ 22
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B shares sold since October 29, 1993
(commencement of operations) and all eligible Class C shares sold since
October 21, 1994 (commencement of operations) other than shares acquired
through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares--Distribution Plans" in the Prospectus. This figure may
include CDSCs that were deferred when a shareholder redeemed shares prior to
the expiration of the applicable CDSC period and invested the proceeds,
without the imposition of a sales charge, in Class A shares in conjunction
with the shareholder's participation in the Merrill Lynch Mutual Funds
Advisor ("MFA") program. The CDSC is booked as a contingent obligation that
may be payable if the shareholder terminates participation in the MFA
program.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
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 Commission may by order permit
for the protection of shareholders of the Fund.
Shares are redeemable at the option of the Fund if, in the opinion of the
Fund, ownership of the shares has or may become concentrated to the extent which
would cause the Fund to be deemed a personal holding company within the meaning
of the Code.
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares," while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in certain instances,
including in connection with certain post-retirement withdrawals from an
Individual Retirement Account ("IRA") or other retirement plan or following the
death or disability of a Class B shareholder. Redemptions for which the waiver
applies in the case of such withdrawals are: (a) any partial or complete
redemption in connection with a distribution following retirement under a
tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments
22
<PAGE> 79
(not less frequently than annually) made for life (or life expectancy), or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or disability
(as defined in the Code) of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse), provided the redemption
is requested within one year of the death or initial determination of
disability. For the fiscal years ended August 31, 1995, 1996 and 1997, the
Distributor received CDSCs of $130,486, $159,510 and $109,154, respectively,
with respect to redemptions of Class B shares, all of which were paid to Merrill
Lynch. Additional CDSCs payable to the Distributor may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs. Similarly, for the period October
21, 1994 (commencement of operations) to August 31, 1995 and the fiscal years
ended August 31, 1996 and 1997, the Distributor received CDSCs of $603, $2,585
and $669, respectively, with respect to redemptions of Class C shares, all of
which were paid to Merrill Lynch.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to
participants in Blueprint. Blueprint is directed to small investors and
participants in certain affinity groups such as trade associations and credit
unions. Class B shares of the Fund are offered through Blueprint only to members
of certain affinity groups. The CDSC is waived in connection with purchase
orders placed through Blueprint. Services, including the exchange privilege,
available to Class B shareholders through Blueprint, however, may differ from
those available to other Class B investors. Orders for purchases and redemptions
of Class B shares of the Fund will be grouped for execution purposes which, in
some circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price is
$100, with a $50 minimum for subsequent purchases through Blueprint. There is no
minimum initial or subsequent purchase requirement for investors who are part of
a Blueprint automatic investment plan. Additional information concerning these
Blueprint programs, including any annual fees or transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions. In executing such transactions, the Manager seeks to obtain the
best net results for the Fund, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm involved and the
firm's risk in positioning a block of securities. Subject to obtaining the best
price and execution, brokers who provide supplemental investment research to the
Manager may receive orders for transactions by the Fund. Information so received
will be in addition to and not in lieu of the services required to be performed
by the Manager under the Management Agreement and the expenses of the Manager
will not necessarily be reduced as a result of the receipt of such supplemental
information. In addition, consistent with the Rules of Fair Practice of the NASD
and policies established by the Directors of the Fund, the Manager may consider
sales of shares of the Fund as a factor in the selection of brokers or dealers
to execute portfolio transactions for the Fund.
The Fund is not required to use any particular broker or dealer, and
brokers who provide supplemental investment research to the Manager may receive
orders for transactions by the Fund. Such supplemental research services
ordinarily consist of assessments and analyses of the business or prospects of a
company,
23
<PAGE> 80
industry or economic sector. Information so received will be in addition to and
not in lieu of the services required to be performed by the Manager under the
Management Agreement. If in the judgment of the Manager the Fund will be
benefitted by supplemental research services, the Manager is authorized to pay
brokerage commissions to a broker furnishing such services which are in excess
of commissions which another broker may have charged for effecting the same
transaction. The expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information, and the Manager may use
such information in servicing its other accounts. During the fiscal year ended
August 31, 1996, the Fund did not acquire any securities of brokers or dealers
which executed its portfolio transactions.
The Fund invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with the dealers who make a market in
the securities involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund are prohibited from dealing with the Fund as principal
in the purchase and sale of securities. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the Fund, including
Merrill Lynch, will not serve as the Fund's dealer in such transactions.
However, affiliated persons of the Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation of
foreign stock exchanges and brokers than in the United States.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in United States dollars, the Fund intends to manage its portfolio so as
to give reasonable assurance that it will be able to obtain United States
dollars to the extent necessary to meet anticipated redemptions. Under present
conditions, it is not believed that these considerations will have any
significant effect on its portfolio strategy.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, Merrill Lynch may execute transactions for the Fund on the floor of any
national securities exchange provided that prior authorization of such
transactions is obtained and Merrill Lynch furnishes a statement to the Fund at
least annually setting forth the compensation it has received in connection with
such transactions.
For the fiscal year ended August 31, 1995, the Fund paid total brokerage
commissions of $40,593, of which $750 or 1.85% was paid to Merrill Lynch for
effecting 3.82% of the aggregate dollar amount of transactions in which the Fund
paid brokerage commissions. For the fiscal year ended August 31, 1996, the Fund
paid total brokerage commissions of $49,682, none of which was paid to Merrill
Lynch. For the fiscal year ended August 31, 1997, the Fund paid total brokerage
commissions of $23,190, of which $690 or 2.98% was paid to Merrill Lynch for
effecting 3.24% of the aggregate dollar amount of transactions in which the Fund
paid 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
24
<PAGE> 81
conducting portfolio transactions through affiliated entities. For example,
brokerage commissions received by affiliated brokers could be offset against the
advisory fee paid by the Fund. After considering all factors deemed relevant,
the Directors made a determination not to seek such recapture. The Directors
will reconsider this matter from time to time.
While the Fund generally does not expect to engage in trading for
short-term gains, it will effect portfolio transactions without regard to
holding period if, in its management's judgment, such transactions are advisable
in light of a change in circumstances of a particular company or within a
particular industry or in general market, economic or financial conditions.
Accordingly, while the Fund anticipates that its annual turnover rate should not
exceed 100% under normal conditions, it is impossible to predict portfolio
turnover rates. Higher portfolio turnover involves correspondingly greater
transaction costs in the form of dealer spreads and brokerage commissions, which
are borne directly by the Fund. The portfolio turnover rate is calculated by
dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of all securities whose maturities
at the time of acquisition were one year or less) by the monthly average value
of the securities in the portfolio during the year. For the fiscal years ended
August 31, 1996 and 1997, the portfolio turnover rates for the Fund were 25.98%
and 5.50%, respectively.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value.
The net asset value of the shares of the Fund is determined once daily
Monday through Friday as of 15 minutes after the close of business on the New
York Stock Exchange ("NYSE") (generally 4:00 p.m., New York time) on each day
the NYSE is open for trading. The NYSE is not open on New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The net asset value is computed by dividing the
value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the fees payable to the Manager
and the Distributor and any account maintenance and/or distribution fees, are
accrued daily. The per share net asset value of the Class B, Class C and Class D
shares generally will be lower than the per share net asset value of the Class A
shares reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares and the daily expense accruals of the account
maintenance fees applicable with respect to the Class D shares; moreover, the
per share net asset value of the Class B and Class C shares generally will be
lower than the per share net asset value of the Class D shares reflecting the
daily expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to Class B and Class C shares of the Fund. It is
expected, however, that the per share net asset value of the four classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends or distributions, which will differ by approximately the amount of
the expense accrual differential among the classes.
Securities traded in the over-the-counter ("OTC") market are valued at the
last available bid price in the OTC market prior to the time of valuation. When
the Fund writes an option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last
25
<PAGE> 82
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last asked price. Options purchased by the Fund
are valued at their last sale price in the case of exchange-traded options or in
the case of options traded in the OTC market, the last bid price. Other
investments, including futures contracts and related options, are stated at
market value. Portfolio securities that are traded on stock exchanges are valued
at the last sale price (regular way) on the exchange on which such securities
are traded, as of the close of business on the day the securities are being
valued or, lacking any sales, at the last available bid price. Other
investments, including futures contracts and related options, are stated at
market value.
Securities and assets for which market quotations are not readily available
are valued at fair market value, as determined in good faith by or under the
direction of the Board of Directors of the Fund, including valuations furnished
by a pricing service retained by the Fund. Such valuations and procedures will
be reviewed periodically by the Board of Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below that are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to United States investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends, and
long-term capital gains distributions. The statements will also show any other
activity in the account since the preceding statement. Shareholders will receive
separate transaction confirmations for each purchase or sale transaction other
than automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gains distributions. A shareholder may make
additions to his Investment Account at any time by mailing a check directly to
the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent. Shareholders considering
transferring their Class A or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class A or Class D
shares so that the cash proceeds can be transferred to the account at the new
firm or such shareholder must continue to maintain an Investment Account at the
Transfer Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder.
If the new brokerage firm is willing to 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.
