As filed with the Securities and Exchange Commission on December 8,
1999
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. 8
x
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940
Amendment No. 10
x
(Check appropriate box or boxes)
Merrill Lynch Utility Income Fund, Inc.
(Exact name of Registrant as specified in
charter)
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
(609) 282-2800
(Registrant’s Telephone Number, Including Area
Code)
Terry K. Glenn
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)
Approximate Date of Proposed Offering:
As soon as practicable after the effective date of the
Registration Statement.
Copies to:
|
|
| Counsel for
the Fund:
Joel H. Goldberg, Esq.
SWIDLER
BERLIN
SHEREFF
FRIEDMAN
, LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
|
|
Michael J.
Hennewinkel, Esq
Ira P. Shapiro, Esq.
MERRILL
LYNCH
ASSET
MANAGEMENT
, L
.P
.
P.O. Box 9011
Princeton, New Jersey 08543-9011
|
|
It is proposed that this filing will 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.
|
P r o s p e c t u s
[LOGO] Merrill Lynch
|
Merrill Lynch Utility
Income Fund, Inc.
|
December 8, 1999
|
This Prospectus
contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for
future reference.
|
|
The Securities and
Exchange Commission has not approved or disapproved these securities or
passed upon the adequacy of this Prospectus. Any representation to the
contrary is a criminal offense.
|
Table of Contents
MERRILL LYNCH UTILITY INCOME FUND, INC.
[GRAPHIC] Key Facts
In an effort to help you better understand the many concepts
involved in making an investment decision, we have defined the
highlighted terms in this prospectus in the sidebar.
Utility Companies —
companies that are primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
Common Stocks —
shares of ownership of a corporation.
Bonds
— debt obligations issued by corporations or
governments.
Preferred Stock
— class of stock that often pays dividends at a specified
rate and has preference over common stock in dividend payments and
liquidation of assets.
MERRILL LYNCH UTILITY INCOME FUND AT A GLANCE
What is the Fund’s investment objective?
The investment objective of the Fund is to seek high current
income through investment of at least 65% of its total assets in equity
and debt securities issued by companies that management of the Fund
believes are primarily engaged in the ownership or operation of
facilities used to generate, transmit or distribute electricity,
telecommunications, gas or water. In other words, the Fund’s goal
is to provide high current income.
What are the Fund’s main investment strategies?
The Fund tries to achieve its goal by investing in a diversified
portfolio of securities issued by utility companies. The
Fund invests primarily in securities that pay above-average dividends
or yields. In selecting investments, Fund management emphasizes
common stocks, bonds and preferred
stocks that it believes have the ability to continue paying
above-average dividends or yields. The Fund may also invest up to 20%
of its assets in securities issued by foreign companies. We cannot
guarantee that it will achieve its objective.
What are the main risks of investing in the Fund?
As with any mutual fund, the value of the Fund’s investments
— and therefore the value of Fund shares —
may go up or down. These changes may occur because a particular
stock market is rising or falling. At other times, there are specific
factors that may affect the value of a particular investment. If the
value of the Fund’s investments go down, you may lose money. The
Fund is also subject to the risk that the investments that Fund
management selects will underperform the stock market or other funds
with similar investment objectives and investment
strategies.
As a sector fund that invests in utility companies, the Fund is
subject to the risks associated with this sector. This makes the Fund
more vulnerable to price changes of utility companies and other factors
that particularly affect the utilities industry than a more broadly
diversified mutual fund. In addition, the prices of securities issued
by utility companies may change in response to interest rate changes.
Generally when interest rates go up, the value of securities issued by
utility companies goes down. Conversely, when interest rates go down,
the value of securities issued by utility companies generally go up.
There is no guarantee that this relationship will continue in the
future.
MERRILL LYNCH UTILITY INCOME FUND, INC.
3
[GRAPHIC] Key Facts
MERRILL LYNCH UTILITY INCOME FUND AT A GLANCE
Foreign investing involves special risks, including foreign currency risk
and the possibility of substantial volatility due to adverse political,
economic or other developments.