26
<PAGE> 83
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to the Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through Blueprint, no minimum charge to the
investors' bank account is required. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund, in the
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more ($1 for retirement accounts) through the CMA(R) or CBA(R) Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund, without sales charge, as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their income
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or 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. The Fund is not responsible
for any failure of delivery to the shareholder's address of record and no
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares 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 shares of the Fund having a value,
based on cost or the current offering price, of $5,000 or more, and monthly
withdrawals are available for shareholders with shares having a value of $10,000
or more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify the dollar amount and class of shares to be redeemed. Redemptions will
be made at net asset value determined as described herein on the 24th day of
each month or the 24th day of the last month of each quarter, whichever is
applicable. If the NYSE is not open for business on such date, the 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
shares in
27
<PAGE> 84
the Investment Account are reinvested automatically in shares of the Fund. A
shareholder's systematic withdrawal plan may be terminated at any time, without
a charge or penalty, by the shareholder, the Fund, the Fund's Transfer Agent or
the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional 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 shares of
the Fund from investors who maintain a systematic withdrawal plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a 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 CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the shareholder's
account three business days after the date the shares are redeemed. All
redemptions are made at net asset value. A shareholder may elect to have his or
her shares redeemed on the first, second, third or fourth Monday of each month,
in the case of monthly redemptions, or of every other month, in the case of
bi-monthly redemptions. For quarterly, semiannual or annual redemptions, the
shareholder may select the month in which the shares are to be redeemed and may
designate whether the redemption is to be made on the first, second, third or
fourth Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Contingent Deferred Sales Charges -- Class B Shares" and
"-- Contingent Deferred Sales Charges -- Class C Shares" in the prospectus.
Where the systematic withdrawal plan is applied to Class B Shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will automatically be applied thereafter to Class D
shares. See "Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B
and Class C Shares -- Conversion of Class B Shares to Class D Shares" in the
prospectus; if an investor wishes to change the amount being withdrawn in a
systematic withdrawal plan the investor should contact his or her 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
28
<PAGE> 85
custodial fee for each account. Information with respect to these plans is
available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100 and the minimum subsequent purchase is $1.
However, there is no minimum for purchases through Blueprint's systematic
investment plans.
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. Under the Merrill Lynch Select
Pricing(SM) System, Class A shareholders may exchange Class A shares of the Fund
for Class A shares of a second MLAM-advised mutual fund if the shareholder holds
any Class A shares of the second fund in his account in which the exchange is
made at the time of the exchange or is otherwise eligible to purchase Class A
shares of the second fund. If the Class A shareholder wants to exchange Class A
shares for shares of a second MLAM-advised mutual fund, and the shareholder does
not hold Class A shares of the second fund in his account at the time of the
exchange and is not otherwise eligible to acquire Class A shares of the second
fund, the shareholder will receive Class D shares of the second fund as a result
of the exchange. Class D shares also may be exchanged for Class A shares of a
second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the account
in which the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund. Class B, Class C and Class D shares will be
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other Fund as more fully described below. Class A, Class B, Class
C and Class D shares also will be exchangeable for shares of certain
MLAM-advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C or Class D shares. Shares with
an aggregate net asset value of at least $100 are required to qualify for the
exchange privilege, and any shares utilized in an exchange must have been held
by the shareholder for 15 days.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
dividend reinvestment Class A and Class D shares shall be exchanged into the
Class A or Class D shares of the other funds or into shares of the Class A money
market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively
29
<PAGE> 86
("new Class B or Class C Shares"), of another MLAM-advised mutual fund on the
basis of relative net asset value per Class B or Class C share, without the
payment of any CDSC that might otherwise be due on redemption of the outstanding
shares. Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares acquired through use
of the exchange privilege. In addition, Class B shares of the Fund acquired
through use of the exchange privilege will be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares of the fund from which the exchange has been made. For purposes of
computing the sales load that may be payable on a disposition of the new Class B
or Class C shares, the period of time that the outstanding Class B or Class C
shares were held will count toward satisfaction of the holding period of the new
Class B or Class C shares. For example, an investor may exchange Class B shares
of the Fund for those of Merrill Lynch Special Value Fund, Inc. ("Special Value
Fund") after having held the Fund's Class B shares for two and a half years. The
2% CDSC that generally would apply to a redemption would not apply to the
exchange. Three years later the investor may decide to redeem the Class B shares
of Special Value Fund and receive cash. There will be no 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
Special Value Fund Class B shares, the investor will be deemed to have held the
new Special Value Fund Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
toward satisfaction of the holding period requirement for purposes of reducing
the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund that were acquired as
a result of an exchange for Class B or Class C shares of the Fund may, in turn,
be exchanged back into Class B or Class C shares, respectively, of any fund
offering such shares, in which event the holding period for Class B or Class C
shares of that fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange Class
B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Class B shares for two-and-a-half
years and three years later decide to redeem the shares of Institutional Fund
for cash. At the time of this redemption, the 2% CDSC that would have been due
had the Class B shares of the Fund been redeemed for cash rather than exchanged
for shares of Institutional Fund will be payable. If instead of such redemption
the shareholder exchanged such shares for Class B shares of a fund which the
shareholder continued to hold for an additional two-and-a-half years, any
subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire transfer through their securities dealers. The Fund
reserves the right to require a properly completed Exchange Application. This
exchange privilege may be modified or terminated in accordance with the rules of
the Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares to the general public at any time and may
thereafter resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made.
30
<PAGE> 87
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
All or a portion of the Fund's net investment income will be declared and
paid as dividends monthly. The Fund may at times pay out less than the entire
amount of net investment income earned in any particular period and may at times
pay out such accumulated undistributed income in addition to net investment
income earned in any particular period in order to permit the Fund to maintain a
more stable level of distributions. As a result, the distribution paid by the
Fund for any particular period may be more or less than the amount of net
investment income earned by the Fund during such period. However, it is the
Fund's intention to distribute during any fiscal year all its net investment
income. Shares will accrue dividends as long as they are issued and outstanding.
Shares are issued and outstanding as of the settlement date of a purchase order
to the settlement date of a redemption order. All net realized long-term and
short-term capital gains, if any, will be distributed to the Fund's shareholders
at least annually. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with a
Federal income tax requirement that certain percentages of its ordinary income
and capital gains be distributed during the taxable year. Premiums from expired
call options written by the Fund and net gains from closing purchase
transactions are treated as short-term capital gains for Federal income tax
purposes. See "Shareholder Services--Automatic Reinvestment of Dividends and
Capital Gains Distributions" for information concerning the manner in which
dividends and distributions may be reinvested automatically in shares of the
Fund. Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as described below whether they are invested in shares of the Fund
or received in cash. The per share dividends and distributions on Class B and
Class C shares will be lower than the per share dividends and distributions on
Class A and Class D shares as a result of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and Class
C shares; similarly, the per share dividends and distributions on Class D shares
will be lower than the per share dividends and distributions on Class A shares
as a result of the account maintenance fees applicable with respect to the Class
D shares. See "Determination of Net Asset Value."
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 long as it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to Class
A, Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
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) solely with respect to
tax years beginning on or before August 5, 1997, 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
31
<PAGE> 88
total assets and 10% of the outstanding voting securities of such issuer; and
(v) at the end of each fiscal quarter have no more than 25% of its assets
invested in the securities (other than those of the government or other RICs) of
any one issuer or of two or more issuers which the Fund controls and which are
engaged in the same, similar or related trades and businesses.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized 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.
Any net capital gains (i.e., the excess of net capital gains from the sale
of assets held for more than 12 months over net short-term capital losses, and
including such gains from certain transactions in futures and options)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
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, and also designating the amounts of
various categories of capital gain income in capital gain dividends. The portion
of the Fund's ordinary income dividends which is attributable to dividends
received by the Fund from U.S. corporations may be eligible for the dividends
received deduction allowed to corporations under the Code, if certain
requirements are met. For this purpose, the Fund will allocate dividends
eligible for the dividends received deduction between the Class A, Class B,
Class C and Class D shareholders according to a method (which it believes is
consistent with the Securities and Exchange Commission exemptive order
permitting the issuance and sale of multiple classes of stock) that is based
upon the gross income that is allocable to the Class A, Class B, Class C and
Class D shareholders during the taxable year, or such other method as the
Internal Revenue Service may prescribe. If the Fund pays a dividend in January
which was declared in the previous October, November or December to shareholders
of record on a date in such a month, then such dividend or distribution will be
treated for tax purposes as being paid on December 31, and will be taxable to
its shareholders on December 31 of the year in which the dividend was declared.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains distributions
and redemption payments ("backup withholding"). Generally, shareholders subject
to backup withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
shareholder is not otherwise subject to backup withholding taxes.
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.
32
<PAGE> 89
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States withholding tax under existing provisions of the Code applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.
Upon a sale or exchange of its shares, a shareholder will realize a taxable
gain or loss depending on its basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will be
treated as short-term capital loss if the shares were held for not more than 12
months, gain taxable at the maximum rate of 28% if such shares were held for
more than 12, but not more than 18 months, and long-term capital gain taxable at
the maximum rate of 20% if such shares were held for more than 18 months. In the
case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Generally, any loss realized on a sale or exchange
will be disallowed to the extent shares disposed of are replaced (whether
through the automatic reinvestment of dividends or otherwise) within a period of
61 days beginning 30 days before and ending 30 days after the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. 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.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell options or futures. Options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each option
or futures contract will be treated as sold for its fair market value on the
last day of the taxable year. Unless such contract is a forward foreign exchange
contract, or is a non-equity option or a regulated futures contract for a
non-U.S. currency for which the Fund elects to have gain or loss treated as
ordinary gain or loss under Code Section 988 (as described below), gain or loss
from Section 1256 contracts will be 60%
33
<PAGE> 90
long-term and 40% short-term capital gain or loss. The mark-to-market rules
outlined above, however, will not apply to certain transactions entered into by
the Fund solely to reduce the risk of changes in price or interest rates with
respect to its investments.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's transactions in options and futures contracts. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures.
Similarly, Code Section 1091, which deals with "wash sales," may cause the Fund
to postpone recognition of certain losses for tax purposes; Code Section 1258,
which deals with "conversion transactions," may apply to recharacterize certain
capital gains as ordinary income for tax purposes, and Code Section 1259, which
deals with "constructive sales" of appreciated financial positions (e.g. stock),
may treat the Fund as having recognized income before the time that such income
is economically recognized by the Fund.
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. Under recently enacted legislation,
this requirement will no longer apply to the Fund after its fiscal year ending
August 31, 1998.
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.
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.
34
<PAGE> 91
Dividends and capital gains distributions and gains on the sale or exchange
of shares in the Fund may also be subject to state and local taxes.
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.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield, in advertisements or information
furnished to present or prospective shareholders. Total return and yield figures
are based on the Fund's historical performance and are not intended to indicate
future performance. Average annual total return and yield are determined
separately for Class A, Class B, Class C and Class D shares in accordance with a
formula specified by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment. Such data will be
computed as described above, except that (i) as required by the periods of the
quotations, actual annual, annualized or aggregate data, rather than average
annual data, may be quoted and (ii) the maximum applicable sales charges will
not be included. Actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares," respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may not take into account the CDSC
and therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses may be
deducted.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period.
From time to time, the Fund may include the Fund's Morningstar
risk-adjusted performance ratings in advertisements or supplemental sales
literature.
35
<PAGE> 92
Set forth below is total return and yield information for Class A, Class B,
Class C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------- -------------------------------------
REDEEMABLE REDEEMABLE
EXPRESSED VALUE OF A EXPRESSED VALUE OF A
AS A PERCENTAGE HYPOTHETICAL AS A PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
- ---------------------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year Ended August 31, 1997................ 4.99% $1,049.90 4.39% $1,043.90
Inception (October 29, 1993) to August 31,
1997........................................ 3.28% $1,131.70 3.34% $1,134.30
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year Ended August 31,
1997.......................................... 9.36% $1,093.60 8.39% $1,083.90
1996.......................................... 6.61% $1,066.10 5.86% $1,058.60
1995.......................................... 14.68% $1,146.80 13.72% $1,137.20
Inception (October 29, 1993) to August 31,
1994........................................ (11.84)% $ 881.60 (12.34)% $ 876.60
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (October 29, 1993) to August 31,
1997........................................ 13.17% $1,131.70 13.43% $1,134.30
YIELD
30 Days Ended August 31, 1997................. 4.74% 4.15%
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------- -------------------------------------
REDEEMABLE REDEEMABLE
EXPRESSED VALUE OF A EXPRESSED VALUE OF A
AS A PERCENTAGE HYPOTHETICAL AS A PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
- ---------------------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One year ended August 31, 1997................ 7.48% $1,074.80 4.72% $1,074.20
Inception (October 21, 1994) to August 31,
1997........................................ 10.63% $1,335.20 9.74% $1,304.70
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One year ended August 31, 1997................ 8.48% $1,084.80 9.08% $1,090.80
One year ended August 31, 1996................ 5.65% $1,056.50 6.46% $1,064.60
Inception (October 21, 1994) to August 31,
1995........................................ 16.50% $1,165.00 17.03% $1,170.30
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (October 21, 1994) to August 31,
1997........................................ 33.52% $1,335.20 30.47% $1,304.70
YIELD
30 Days Ended August 31, 1997................. 4.08% 4.49%
</TABLE>
36
<PAGE> 93
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on July 14, 1993. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the distribution of such shares
and the account maintenance fee and have exclusive voting rights with respect to
matters relating to such account maintenance and/or distribution expenditures.
The Fund has received an order from the Securities and Exchange Commission
permitting the issuance and sale of multiple classes of Common Stock. The Board
of Directors of the Fund may classify and reclassify the shares of the Fund into
additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent accountants. Also, the by-laws of the Fund require that a special
meeting of stockholders be held upon the written request of at least 10% of the
outstanding shares of the Fund entitled to vote at such meeting. Voting rights
for Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive rights. Redemption and conversion rights
are discussed elsewhere herein and in the Prospectus. Each share is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund upon liquidation or dissolution after satisfaction of
outstanding liabilities. Stock certificates are issued by the transfer agent
only on specific request. Certificates for fractional shares are not issued in
any case.
The Manager provided the initial capital for the Fund by purchasing 5,000
shares of each class of stock for an aggregate of $100,000. Such shares were
acquired for investment and can only be disposed of by redemption. The
organizational expenses of the Fund were paid by the Fund and are being
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.
37
<PAGE> 94
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A, Class B, Class C and Class D shares of the
Fund based on the value of the Fund's net assets and number of shares
outstanding as of August 31, 1997, is calculated as set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets.......................... $1,376,182 $27,259,135 $4,104,244 $1,632,382
========== =========== ========= =======
Number of Shares Outstanding........ 145,521 2,883,169 434,832 172,373
========== =========== ========= =======
Net Asset Value Per Share (net
assets divided by number of shares
outstanding)...................... $ 9.46 $ 9.45 $ 9.44 $ 9.47
Sales Charge (for Class A and Class
D shares: 4.00% of offering price
(4.17% of net asset value per
share))*.......................... .39 ** ** .39
---------- ----------- --------- -------
Offering Price...................... $ 9.85 $ 9.45 $ 9.44 $ 9.86
========== =========== ========= =======
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares" in the Prospectus and
"Redemption of Shares--Deferred Sales Charge--Class B and Class C Shares"
herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540 has
been selected as the independent auditors of the Fund. The independent auditors
are responsible for auditing the annual financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, One Heritage Drive P2N, North Quincy,
Massachusetts 02171, acts as the Custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the Fund
to be held in its offices outside the United States and with certain foreign
banks and securities depositories. The Custodian is responsible for safeguarding
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities and collecting interest and dividends on the Fund's
investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The
Transfer Agent 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, LLP, 919 Third Avenue, New York, New
York 10022, is counsel for the Fund.
38
<PAGE> 95
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 November 1, 1997.
39
<PAGE> 96
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
MERRILL LYNCH UTILITY INCOME FUND, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Utility Income Fund, Inc. as of
August 31, 1997, the related statements of operations for the year then ended
and changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the three-year
period then ended and the period October 29, 1993 (commencement of operations)
to August 31, 1994. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at August
31, 1997 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Utility Income Fund, Inc. as of August 31, 1997, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 3, 1997
40
<PAGE> 97
Merrill Lynch Utility Income Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Shares Value Percent of
Industries Held Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Utilities -- Electric 39,000 Allegheny Power System, Inc. $895,450 $1,133,438 3.3%
28,400 American Electric Power Company, Inc. 1,037,871 1,240,725 3.6
33,000 Baltimore Gas & Electric Co. 844,868 891,000 2.6
40,600 Boston Edison Co. 1,015,336 1,146,950 3.3
11,000 CINergy Corp. 284,857 363,688 1.1
18,000 Carolina Power & Light Co. 536,468 607,500 1.8
29,100 Consolidated Edison Company of New York 980,888 891,188 2.6
31,400 DTE Energy Co. 984,627 930,225 2.7
45,000 Delmarva Power & Light Co. 924,651 807,188 2.3
20,800 Dominion Resources, Inc. 980,112 748,800 2.2
24,200 Edison International 437,106 583,825 1.7
48,000 Enova Corp. 1,165,493 1,152,000 3.3
27,000 Entergy Corp. 704,210 669,938 1.9
34,000 Florida Progress Corp. 1,105,601 1,094,375 3.2
27,500 GPU, Inc. 767,170 924,687 2.7
15,300 Houston Industries, Inc. 296,223 309,825 0.9
40,000 MDU Resources Group, Inc. 852,367 957,500 2.8
26,000 Nevada Power Co. 552,810 549,250 1.6
26,000 New Century Energies, Inc.** 841,935 1,049,750 3.0
23,000 New England Electric System 766,360 879,750 2.6
18,000 New York State Electric & Gas Corp. 520,663 438,750 1.3
19,000 Northern States Power Co. 864,640 914,375 2.7
27,000 OGE Energy Corporation 991,971 1,199,812 3.5
41,900 Ohio Edison Co. 936,783 921,800 2.7
12,900 PECO Energy Co. 373,224 307,181 0.9
35,800 PacifiCorp 706,649 742,850 2.2
29,400 Public Service Enterprise Group, Inc. 947,445 729,487 2.1
43,400 Southern Co. 923,825 914,112 2.7
21,000 Texas Utilities Holding Co. 715,885 732,375 2.1
32,600 Unicom Corp. 954,082 770,175 2.2
22,600 Union Electric Co. 912,093 840,437 2.4
9,000 Washington Water Power Co. 172,012 175,500 0.5
17,000 Western Resources Co. 478,125 569,500 1.7
----------- ----------- ------
25,471,800 26,187,956 76.2
Utilities -- Gas 40,300 AGL Resources Inc. 741,707 763,181 2.2
26,000 New Jersey Resources Corp. 750,192 833,625 2.4
----------- ----------- ------
1,491,899 1,596,806 4.6
Total Stocks 26,963,699 27,784,762 80.8
=========== =========== ======
<CAPTION>
Face
Amount Corporate Bonds
<S> <C> <C> <C> <C> <C>
Telecommunications $1,000,000 Southwestern Bell Corp., 7% due
7/01/2015 1,034,480 987,030 2.9
1,000,000 United Telephone Company of Florida,
6.875% due 7/15/2013 1,019,950 971,950 2.8
----------- ----------- ------
2,054,430 1,958,980 5.7
Utilities -- Electric 1,000,000 Public Service Company of Colorado,
6.375% due 11/01/2005 991,300 971,740 2.8
</TABLE>
41
<PAGE> 98
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Utilities -- Gas 1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 1,491,030 1,456,545 4.3
1,000,000 El Paso Natural Gas Co., 7.75% due
1/15/2002 1,090,950 1,034,380 3.0
----------- ----------- ------
2,581,980 2,490,925 7.3
Total Corporate Bonds 5,627,710 5,421,645 15.8
=========== =========== ======
<CAPTION>
Short-Term Securities
<S> <C> <C> <C> <C> <C>
Commercial Paper* 1,099,000 General Motors Acceptance Corp., 5.69%
due 9/02/1997 1,098,479 1,098,479 3.2
Total Short-Term Securities 1,098,479 1,098,479 3.2
=========== =========== ======
Total Investments $33,689,888 34,304,886 99.8
===========
Other Assets Less Liabilities 67,057 0.2
----------- ------
Net Assets $34,371,943 100.0%
=========== ======
* Commercial Paper is traded on a discount basis; the interest rate shown is the discount rate paid at the time of
purchase by the Fund.