Who should invest?
The Fund may be an appropriate investment for you if
you:
|
Ÿ
|
Are seeking
current income
|
|
Ÿ
|
Want to
diversify your portfolio to include exposure to utility
companies
|
|
Ÿ
|
Want a
professionally managed and diversified portfolio
|
|
Ÿ
|
Are willing
to accept the risk that the value of your investment may decline in
order to seek high current income
|
MERRILL LYNCH UTILITY INCOME FUND, INC.
4
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund’s
performance for Class B shares for each complete calendar year since
the Fund’s inception. Sales charges are not reflected in the bar
chart. If these amounts were reflected, returns would be less than
those shown. The table compares the average annual total returns for
each class of the Fund’s shares for the periods shown with those
of the S&P 500 Index and the Composite Index. How the Fund
performed in the past is not necessarily an indication of how the Fund
will perform in the future.
[BAR CHART]
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(11.19)% 27.28% 0.46% 23.42% 9.93%
During the period shown in the bar chart, the highest return for
a quarter was 14.99% (quarter ended December 31, 1997) and the lowest
return for a quarter was -9.76% (quarter ended March 31, 1994). The
year-to-date return as of September 30, 1999 was -6.67%.
Average Annual Total Returns
(as of the calendar year ended)
December 31, 1998 |
|
|
|
Past
One Year |
|
Past
Five Years |
|
Since
Inception |
|
|
Merrill Lynch Utility Income Fund* |
|
A |
|
6.42 |
% |
|
8.98 |
% |
|
8.36 |
%† |
| S
&P 500 Index** |
|
|
|
28.58 |
% |
|
24.05 |
% |
|
23.22 |
%†† |
|
Composite Index*** |
|
|
|
15.16 |
% |
|
10.30 |
% |
|
9.37 |
%†† |
|
|
Merrill Lynch Utility Income Fund* |
|
B |
|
5.93 |
% |
|
9.03 |
% |
|
8.37 |
%† |
| S
&P 500 Index** |
|
|
|
28.58 |
% |
|
24.05 |
% |
|
23.22 |
%†† |
|
Composite Index*** |
|
|
|
15.16 |
% |
|
10.30 |
% |
|
9.37 |
%†† |
|
|
Merrill Lynch Utility Income Fund* |
|
C |
|
8.85 |
% |
|
N/A |
|
|
14.53 |
%††† |
| S
&P 500 Index** |
|
|
|
28.58 |
% |
|
N/A |
|
|
28.70 |
%# |
|
Composite Index*** |
|
|
|
15.16 |
% |
|
N/A |
|
|
15.95 |
%## |
|
|
Merrill Lynch Utility Income Fund* |
|
D |
|
6.14 |
% |
|
N/A |
|
|
14.13 |
%††† |
| S
&P 500 Index** |
|
|
|
28.58 |
% |
|
N/A |
|
|
28.70 |
%# |
|
Composite Index*** |
|
|
|
15.16 |
% |
|
N/A |
|
|
15.95 |
%## |
|
|
| *
Includes sales charge. |
|
| ** The S
&P 500® is the Standard & Poor’s Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock
prices. Past performance is not predictive of future
performance. |
|
| *** This unmanaged
market value-weighted Composite Index is comprised of the S&P
Electric Utility Index (75%), representing 25 electric utility
companies and the Merrill Lynch C5GO High and Medium Quality
Utilities Index (25%), representing U.S. corporate utility and
phone bonds maturing in 1-10 years. Past performance is not
predictive of future performance. |
|
| †
Inception date is October 29, 1993. |
|
| ††
Since October 31, 1993. |
|
| †††
Inception date is October 21, 1994. |
|
| #
Since October 21, 1994. |
|
| ## Since
October 31, 1994. |
MERRILL LYNCH UTILITY INCOME FUND,
INC.