** Public Service Company of Colorado merged with Southwestern Public Service Co. to form New Century Energies, Inc.
See Notes to Financial Statements.
</TABLE>
PORTFOLIO INFORMATION
For the Quarter Ended August 31, 1997
Percent of
Ten Largest Holdings Net Assets
ENSERCH Corp., 6.375% due 2/01/2004 4.3%
American Electric Power Company, Inc. 3.6
OGE Energy Corporation 3.5
Enova Corp. 3.3
Boston Edison Co. 3.3
Allegheny Power System, Inc. 3.3
Florida Progress Corp. 3.2
New Century Energies, Inc. 3.0
El Paso Natural Gas Co., 7.75% due
1/15/2002 3.0
Southwestern Bell Corp., 7% due 7/01/2015 2.9
Additions (Equity Investments)
Nevada Power Co.
Washington Water Power Co.
42
<PAGE> 99
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $33,689,888) (Note 1a) $34,304,886
Cash 479
Receivables:
Dividends $106,135
Interest 58,191
Investment adviser (Note 2) 18,275
Capital shares sold 13,352 195,953
------------
Deferred organization expenses (Note 1f) 21,140
Prepaid registration fees and other assets (Note 1f) 51,537
------------
Total assets 34,573,995
------------
Liabilities: Payables:
Capital shares redeemed 78,402
Distributor (Note 2) 19,445 97,847
------------
Accrued expenses and other liabilities 104,205
------------
Total liabilities 202,052
------------
Net Assets: Net assets $34,371,943
============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $14,552
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 288,317
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 43,483
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 17,237
Paid-in capital in excess of par 34,448,049
Undistributed investment income -- net 217,971
Accumulated realized capital losses on investments and foreign
currency transactions -- net (Note 6) (1,272,664)
Unrealized appreciation on investments -- net 614,998
------------
Net assets $34,371,943
============
Net Asset Value: Class A -- Based on net assets of $1,376,182 and 145,521 shares outstanding $9.46
============
Class B -- Based on net assets of $27,259,135 and 2,883,169 shares outstanding $9.45
============
Class C -- Based on net assets of $4,104,244 and 434,832 shares outstanding $9.44
============
Class D -- Based on net assets of $1,632,382 and 172,373 shares outstanding $9.47
============
See Notes to Financial Statements.
</TABLE>
43
<PAGE> 100
<TABLE>
<CAPTION>
Statement of Operations for the Year Ended August 31, 1997
<S> <C> <C> <C>
Investment Dividends (net of $3,238 foreign withholding tax) $1,923,568
Income Interest and amortization of premium and discount earned 474,383
(Notes 1d & 1e): -----------
Total income 2,397,951
-----------
Expenses: Account maintenance and distribution fees -- Class B (Note 2) $239,434
Investment advisory fees (Note 2) 207,552
Registration fees (Note 1f) 75,620
Printing and shareholder reports 64,489
Professional fees 61,175
Accounting services (Note 2) 52,946
Transfer agent fees -- Class B (Note 2) 51,748
Directors' fees and expenses 25,151
Account maintenance and distribution fees -- Class C (Note 2) 18,216
Amortization of organization expenses (Note 1f) 18,120
Custodian fees 6,384
Account maintenance fees -- Class D (Note 2) 4,108
Transfer agent fees -- Class C (Note 2) 3,678
Transfer agent fees -- Class A (Note 2) 2,589
Transfer agent fees -- Class D (Note 2) 2,230
Pricing fees 692
Other 4,522
------------
Total expenses before reimbursement 838,654
Reimbursement of expenses (Note 2) (346,702)
------------
Total expenses after reimbursement 491,952
-----------
Investment income -- net 1,905,999
-----------
Realized & Realized gain (loss) from:
Unrealized Gain Investments -- net (523,176)
(Loss) on Foreign currency transactions -- net 278 (522,898)
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions -- Net Investments -- net 1,806,145
(Notes 1b, 1c, Foreign currency transactions -- net 69 1,806,214
1e & 3): ------------ ------------
Net realized and unrealized gain on investments and foreign
currency transactions 1,283,316
-----------
Net Increase in Net Assets Resulting from Operations $3,189,315
===========
See Notes to Financial Statements.
</TABLE>
44
<PAGE> 101
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended
August 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $1,905,999 $2,258,055
Realized gain (loss) on investments and foreign currency
transactions -- net (522,898) 816,224
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions -- net 1,806,214 (548,790)
----------- -----------
Net increase in net assets resulting from operations 3,189,315 2,525,489
----------- -----------
Dividends to Investment income -- net:
Shareholders Class A (111,824) (179,490)
(Note 1g): Class B (1,638,691) (2,251,068)
Class C (108,910) (114,861)
Class D (93,142) (66,229)
----------- -----------
Net decrease in net assets resulting from dividends to shareholders (1,952,567) (2,611,648)
----------- -----------
Capital Share Net decrease in net assets derived from capital share transactions (8,197,559) (1,266,935)
Transactions ----------- -----------
(Note 4):
Net Assets: Total decrease in net assets (6,960,811) (1,353,094)
Beginning of year 41,332,754 42,685,848
----------- -----------
End of year* $34,371,943 $41,332,754
=========== ===========
* Undistributed investment income -- net (Note 1h) $217,971 $272,971
=========== ===========
See Notes to Financial Statements.
</TABLE>
45
<PAGE> 102
<TABLE>
<CAPTION>
Financial Highlights
Class A
For the
Period
Oct. 29,
The following per share data and ratios have been derived 1993+ to
from information provided in the financial statements. For the Year Ended August 31, Aug. 31,
1997++ 1996 1995 1994
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.17 $9.15 $8.44 $10.00
Operating -------- -------- -------- --------
Performance: Investment income -- net .55 .60 .60 .40
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net .29 .02 .59 (1.57)
-------- -------- -------- --------
Total from investment operations .84 .62 1.19 (1.17)
-------- -------- -------- --------
Less dividends from investment
income -- net (.55) (.60) (.48) (.39)
-------- -------- -------- --------
Net asset value, end of period $9.46 $9.17 $9.15 $8.44
======== ======== ======== ========
Total Investment Based on net asset value per share 9.36% 6.61% 14.68% (11.84%)++++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .59% .56% .49% .44%*
Net Assets: ======== ======== ======== ========
Expenses 1.51% 1.52% 1.87% 1.58%*
======== ======== ======== ========
Investment income -- net 5.79% 5.56% 6.60% 5.92%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $1,376 $2,108 $3,253 $4,238
Data: ======== ======== ======== ========
Portfolio turnover 5.50% 25.98% 12.59% 8.50%
======== ======== ======== ========
Average commission rate paid+++++ $.0595 $.0395 -- --
======== ======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
++++ Aggregate total investment return.
+++++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its
average commission rate per share for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted
into US dollars using the prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
46
<PAGE> 103
<TABLE>
<CAPTION>
Class B
For the
Period
Oct. 29,
The following per share data and ratios have been derived 1993+ to
from information provided in the financial statements. For the Year Ended August 31, Aug. 31,
1997++ 1996 1995 1994
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.17 $9.15 $8.44 $10.00
Operating -------- -------- -------- --------
Performance: Investment income -- net .47 .46 .49 .35
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net .28 .09 .63 (1.57)
-------- -------- -------- --------
Total from investment operations .75 .55 1.12 (1.22)
-------- -------- -------- --------
Less dividends from investment
income -- net (.47) (.53) (.41) (.34)
-------- -------- -------- --------
Net asset value, end of period $9.45 $9.17 $9.15 $8.44
======== ======== ======== ========
Total Investment Based on net asset value per share 8.39% 5.86% 13.72% (12.34%)++++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.36% 1.34% 1.27% 1.21%*
Net Assets: ======== ======== ======== ========
Expenses 2.28% 2.29% 2.66% 2.35%*
======== ======== ======== ========
Investment income -- net 5.00% 4.79% 5.75% 5.22%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $27,259 $35,702 $37,498 $27,395
Data: ======== ======== ======== ========
Portfolio turnover 5.50% 25.98% 12.59% 8.50%
======== ======== ======== ========
Average commission rate paid+++++ $.0595 $.0395 -- --
======== ======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
++++ Aggregate total investment return.
+++++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its
average commission rate per share for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted
into US dollars using the prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
47
<PAGE> 104
<TABLE>
<CAPTION>
Class C
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994+ to
August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997++ 1996 1995
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.15 $9.14 $8.17
Operating -------- -------- --------
Performance: Investment income -- net .47 .43 .42
Realized and unrealized gain on investments
and foreign currency transactions -- net .29 .10 .90
-------- -------- --------
Total from investment operations .76 .53 1.32
-------- -------- --------
Less dividends from investment income -- net (.47) (.52) (.35)
-------- -------- --------
Net asset value, end of period $9.44 $9.15 $9.14
======== ======== ========
Total Investment Based on net asset value per share 8.48% 5.65% 16.50%++++
Return:** ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.42% 1.40% 1.32%*
Net Assets: ======== ======== ========
Expenses 2.30% 2.34% 2.77%*
======== ======== ========
Investment income -- net 4.79% 4.75% 5.56%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $4,104 $2,107 $1,377
Data: ======== ======== ========
Portfolio turnover 5.50% 25.98% 12.59%
======== ======== ========
Average commission rate paid+++++ $.0595 $.0395 --
======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
++++ Aggregate total investment return.
+++++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its
average commission rate per share for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted
into US dollars using the prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
48
<PAGE> 105
<TABLE>
<CAPTION>
Class D
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994+ to
August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1997++ 1996 1995
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $9.18 $9.15 $8.17
Operating -------- -------- --------
Performance: Investment income -- net .52 .47 .51
Realized and unrealized gain on investments and
foreign currency transactions -- net .29 .13 .85
-------- -------- --------
Total from investment operations .81 .60 1.36
-------- -------- --------
Less dividends from investment income -- net (.52) (.57) (.38)
-------- -------- --------
Net asset value, end of period $9.47 $9.18 $9.15
======== ======== ========
Total Investment Based on net asset value per share 9.08% 6.46% 17.03%++++
Return:** ======== ======== ========
Ratios to Average Expenses, net of reimbursement .84% .82% .74%*
Net Assets: ======== ======== ========
Expenses 1.76% 1.75% 2.10%*
======== ======== ========
Investment income -- net 5.47% 5.37% 6.14%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $1,633 $1,416 $558
Data: ======== ======== ========
Portfolio turnover 5.50% 25.98% 12.59%
======== ======== ========
Average commission rate paid+++++ $.0595 $.0395 --
======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding during the period.
++++ Aggregate total investment return.
+++++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its
average commission rate per share for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted
into US dollars using the prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
49
<PAGE> 106
Merrill Lynch Utility Income Fund, Inc. August 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Utility Income Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The Fund offers four classes of shares under the
Merrill Lynch Select Pricing sm System. Shares of Class A and Class D
are sold with a front-end sales charge. Shares of Class B and Class C
may be subject to a contingent deferred sales charge. All classes of
shares have identical voting, dividend, liquidation and other rights and
the same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of such
shares, and Class B and Class C Shares also bear certain expenses
related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to its account
maintenance and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments -- Portfolio securities which are traded on
stock exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day
the securities are being valued or, lacking any sales, at the last
available bid price. Securities traded in the over-the-counter market
are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market.
Securities which are traded both in the over-the-counter market and on a
stock exchange are valued according to the broadest and most
representative market. Options written are valued at the last sale price
in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the last asked price. Options purchased
are valued at the last sale price in the case of exchange-traded options
or, in the case of options traded in the over-the-counter market, the
last bid price. Short-term securities are valued at amortized cost,
which approximates market value. Other investments, including futures
contracts and related options, are stated at market value. Securities
and assets for which market value quotations are not available are
valued at their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.
(b) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at
the exchange rate at the end of the period. Foreign currency
transactions are the result of settling (realized) or valuing
(unrealized) assets or liabilities expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
(c) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the contract or
if the counterparty does not perform under the contract.
[bullet] Forward foreign exchange contracts -- The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. Such contracts are not
entered on the Fund's records. However, the effect on operations is
recorded from the date the Fund enters into such contracts. Premium or
discount is amortized over the life of the contracts.
[bullet] Options -- The Fund is authorized to write covered call options
and purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset and
an equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
[bullet] Financial futures contracts -- The Fund is authorized to engage
in transactions in stock index futures and financial futures and related
options on such
50
<PAGE> 107
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 it was closed.
(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. Dividend
income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently
recorded when the Fund has determined the ex-dividend date.
(f) Deferred organization expenses and prepaid registration fees --
Deferred organization expenses are charged to expense over a five-year
period. Prepaid registration fees are charged to expense as the related
shares are issued.
(g) Dividends and distributions -- Dividends from net investment are
declared and paid monthly. Distribution of capital gains are recorded on
the ex-dividend date.
(h) Reclassification -- Generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, current
year's permanent book/tax differences of $8,432 have been reclassified
between accumulated net realized capital losses and undistributed net
investment income. These reclassifications have no effect on net assets
or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM
is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary
of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner.
The Fund has also entered into a Distribution Agreement and Distribution
Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or
"Distributor"), a wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operation of the Fund. For such
services, the Fund pays a monthly fee of 0.55%, on an annual basis, of
the average daily value of the Fund's net assets. For the year ended
August 31, 1997, MLAM earned fees of $207,552, all of which was
voluntarily waived. MLAM also voluntarily reimbursed the Fund for
additional expenses of $139,150.
Pursuant to the distribution plans (the "Distribution Plans") adopted by
the Fund in accordance with Rule 12b-1 under the Investment Company Act
of 1940, the Fund pays the Distributor ongoing account maintenance and
distribution fees. The fees are accrued daily and paid monthly at annual
rates based upon the average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also
provides account maintenance and distribution services to the Fund. The
ongoing account maintenance fee
51
<PAGE> 108
compensates the Distributor and MLPF&S for providing account maintenance
services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended August 31, 1997, MLFD earned underwriting discounts
and MLPF&S earned dealer concessions on sales of the Fund's Class A and
Class D Shares as follows:
MLFD MLPF&S
Class A $119 $1,611
Class D $446 $6,167
For the year ended August 31, 1997, MLPF&S received contingent deferred
sales charges of $119,366 and $669 relating to transactions in Class B
and Class C Shares, respectively.
In addition, MLPF&S received $690 in commissions on the execution of
portfolio security transactions for the Fund for the year ended August
31, 1997.
During the year ended August 31, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $627 for security
price quotations to compute the net asset value of the Fund.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, MLFD, MLFDS, PSI and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the year ended August 31, 1997 were $2,021,778 and $9,593,302,
respectively.
Realized and unrealized gains (losses) as of August 31, 1997 were as
follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $(523,176) $614,998
Foreign currency
transactions 278 --
---------- ----------
Total $(522,898) $614,998
========== ==========
As of August 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $614,998, of which $2,022,663 related to
appreciated securities and $1,407,665 related to depreciated
securities. At August 31, 1997, the aggregate cost of investments for
Federal income tax purposes was $33,689,888.
4. Capital Share Transactions:
A net decrease in net assets derived from capital share transactions was
$8,197,559 and $1,266,935 for the years ended August 31, 1997 and August
31, 1996, respectively.
Transactions in shares for each class were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 20,399 $187,890
Shares issued to share-
holders in reinvestment
of dividends 8,334 77,642
---------- ----------
Total issued 28,733 265,532
Shares redeemed (113,140) (1,047,248)
---------- ----------
Net decrease (84,407) $(781,716)
========== ==========
Class A Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 26,483 $251,820
Shares issued to share-
holders in reinvestment
of dividends 13,415 128,999
----------- -----------
Total issued 39,898 380,819
Shares redeemed (165,465) (1,575,950)
----------- -----------
Net decrease (125,567) $(1,195,131)
=========== ===========
Class B Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 442,701 $4,126,710
Shares issued to share-
holders in reinvestment
of dividends 113,728 1,060,681
----------- -----------
Total issued 556,429 5,187,391
Automatic conversion
of shares (10,234) (95,906)
Shares redeemed (1,557,581) (14,591,097)
----------- -----------
Net decrease (1,011,386) $(9,499,612)
=========== ===========
52
<PAGE> 109
Class B Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 1,431,503 $13,804,309
Shares issued to shareholders
in reinvestment of dividends 158,467 1,525,503
----------- -----------
Total issued 1,589,970 15,329,812
Automatic conversion
of shares (1,843) (17,967)
Shares redeemed (1,789,750) (17,064,546)
----------- -----------
Net decrease (201,623) $(1,752,701)
=========== ===========
Class C Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 344,100 $3,206,197
Shares issued to shareholders
in reinvestment of dividends 8,267 77,322
----------- -----------
Total issued 352,367 3,283,519
Shares redeemed (147,723) (1,372,843)
----------- -----------
Net increase 204,644 $1,910,676
=========== ===========
Class C Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 149,094 $1,446,377
Shares issued to shareholders
in reinvestment of dividends 8,192 78,695
----------- -----------
Total issued 157,286 1,525,072
Shares redeemed (77,801) (740,744)
----------- -----------
Net increase 79,485 $784,328
=========== ===========
Class D Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 124,751 $1,173,521
Automatic conversion
of shares 10,218 95,906
Shares issued to shareholders
in reinvestment of dividends 3,969 37,053
----------- -----------
Total issued 138,938 1,306,480
Shares redeemed (120,738) (1,133,387)
----------- -----------
Net increase 18,200 $173,093
=========== ===========
Class D Shares for the Year Dollar
Ended August 31, 1996 Shares Amount
Shares sold 559,217 $5,341,712
Automatic conversion
of shares 1,841 17,967
Shares issued to shareholders
in reinvestment of dividends 3,705 35,703
----------- -----------
Total issued 564,763 5,395,382
Shares redeemed (471,566) (4,498,813)
----------- -----------
Net increase 93,197 $896,569
=========== ===========
5. Subsequent Event:
On September 3, 1997, the Fund's Board of Directors declared an ordinary
income dividend in the amount of $0.040587 per Class A Share, $0.034644
per Class B Share, $0.034494 per Class C Share, and $0.038665 per Class
D Share, payable on September 10, 1997, to shareholders of record as of
September 2, 1997.