5
[GRAPHIC] Key Facts
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses,
either directly or indirectly. Listed below are some of the
main types of expenses, which all mutual funds may
charge:
Expenses paid directly by the
shareholder:
Shareholder
Fees — these fees include sales
charges and redemption fees, which you may pay when you buy or
sell shares of the Fund.
Expenses paid indirectly by the
shareholder:
Annual Fund Operating
Expenses — expenses that cover the
costs of operating the Fund.
Management
Fee — a fee paid to the Investment
Adviser for managing the Fund.
Distribution
Fees — fees used to support the Fund
’s marketing and distribution efforts, such as
compensating Financial Consultants, advertising and
promotion.
Service (Account
Maintenance) Fees — fees used to
compensate securities dealers for account maintenance
activities.
The Fund offers four different classes of
shares. Although your money will be invested the same way no
matter which class of shares you buy, there are differences
among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining
which classes you are eligible to buy, decide which class best
suits your needs. Your Merrill Lynch Financial Consultant can
help you with this decision.
This table shows the different fees and expenses
that you may pay if you buy and hold the different classes of
shares of the Fund. Future expenses may be greater or less than
those indicated below.
Shareholder Fees
(fees paid directly from your investment)(a): |
|
Class
A |
|
Class
B(b) |
|
Class
C |
|
Class
D |
|
Maximum Sales Charge (Load) imposed on
purchases
(as a percentage of offering
price) |
|
4.00%(c) |
|
None |
|
None |
|
4.00%(c) |
|
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption
proceeds, whichever is lower) |
|
None(d) |
|
4.0%(c) |
|
1.0%(c) |
|
None(d) |
|
Maximum Sales Charge (Load) imposed on
Dividend
Reinvestments |
|
None |
|
None |
|
None |
|
None |
|
|
Redemption Fee |
|
None |
|
None |
|
None |
|
None |
|
|
Exchange Fee |
|
None |
|
None |
|
None |
|
None |
|
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets): |
|
|
|
|
Management Fee(g) |
|
0.55% |
|
0.55% |
|
0.55% |
|
0.55% |
|
|
Distribution and/or Service (12b-1)
Fees(e) |
|
None |
|
0.75% |
|
0.80% |
|
0.25% |
|
|
Other Expenses (including transfer agency
fees)(f) |
|
0.61% |
|
0.63% |
|
0.64% |
|
0.61% |
|
|
Total Annual Fund Operating Expenses(g) |
|
1.16% |
|
1.93% |
|
1.99% |
|
1.41% |
(a)
|
In addition, Merrill Lynch may charge clients a
processing fee (currently $5.35) when a client buys or redeems
shares.
|
(b)
|
Class B shares automatically convert to Class D
shares about ten years after you buy them and will no longer
be subject to distribution fees.
|
(c)
|
Some investors may qualify for reductions in
the sales charge (load).
|
(d)
|
You may pay a deferred sales charge if you
purchase $1 million or more and you redeem within one
year.
|
(e)
|
The Fund calls the Service Fee an “Account
Maintenance Fee.” Account Maintenance Fee is the term
used elsewhere in this Prospectus and in all other Fund
materials. If you hold Class B or Class C shares for a long
time, it may cost you more in distribution (12b-1) fees than
the maximum sales charge that you would have paid if you had
bought one of the other classes.
|
(f)
|
The Fund pays the Transfer Agent $11.00 for
each Class A and Class D shareholder account and $14.00 for
each Class B and Class C shareholder account and reimburses
the Transfer Agent’s out-of-pocket expenses. The Fund
pays a 0.10% fee for certain accounts that participate in the
Merrill Lynch Mutual Fund Advisor program. The Fund also pays
a $0.20 monthly closed account charge, which is assessed upon
all accounts that close during the year. This fee begins the
month following the month the account is closed and ends at
the end of the calendar year. For the fiscal year ended August
31, 1999, the Fund paid the Transfer Agent fees totaling
$84,904. The investment adviser provides accounting services
to the Fund at its cost. For the fiscal year ended August 31,
1999, the Fund reimbursed the Investment Adviser $63,913 for
these services.
|
MERRILL LYNCH UTILITY INCOME FUND,
INC.