6. Capital Loss Carryforward:
On August 31, 1997, the Fund had a net capital loss carryforward of
approximately $1,098,000, of which $750,000 expires in 2003 and $348,000
expires in 2005. This amount will be available to offset like amounts of
any future taxable gains.
53
<PAGE> 110
(This page intentionally left blank)
<PAGE> 111
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
AAA Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt 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.
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
A-1
<PAGE> 112
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, 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
A-2
<PAGE> 113
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.
Preferred stock rating symbols and their definitions are as follows:
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.
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
A-3
<PAGE> 114
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 RATINGS GROUP'S
("STANDARD & POOR'S") CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
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
A-4
<PAGE> 115
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.
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.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is 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.
A-5
<PAGE> 116
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:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree
of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus
(+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" are regarded as having only adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
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
A-6
<PAGE> 117
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:
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.
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,
B,
CCC Preferred stock rated "BB," "B," and "CCC" are regarded, on
balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations. "BB"
indicates the lowest degree of speculation and "CCC" the highest
degree of speculation. While such issues will likely have some
quality and protection characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
CC The rating "CC" is reserved for a preferred stock issue in
arrears on dividends or sinking fund payments but that is
currently paying.
C
A preferred stock rated "C" is a non-paying issue.
D
A preferred stock rated "D" is a non-paying issue with the issuer
in default on debt instruments.
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.
A-7
<PAGE> 118
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information.
A-8
<PAGE> 119
(This page intentionally left blank)
<PAGE> 120
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies............ 2
Portfolio Strategies Involving Options and
Futures.................................. 2
Other Investment Policies and Practices.... 6
Investment Restrictions.................... 9
Management of the Fund....................... 11
Directors and Officers..................... 11
Management and Advisory Arrangements....... 13
Purchase of Shares........................... 15
Alternative Sales Arrangements............. 15
Initial Sales Charge Alternatives--Class A
and Class D Shares....................... 15
Reduced Initial Sales Charges.............. 16
Employer-Sponsored Retirement or Savings
Plans and Certain Other Arrangements..... 20
Distribution Plans......................... 20
Limitations on the Payment of Deferred
Sales Charges............................ 21
Redemption of Shares......................... 22
Deferred Sales Charges--Class B and Class C
Shares................................... 22
Portfolio Transactions and Brokerage......... 23
Determination of Net Asset Value............. 25
Shareholder Services......................... 26
Investment Account......................... 26
Automatic Investment Plans................. 27
Automatic Reinvestment of Dividends and
Capital Gains Distributions.............. 27
Systematic Withdrawal Plans................ 27
Retirement Plans........................... 28
Exchange Privilege......................... 29
Dividends, Distributions and Taxes........... 31
Dividends and Distributions................ 31
Taxes...................................... 31
Tax Treatment of Options and Futures
Transactions............................. 33
Special Rules for Certain Foreign Currency
Transactions............................. 34
Performance Data............................. 35
General Information.......................... 37
Description of Shares...................... 37
Computation of Offering Price Per Share.... 38
Independent Auditors....................... 38
Custodian.................................. 38
Transfer Agent............................. 38
Legal Counsel.............................. 38
Reports to Shareholders.................... 39
Additional Information..................... 39
Independent Auditors' Report................. 40
Financial Statements......................... 41
Appendix..................................... A-1
Code #16857-1297
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
UTILITY INCOME FUND, INC.
STATEMENT OF
ADDITIONAL
INFORMATION
December 1, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 121
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMDATE OR IMAGE IN TEST
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
<PAGE> 122
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
Contained in Part A, the Prospectus:
Financial Highlights for each of the years in the three-year
period ended August 31, 1997 and the period October 29, 1993
(commencement of operations) to August 31, 1994.
Contained in Part B, the Statement of Additional Information:
Schedule of Investments as of August 31, 1997.
Statement of Assets and Liabilities as of August 31, 1997.
Statement of Operations for the year ended August 31, 1997.
Statements of Changes in Net Assets for each of the years in the
two-year period ended August 31, 1997.
Financial Highlights for each of the years in the three-year
period ended August 31, 1997 and the period October 29, 1993
(commencement of operations) to August 31, 1994.
(b) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------------
<C> <C> <S>
1(a) -- Articles of Incorporation of Registrant.(1)
(b) -- Articles of Amendment dated October 21, 1994.(5)
(c) -- Articles Supplementary dated October 21, 1994.(5)
2(a) -- Amended and Restated By-Laws of Registrant.(2)
3 -- None.
4 -- Instruments defining rights of Shareholders. (Incorporated by reference to
Exhibits 1 and 2 above).
5(a) -- Management Agreement between Registrant and Merrill Lynch Investment Management,
Inc. (reorganized as Merrill Lynch Asset Management, L.P.).(2)
(b) -- Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P. and Merrill
Lynch Asset Management U.K. Limited.
6(a) -- Class A Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(5)
(b) -- Class B Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(2)
(c) -- Class C Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement).(5)
(d) -- Class D Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement).(5)
7 -- None.
8 -- Custody Agreement between Registrant and State Street Bank and Trust Company.(3)
9(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Merrill Lynch Financial Data Services, Inc.(2)
(b) -- License Agreement relating to Use of Name between Merrill Lynch & Co., Inc. and
Registrant.(3)
10 -- Opinion and consent of Shereff, Friedman, Hoffman & Goodman, LLP, counsel for
Registrant.(3)
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
</TABLE>
C-1
<PAGE> 123
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------------
<C> <C> <S>
13 -- Certificate of Merrill Lynch Investment Management, Inc.(3)
14 -- None.
15(a) -- Class B Distribution Plan and Class B Distribution Plan Sub-Agreement.(4)
(b) -- Class C Distribution Plan and Class C Distribution Plan Sub-Agreement.(5)
(c) -- Class D Distribution Plan and Class D Distribution Plan Sub-Agreement.(5)
16(a) -- Schedule for computation for each performance quotation relating to Class A
shares provided in the Registration Statement in Response to Item 22.(4)
(b) -- Schedule for computation of each performance quotation relating to Class B
shares provided in the Registration Statement in Response to Item 22.(4)
(c) -- Schedules for computation of each performance quotation for Class C and Class D
shares provided in the Registration Statement in response to Item 22.(5)
17(a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
(e) -- Powers of Attorney for Officers and Directors(4)
Arthur Zeikel
Gerald M. Richard
Ronald W. Forbes
Cynthia A. Montgomery
Charles C. Reilly
Kevin A. Ryan
Richard R. West
18 -- Rule 18f-3 Plan of Registrant.(6)
</TABLE>
- ---------------
(1) Incorporated by reference to identically numbered Exhibit to Registrant's
initial Registration Statement on Form N-1A (File No. 33-49787).
(2) 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).
(3) 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).
(4) Incorporated by reference to Exhibits to Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A (File No. 33-49787).
(5) Incorporated by reference to Exhibits to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A (File No. 33-49787).
(6) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to Registration Statement under the Securities Act of 1933 on Form N-1A of
Merrill Lynch Multi-State Municipal Series Trust on January 25, 1996 (File
Nos. 2-99473 and 811-4375).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any person.
C-2
<PAGE> 124
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS OCTOBER 31, 1997
- ------------------------------------------------------------------------------ ----------------
<S> <C>
Class A Common Stock, par value $0.10 per share............................... 150
Class B Common Stock, par value $0.10 per share............................... 2,415
Class C Shares of Common Stock, par value $0.10 per share..................... 361
Class D Shares of Common Stock, par value $0.10 per share..................... 431
</TABLE>
- ---------------
Note: The number of holders shown in the table includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch").
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the 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 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 within
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
C-3
<PAGE> 125
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 be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
The 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.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties.
Article IV of the Management Agreement between Registrant and Merrill Lynch
Asset Management, Inc. (now called Merrill Lynch Asset Management, L.P.)
("MLAM") (Exhibit 5 to Registrant's Registration Statement on Form N-1A) limits
the liability of MLAM to liabilities arising from willful misfeasance, bad faith
or gross negligence in the performance of their respective duties or from
reckless disregard of their respective duties and obligations.
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, as amended (the "Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus
and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM") also acts as
the investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
for Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global Convertible
Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap
Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value,
Inc., Merrill
C-4
<PAGE> 126
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.A. Government Reserves,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc.,
Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds (advised
by Hotchkis and Wiley, a division of MLAM); and for the following closed-end
registered investment companies: Merrill Lynch High Income Municipal Bond Fund,
Inc., and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as a
sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisory Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal
Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund
Accumulation Program, Inc.; and the following closed-end registered investment
companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Debt Strategies Fund, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal
Strategy Fund, Inc., MuniAssets Funds, Inc., MuniEnhanced Fund, Inc.,
MuniHoldings Fund, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings Florida Insured Fund, MuniHoldings New York Insured Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield
New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNew York Holdings, Inc., and Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Intermediate Government Bond Fund is
One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The address
of the Manager, FAM, Princeton Services, Inc. ("Princeton Services") and
Princeton Administrators, L.P. ("Princeton Administrators") is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch and Merrill Lynch & Co., Inc. ("ML & Co.") is World
Financial Center, North
C-5
<PAGE> 127
Tower, 250 Vesey Street, New York, New York 10281. The address of Merrill Lynch
Financial Data Services ("MLFDS") is 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since August 31,
1995 for his or her or its 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. Giordano, Harvey, 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>
<CAPTION>
POSITION WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------ ------------------------- -------------------------------------
<S> <C> <C>
ML & Co....................... Limited Partner Financial Services Holding Company;
Limited Partner of FAM.
Merrill Lynch Investment...... Limited Partner Investment Advisory Management, Inc.
Princeton Services............ General Partner General Partner of FAM.
Arthur Zeikel................. President President of FAM; President and
Director of Princeton Services;
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;
Director of MLFDS, President of
Princeton Administrators, L.P.
Linda L. Federici............. 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 A. Griffin.......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services.
Norman R. Harvey.............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services.
Michael J. Hennewinkel........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services.
Philip L. Kirstein............ Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of FAM; Senior
Secretary Vice President, General Counsel,
Director and Secretary of Princeton
Services.
Ronald M. Kloss............... Senior Vice President and Senior Vice President and Controller
Controller of FAM; Senior Vice President and
Controller of Princeton Services.
</TABLE>
C-6
<PAGE> 128
<TABLE>
<CAPTION>
POSITION WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------ ------------------------- -------------------------------------
<S> <C> <C>
Debra Landsman-Yaros.......... Senior Vice President Senior Vice President of FAM; Vice
President of MLFD; Senior Vice
President of Princeton Services.
Stephen M. M. Miller.......... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services.
Joseph T. Monagle, Jr......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services.
Michael L. Quinn.............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services; Managing Director and
First Vice President of Merrill
Lynch from 1989 to 1995.
Richard L. Reller............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services; Director of MLFD.
Gerald M. Richard............. Senior Vice President and Senior Vice President and Treasurer
Treasurer of FAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD.
Ronald L. Welburn............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services.
Gregory D. Upah............... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services.
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic
Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental
Growth Fund Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global
Allocation Fund Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global
Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global
Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth
Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch International Equity
Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa
Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special Value Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series
Funds, Inc., Merrill Lynch World Income Fund, Inc. and Worldwide DollarVest
Fund, Inc. The address of each of these investment companies is P.O.
C-7
<PAGE> 129
Box 9011, Princeton, New Jersey 08543-9011. The address of MLAM U.K. is Milton
Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since August 31,
1995, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert and Richard are officers
of one or more of the registered investment companies listed in the first two
paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------ ------------------------- -------------------------------------
<S> <C> <C>
Arthur Zeikel................. Director and Chairman President of the Manager and FAM;
President and Director of Princeton
Services; Executive Vice President
of ML & Co.
Alan J. Albert................ Senior Managing Vice President of the Manager.
Director
Nicholas C.D. Hall............ Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking
Group.
Gerald M. Richard............. Senior Vice President Senior Vice President and Treasurer
of the Manager and FAM; Senior Vice
President and Treasurer of
Princeton Services; Vice President
and Treasurer of MLFD.
Carol Ann Langham............. Company Secretary None
Debra Anne Searle............. Assistant Company None
Secretary
</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 two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., and The Municipal Fund
Accumulation Program, Inc., and MLFD also acts as principal underwriter for the
following closed-end funds: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of
C-8
<PAGE> 130
Messrs. Aldrich, Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd
Floor, 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 and Director Executive Vice President
Richard L. Reller............. Director None
Thomas J. Verage.............. Director None
William E. Aldrich............ Senior Vice President None
Robert W. Crook............... Senior Vice President None
Michael J. Brady.............. Vice President None
William M. Breen.............. Vice President None
Michael G. Clark.............. Vice President None
James T. Fatseas.............. Vice President None
Debra W. Landsman-Yaros....... Vice President None
Michelle T. Lau............... Vice President None
Gerald M. Richard............. Vice President and Treasurer Treasurer
Salvatore Venezia............. Vice President None
William Wasel................. Vice President None
Robert Harris................. Secretary None
</TABLE>
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and its transfer agent, Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Fund--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-9
<PAGE> 131
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF
THE REQUIREMENTS FOR EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933
AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
TOWNSHIP OF PLAINSBORO, AND STATE OF NEW JERSEY, ON THE 1ST DAY OF DECEMBER,
1997.
Merrill Lynch Utility Income Fund, Inc.
(Registrant)
By /s/ ARTHUR ZEIKEL
---------------------------------
(Arthur Zeikel, President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------- ------------------
<C> <S> <C>
/s/ ARTHUR ZEIKEL President (Chief Executive December 1, 1997
- ------------------------------------------ Officer) and Director
(Arthur Zeikel)
* Treasurer (Principal
- ------------------------------------------ Financial and Accounting
(Gerald M. Richard) Officer)
* Director
- ------------------------------------------
(Ronald W. Forbes)
* Director
- ------------------------------------------
(Cynthia A. Montgomery)
* Director
- ------------------------------------------
(Charles C. Reilly)
* Director
- ------------------------------------------
(Kevin A. Ryan)
* Director
- ------------------------------------------
(Richard R. West)
*This amendment has been signed by each of
the persons so indicated by the
undersigned as Attorney-in-Fact.
*By: /s/ ARTHUR ZEIKEL December 1, 1997
- ------------------------------------------
(Arthur Zeikel, President)
</TABLE>
C-10
<PAGE> 132
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------
<C> <C> <S> <C>
5(b) -- Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P. and
Merrill Lynch Asset Management U.K. Limited
11 -- Consent of Deloitte & Touche LLP, independent auditors for Registrant.
17(a) -- Financial Data Schedule for Class A Shares.
17(b) -- Financial Data Schedule for Class B Shares.
17(c) -- Financial Data Schedule for Class C Shares.
17(d) -- Financial Data Schedule for Class D Shares.
</TABLE>
<PAGE> 1
EXHIBIT 5(b)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the 13th day of November, 1997, by and between
MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership
(hereinafter referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K.
LIMITED, a corporation organized under the laws of England and Wales
(hereinafter referred to as "MLAM U.K.").
W I T N E S S E T H:
WHEREAS, MERRILL LYNCH UTILITY INCOME FUND, INC. (the "Fund") is a
Maryland corporation engaged in business as a diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended (hereinafter referred to as the "Investment Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering
investment advisory services and are registered as investment advisers under the
Investment Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is regulated by the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United
<PAGE> 2
Kingdom (hereinafter referred to as "IMRO"), and the conduct of its investment
business is regulated by IMRO; and
WHEREAS, MLAM has entered into a management agreement (the "Management
Agreement") dated September 1, 1993 pursuant to which MLAM provides management
and investment and advisory services to the Fund; and
WHEREAS, MLAM U.K. is willing to provide investment advisory services
to MLAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
Duties of MLAM U.K.
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and
to furnish, or arrange for affiliates to furnish, the investment advisory
services described below, subject to the broad supervision of MLAM and the Fund,
for the period and on the terms and conditions set forth in this Agreement. MLAM
U.K. hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such
2
<PAGE> 3
services and to assume the obligations herein set forth for the compensation
provided for herein. MLAM and its affiliates shall for all purposes herein be
deemed a Non-private Customer as defined under the rules promulgated by IMRO
(hereinafter referred to as the "IMRO Rules"). MLAM U.K. and its affiliates
shall for all purposes herein be deemed to be an independent contractor and
shall, unless otherwise expressly provided or authorized, have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
MLAM U.K. shall have the right to make unsolicited calls on MLAM and
shall provide MLAM with such investment research, advice and supervision as the
latter may from time to time consider necessary for the proper supervision of
the assets of the Fund; shall make recommendations from time to time as to which
securities shall be purchased, sold or exchanged and what portion of the assets
of the Fund shall be held in the various securities in which the Fund invests,
options, futures, options on futures or cash; all of the foregoing subject
always to the restrictions of the Articles of Incorporation and By-Laws of the
Fund, as they may be amended and/or restated from time to time, the provisions
of the Investment Company Act and the statements relating to the
3
<PAGE> 4
Fund's investment objective, investment policies and investment restrictions as
the same are set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under the Securities
Act of 1933, as amended (the "Prospectus" and "Statement of Additional
Information", respectively). MLAM U.K. shall make recommendations and effect
transactions with respect to foreign currency matters, including foreign
exchange contracts, foreign currency options, foreign currency futures and
related options on foreign currency futures and forward foreign currency
transactions. MLAM U.K. shall also make recommendations or take action as to the
manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the portfolio securities of the Fund shall be
exercised.
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will
MLAM U.K. be the registered holder of the registered investments of MLAM or the
Fund or be the custodian of documents or other evidence of title.
4
<PAGE> 5
ARTICLE II
Allocation of Charges and Expenses
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof and shall pay all compensation of officers of
the Fund and all Directors of the Fund who are affiliated persons of MLAM U.K.
ARTICLE III
Compensation of MLAM U.K.
For the services rendered, the facilities furnished and expenses
assumed by MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be
determined from time to time by MLAM and MLAM U.K. but in no event in excess of
the amount that MLAM actually receives for providing services to the Fund
pursuant to the Management Agreement.