6
|
(Footnotes continued from previous page)
|
(g)
|
As of August 31, 1999, the Investment Adviser
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
includes expense amounts that would have been incurred absent
expense reimbursement or fee waiver arrangements. During the
fiscal year ended August 31, 1999, the Investment Adviser
waived management fees and reimbursed expenses totaling 0.70%
for Class A shares, 0.69% for Class B shares, 0.68% for Class
C shares and 0.70% for Class D shares after which the Fund
’s total expense ratio was 0.59% for Class A shares,
1.37% for Class B shares, 1.40% for Class C shares and 0.84%
for Class D shares. The Investment Adviser may discontinue or
reduce the expense reimbursement or fee waiver arrangement at
any time without notice.
|
Examples:
These examples are intended to help you compare
the cost of investing in the Fund with the cost of investing in
other mutual funds.
These examples assume that you invest $10,000 in
the Fund for the time periods indicated, that your investment
has a 5% return each year, that you pay the sales charges, if
any, that apply to the particular class and that the Fund’s
operating expenses remain the same. This assumption is not meant
to indicate you will receive a 5% annual rate of return. Your
annual return may be more or less than the 5% used in this
example. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR
SHARES:
|
|
|
1
Year |
|
3
Years |
|
5
Years |
|
10
Years |
|
| Class
A |
|
$514 |
|
$754 |
|
$1,013 |
|
$1,753 |
|
| Class
B |
|
$596 |
|
$806 |
|
$1,042 |
|
$2,254 |
|
| Class
C |
|
$302 |
|
$624 |
|
$1,073 |
|
$2,317 |
|
| Class
D |
|
$538 |
|
$828 |
|
$1,140 |
|
$2,023 |
|
|
| EXPENSES IF YOU DID NOT
REDEEM YOUR SHARES: |
|
|
|
|
1
Year |
|
3
Years |
|
5
Years |
|
10
Years |
|
| Class
A |
|
$514 |
|
$754 |
|
$1,013 |
|
$1,753 |
|
| Class
B |
|
$196 |
|
$606 |
|
$1,042 |
|
$2,254 |
|
| Class
C |
|
$202 |
|
$624 |
|
$1,073 |
|
$2,317 |
|
| Class
D |
|
$538 |
|
$828 |
|
$1,140 |
|
$2,023 |
|
MERRILL LYNCH UTILITY INCOME FUND,
INC.
7
[GRAPHIC] Details About the Fund
ABOUT THE
PORTFOLIO MANAGER
Walter D. Rogers is a Senior Vice President and
the portfolio manager of the Fund. Mr. Rogers has been a First
Vice President of Merrill Lynch Asset Management since 1997 and
a Vice President from 1987 to 1997.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset
Management.
The Fund’s objective is high current income. The Fund tries
to achieve its objective by investing in a diversified portfolio
of securities issued by utility companies. The Fund invests at
least 65% of its assets in securities issued by utility
companies, except during temporary defensive periods. The Fund
may invest in common stocks, bonds and preferred stock. Fund
management adjusts the mix of securities in its portfolio as it
sees appropriate to seek to meet the Fund’s
objective.
In selecting securities, Fund management
emphasizes securities of utility companies that have strong
financial characteristics and are paying above-average dividends
or yields. Fund management analyzes the dividend that a utility
stock pays and whether the company has the ability to continue
paying the dividend in the future. Similarly, when selecting
bonds, Fund management considers the yield a bond provides and
whether the company has the ability to continue paying that
yield. Fund management assesses the financial strength of the
utility company by considering factors such as financial
resources, quality of management and overall business
prospects.
The Fund also looks for utility companies that
may prosper in a deregulated environment. Historically, utility
companies have been highly regulated. Currently, there is a
growing movement in the United States and worldwide to
deregulate utility companies, particularly electric utility and
telecommunication companies, and permit greater competition
among them. Deregulation may allow utility companies to increase
their earnings at a faster rate than was allowed in a regulated
environment. Deregulation presents both opportunities and risks
for investors in utility company securities. For example, in
recent years, changes in regulation in the United States
increasingly have allowed utility companies to provide services
and products outside their traditional geographic areas and
lines of business, creating new areas of competition within the
industries. In some instances, utility companies are operating
on an unregulated basis. Because of trends toward deregulation
and the evolution of independent power producers as well as new
entrants to the field of telecommunications, non-regulated
providers of utility services have become a significant part of
their respective industries. The emergence of competition and
deregulation may 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 bonds in which the Fund invests generally are
limited to those rated investment grade, though the Fund may
invest up to 5% of its total assets in
lower rated debt securities also known as junk bonds. The Fund may
also invest up to 20% of its total assets in securities of
foreign issuers. (American Depositary Receipts are not included
in this 20% limit). The Fund may also invest in European
Depositary Receipts, convertible securities, when-issued
securities, illiquid securities and may engage in securities
lending.
The Fund may or may not choose to use
derivatives, such as options and
futures, to hedge against movements in interest
rates, currencies and market movements. The Fund may also write
covered call options to enhance income.
The Fund may invest up to 35% of its assets in
securities of companies that are not utility companies. These
investments will be selected to meet the Fund’s investment
objective.
The Fund will normally invest a portion of its
assets in short-term debt securities, such as commercial paper.
Except during temporary defensive periods, the Fund’s
investment in short-term securities will not exceed 20% of its
total assets. During temporary defensive periods, the Fund may
invest more heavily in these securities, without limitation.
Therefore, the Fund may not achieve its investment objective.
The Fund may also increase its investments in these securities
when Fund management is unable to find enough attractive
long-term investments, to reduce exposure to equities when
management believes it is advisable to do so or to meet
redemptions. Investments in short-term debt securities can be
sold easily and have limited risk of loss but earn only limited
returns.
This section contains a summary discussion of the
general risks of investing in the Fund. As with any mutual fund,
there can be no guarantee that the Fund will meet its goals or
that the Fund’s performance will be positive for any period
of time.
Sector Risk
— Sector risk is the risk that the Fund’s
concentration in the securities of utility companies will expose
the Fund to the price movements of companies in one industry
more than a more broadly diversified mutual fund. Because the
Fund invests primarily in one sector, there is the risk that the
Fund will perform poorly during a downturn in that sector. The
Fund should be considered a vehicle for diversification and
should not be considered a balanced investment program by
itself.
MERRILL LYNCH UTILITY INCOME FUND,
INC.
9
[GRAPHIC] Details About the Fund
When interest rates go up, the value of
securities issued by utility companies generally goes down.
Although the average dividend yield of utility industry stocks
historically has been higher than those of industrial companies,
the total return of utility industry securities has historically
underperformed those of industrial companies. In most countries
and localities, the utilities industry is regulated by
government entities, which can increase costs and delays for new
projects and make it difficult to pass increased costs on to
consumers. In certain areas, deregulation of utilities has
resulted in increased competition and reduced profitability for
certain companies. Reduced profitability as well as new uses of
funds (such as for expansion, operations or stock buybacks)
could result in reduced dividend payout rates for utility
companies. In addition, utility companies face the risk of
increases in the cost and reduced availability of fuel (such as
oil, coal, nuclear or natural gas) and high interest costs for
borrowing to finance new projects.
Market and Selection
Risk — Market risk is
the risk that the stock market will go down in value, including
the possibility that the market will go down sharply and
unpredictably. Selection risk is the risk that the investments
that Fund management selects will underperform the markets or
other funds with similar investment objectives and investment
strategies.
Interest Rate Risk
— Interest rate risk is the risk that prices of
bonds generally increase when interest rates decline and
decrease when interest rates increase. Prices of longer term
securities generally change more in response to interest rate
changes than prices of shorter term securities.
Credit Risk —
Credit risk is the risk that the issuer will be
unable to pay the interest or principal when due. The degree of
credit risk depends on both the financial condition of the
issuer and the terms of the obligation.
Foreign Market Risk
— Since the Fund may invest in foreign
securities, it offers the potential for more diversification
than an investment only in the United States. This is because
stocks traded on foreign markets have often (though not always)
performed differently than stocks in the United States. However,
such investments involve special risks not present in U.S.
investments that can increase the chances that the Fund will
lose money. In particular, investment in foreign securities
involves the following risks, which are generally greater for
investments in emerging markets.
MERRILL LYNCH UTILITY INCOME FUND,
INC.
10
|
Ÿ
|
The economies of certain foreign markets often
do not compare favorably with that of the United States in
areas such as growth of gross domestic product, reinvestment
of capital, resources and balance of payments. Some of these
economies may rely heavily on particular industries or foreign
capital. They may be more vulnerable to adverse diplomatic
developments, the imposition of economic sanctions against a
particular country or countries, changes in international
trading patterns, trade barriers and other protectionist or
retaliatory measures.
|
|
Ÿ
|
Investments in foreign markets may be adversely
affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries,
expropriation of assets or the imposition of punitive
taxes.
|
|
Ÿ
|
The governments of certain countries may
prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries.
Any of these actions could severely affect security prices,
impair the Fund’s ability to purchase or sell foreign
securities or transfer the Fund’s assets or income back
into the United States, or otherwise adversely affect the Fund
’s operations.
|
|
Ÿ
|
Other foreign market risks include foreign
exchange controls, difficulties in pricing securities,
defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to
investors in certain foreign countries may be less extensive
than those available to investors in the United
States.
|
|
Ÿ
|
Because there are generally fewer investors on
foreign exchanges and a smaller number of shares traded each
day, it may be difficult for the Fund to buy and sell
securities on those exchanges. In addition, prices of foreign
securities may go up and down more than prices of securities
traded in the United States.
|
|
Ÿ
|
Foreign markets have different clearance and
settlement procedures. In certain markets, settlements may be
unable to keep pace with the volume of securities
transactions.If this occurs, settlement may be delayed and the
Fund’s assets may be uninvested and not earning returns.
The Fund may miss investment opportunities or be unable to
dispose of a security because of these delays.
|
MERRILL LYNCH UTILITY INCOME FUND,
INC.
11
[GRAPHIC] Details About the Fund
Forwards
— private contracts involving the obligation
of the seller to deliver, and the buyer to receive, certain
assets at a specified time.
European Economic And Monetary Union (“EMU
”) —
A number of European countries have agreed to
enter into EMU in an effort to reduce trade barriers between
themselves and eliminate fluctuations in their currencies. EMU
established a single European currency (the euro), which was
introduced on January 1, 1999 and is expected to replace the
existing national currencies of all initial EMU participants by
July 1, 2002. Certain securities (beginning with government and
corporate bonds) were redenominated in the euro. These
securities trade and make dividend and other payments only in
euros. Like other investment companies and business
organizations, including the companies in which the Fund
invests, the Fund could be adversely affected:
|
Ÿ
|
If the transition to the euro, or EMU as a
whole, does not proceed as planned.
|
|
Ÿ
|
If a participating country withdraws from
EMU.
|
Convertible Securities
— Convertible securities are
generally debt securities or preferred stocks that may be
converted into common stock. Convertible securities typically
pay current income, as either interest (debt security
convertibles) or dividends (preferred stocks). A convertible
security’s value usually reflects both the stream of
current income payments and the value of the underlying common
stock. The market value of a convertible security performs like
regular debt securities; that is, if market interest rates rise,
the value of a convertible security usually falls. Since it is
convertible into common stock, the convertible security also has
the same types of market and issuer risk as the value of the
underlying common stock.
Derivatives
— Derivatives allow the Fund to
increase or decrease its risk exposure more quickly and
efficiently than other types of instruments. The Fund may use
the following types of derivative instruments including:
Futures, Forwards and Options.
Derivatives are volatile and involve significant
risks, including:
|
Ÿ
|
Leverage risk
— the risk associated with certain types of
investments or trading strategies (such as borrowing money to
increase the amount of investments) that relatively small
market movements may result in large changes in the value of
an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the
amount originally invested.
|
MERRILL LYNCH UTILITY INCOME FUND,
INC..
12
|
Ÿ
|
Credit risk
— the risk that the counterparty
(the party on the other side of the transaction) on a
derivative transaction will be unable to honor its financial
obligation to the Fund.
|
|
Ÿ
|
Currency risk
— the risk that
changes in the exchange rate between currencies will adversely
affect the value (in U.S. dollar terms) of an
investment.
|
|
Ÿ
|
Liquidity Risk
— the risk that
certain securities may be difficult or impossible to sell at
the time that the seller would like or at the price that the
seller believes the security is currently worth.
|
The Fund may use derivatives, including
anticipatory hedges, for hedging purposes. The Fund may also
write covered call options to enhance income. Hedging is a
strategy in which the Fund uses a derivative to offset the risk
that other Fund holdings may decrease in value. While hedging
can reduce losses, it can also reduce or eliminate gains if the
market moves in a different manner than anticipated by the Fund
or if the cost of the derivative outweighs the benefit of the
hedge. Hedging also involves the risk that changes in the value
of the derivative will not match those of the holdings being
hedged as expected by the Fund, in which case any losses on the
holdings being hedged may not be reduced. There can be no
assurance that the Fund’s hedging strategy will reduce risk
or that hedging transactions will be either available or cost
effective. The Fund is not required to use hedging and may
choose not to do so.
Borrowing And Leverage
— The Fund may borrow for
temporary emergency purposes including to meet redemptions.
Borrowing may exaggerate changes in the net asset value of Fund
shares and in the yield on the Fund’s portfolio. Borrowing
will cost the Fund interest expense and other fees. The cost of
borrowing may reduce the Fund’s return. Certain securities
that the Fund buys may create leverage, including, for example,
when-issued securities, forward commitments and
options.
STATEMENT OF ADDITIONAL INFORMATION
If you would like further information about the
Fund, including how it invests, please see the Statement of
Additional Information.
MERRILL LYNCH UTILITY INCOME FUND,
INC.
13
[GRAPHIC] Your Account
MERRILL LYNCH SELECT PRICING
SM
SYSTEM
The Fund offers four share classes, each with
its own sales charge and expense structure, allowing you to
invest in the way that best suits your needs. Each share class
represents an ownership interest in the same investment
portfolio. When you choose your class of shares you should
consider the size of your investment and how long you plan to
hold your shares. Your Merrill Lynch Financial Consultant can
help you determine which share class is best suited to your
personal financial goals.
For example, if you select Class A or D shares,
you generally pay a sales charge at the time of purchase. If you
buy Class D shares, you also pay an ongoing account maintenance
fee of 0.25%. You may be eligible for a sales charge reduction
or waiver.
If you select Class B or C shares, you will
invest the full amount of your purchase price, but you will be
subject to distribution fees of 0.50% for Class B shares and
0.55% for Class C shares and account maintenance of 0.25% for
both Class B and Class C shares. Because these fees are paid out
of the Fund’s assets on an ongoing basis, over time these
fees increase the cost of your investment and may cost you more
than paying an initial sales charge. In addition, you may be
subject to a deferred sales charge when you sell Class B or C
shares.
The Fund’s shares are distributed by Merrill
Lynch Funds Distributor, a division of Princeton Funds
Distributor, Inc., an affiliate of Merrill Lynch.
MERRILL LYNCH UTILITY INCOME FUND,
INC.
14
The table below summarizes key features of the
Merrill