5
<PAGE> 6
ARTICLE IV
Limitation of Liability of MLAM U.K.
MLAM U.K. shall not be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or omission in
the performance of sub-advisory services rendered with respect to the Fund,
except for willful misfeasance, bad faith or gross negligence in the performance
of its duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates of
MLAM U.K. performing services for MLAM contemplated hereby and directors,
officers and employees of MLAM U.K. and such affiliates.
ARTICLE V
Activities of MLAM U.K.
The services of MLAM U.K. to the Fund are not to be deemed to be
exclusive, MLAM U.K. and any person controlled by or under common control with
MLAM U.K. (for purposes of this Article V referred to as "affiliates") being
free to render services to others. It is understood that Directors, officers,
employees and shareholders of the Fund are or may become interested in MLAM U.K.
and its affiliates, as directors, officers, employees and
6
<PAGE> 7
shareholders or otherwise and that directors, officers, employees and
shareholders of MLAM U.K. and its affiliates are or may become similarly
interested in the Fund, and that MLAM U.K. and directors, officers, employees,
partners and shareholders of its affiliates may become interested in the Fund as
shareholders or otherwise.
ARTICLE VI
MLAM U.K. Statements Pursuant to IMRO Rules
Any complaints concerning MLAM U.K. should be in writing addressed to
the attention of the Managing Director of MLAM U.K. MLAM has the right to obtain
from MLAM U.K. a copy of the IMRO complaints procedure and to approach IMRO and
the Investment Ombudsman directly.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding Investments Not Readily
Realisable (as that term is used in the IMRO Rules) or investments denominated
in a currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be
7
<PAGE> 8
subject to exchange rate fluctuations which may have favorable or unfavorable
effects on investments.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding options, futures or
contracts for differences. Markets can be highly volatile and such investments
carry a high degree of risk of loss exceeding the original investment and any
margin on deposit.
ARTICLE VII
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above
written and shall remain in force until the date of termination of the
Management Agreement (but not later than two years after the date hereof) and
thereafter, but only so long as such continuance is specifically approved at
least annually by (i) the Directors of the Fund or by the vote of a majority of
the outstanding voting securities of the Fund and (ii) a majority of those
Directors who are not parties to this Agreement or
8
<PAGE> 9
interested persons of any such party cast in person at a meeting called for the
purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by MLAM or by vote of a majority of the outstanding voting
securities of the Fund, or by MLAM U.K., on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Management Agreement. Any
termination shall be without prejudice to the completion of transactions already
initiated.
ARTICLE VIII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.(i) the Directors of the Fund or by the vote of a majority of
outstanding voting securities of the Fund and (ii) a majority of those Directors
who are not parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on such approval.
9
<PAGE> 10
ARTICLE IX
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE X
Governing Law
This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By /s/ Arthur Zeikel
------------------------------------------
Title:
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By /s/ Arthur Zeikel
------------------------------------------
Title:
11
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Utility Income Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 5 to Registration
Statement No. 33-49787 of our report dated October 3, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
November 26, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000908882
<NAME> MERRILL LYNCH UTILITY INCOME FUND, INC.
<SERIES>
<NUMBER> 01
<NAME> CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 33689888
<INVESTMENTS-AT-VALUE> 34304886
<RECEIVABLES> 195953
<ASSETS-OTHER> 73156
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 34573995
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 202052
<TOTAL-LIABILITIES> 202052
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34811638
<SHARES-COMMON-STOCK> 145521
<SHARES-COMMON-PRIOR> 229928
<ACCUMULATED-NII-CURRENT> 217971
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1272664)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 614998
<NET-ASSETS> 1376182
<DIVIDEND-INCOME> 1923568
<INTEREST-INCOME> 474383
<OTHER-INCOME> 0
<EXPENSES-NET> (491952)
<NET-INVESTMENT-INCOME> 1905999
<REALIZED-GAINS-CURRENT> (522898)
<APPREC-INCREASE-CURRENT> 1806214
<NET-CHANGE-FROM-OPS> 3189315
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (111824)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 20399
<NUMBER-OF-SHARES-REDEEMED> (113140)
<SHARES-REINVESTED> 8334
<NET-CHANGE-IN-ASSETS> (6960811)
<ACCUMULATED-NII-PRIOR> 272971
<ACCUMULATED-GAINS-PRIOR> (758198)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 207552
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 838654
<AVERAGE-NET-ASSETS> 1896924
<PER-SHARE-NAV-BEGIN> 9.17
<PER-SHARE-NII> .55
<PER-SHARE-GAIN-APPREC> .29
<PER-SHARE-DIVIDEND> (.55)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.46
<EXPENSE-RATIO> 1.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000908882
<NAME> MERRILL LYNCH UTILITY INCOME FUND, INC.
<SERIES>
<NUMBER> 02
<NAME> CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 33689888
<INVESTMENTS-AT-VALUE> 34304886
<RECEIVABLES> 195953
<ASSETS-OTHER> 73156
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 34573995
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 202052
<TOTAL-LIABILITIES> 202052
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34811638
<SHARES-COMMON-STOCK> 2883169
<SHARES-COMMON-PRIOR> 3894555
<ACCUMULATED-NII-CURRENT> 217971
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1272664)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 614998
<NET-ASSETS> 27259135
<DIVIDEND-INCOME> 1923568
<INTEREST-INCOME> 474383
<OTHER-INCOME> 0
<EXPENSES-NET> (491952)
<NET-INVESTMENT-INCOME> 1905999
<REALIZED-GAINS-CURRENT> (522898)
<APPREC-INCREASE-CURRENT> 1806214
<NET-CHANGE-FROM-OPS> 3189315
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1638691)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 442701
<NUMBER-OF-SHARES-REDEEMED> (1567815)
<SHARES-REINVESTED> 113728
<NET-CHANGE-IN-ASSETS> (6960811)
<ACCUMULATED-NII-PRIOR> 272971
<ACCUMULATED-GAINS-PRIOR> (758198)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 207552
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 838654
<AVERAGE-NET-ASSETS> 32012225
<PER-SHARE-NAV-BEGIN> 9.17
<PER-SHARE-NII> .47
<PER-SHARE-GAIN-APPREC> .28
<PER-SHARE-DIVIDEND> (.47)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.45
<EXPENSE-RATIO> 2.28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000908882
<NAME> MERRILL LYNCH UTILITY INCOME FUND, INC.
<SERIES>
<NUMBER> 03
<NAME> CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 33689888
<INVESTMENTS-AT-VALUE> 34304886
<RECEIVABLES> 195953
<ASSETS-OTHER> 73156
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 34573995
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 202052
<TOTAL-LIABILITIES> 202052
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34811638
<SHARES-COMMON-STOCK> 434832
<SHARES-COMMON-PRIOR> 230188
<ACCUMULATED-NII-CURRENT> 217971
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1272664)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 614998
<NET-ASSETS> 4104244
<DIVIDEND-INCOME> 1923568
<INTEREST-INCOME> 474383
<OTHER-INCOME> 0
<EXPENSES-NET> (491952)
<NET-INVESTMENT-INCOME> 1905999
<REALIZED-GAINS-CURRENT> (522898)
<APPREC-INCREASE-CURRENT> 1806214
<NET-CHANGE-FROM-OPS> 3189315
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (108910)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 344100
<NUMBER-OF-SHARES-REDEEMED> (147723)
<SHARES-REINVESTED> 8267
<NET-CHANGE-IN-ASSETS> (6960811)
<ACCUMULATED-NII-PRIOR> 272971
<ACCUMULATED-GAINS-PRIOR> (758198)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 207552
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 838654
<AVERAGE-NET-ASSETS> 2283247
<PER-SHARE-NAV-BEGIN> 9.15
<PER-SHARE-NII> .47
<PER-SHARE-GAIN-APPREC> .29
<PER-SHARE-DIVIDEND> (.47)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.44
<EXPENSE-RATIO> 2.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000908882
<NAME> MERRILL LYNCH UTILITY INCOME FUND, INC.
<SERIES>
<NUMBER> 04
<NAME> CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 33689888
<INVESTMENTS-AT-VALUE> 34304886
<RECEIVABLES> 195953
<ASSETS-OTHER> 73156
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 34573995
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 202052
<TOTAL-LIABILITIES> 202052
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34811638
<SHARES-COMMON-STOCK> 172373
<SHARES-COMMON-PRIOR> 154173
<ACCUMULATED-NII-CURRENT> 217971
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1272664)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 614998
<NET-ASSETS> 1632382
<DIVIDEND-INCOME> 1923568
<INTEREST-INCOME> 474383
<OTHER-INCOME> 0
<EXPENSES-NET> (491952)
<NET-INVESTMENT-INCOME> 1905999
<REALIZED-GAINS-CURRENT> (522898)
<APPREC-INCREASE-CURRENT> 1806214
<NET-CHANGE-FROM-OPS> 3189315
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (93142)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 134969
<NUMBER-OF-SHARES-REDEEMED> (120738)
<SHARES-REINVESTED> 3969
<NET-CHANGE-IN-ASSETS> (6960811)
<ACCUMULATED-NII-PRIOR> 272971
<ACCUMULATED-GAINS-PRIOR> (758198)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 207552
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 838654
<AVERAGE-NET-ASSETS> 1647927
<PER-SHARE-NAV-BEGIN> 9.18
<PER-SHARE-NII> .52
<PER-SHARE-GAIN-APPREC> .29
<PER-SHARE-DIVIDEND> (.52)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.47
<EXPENSE-RATIO> 1.76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
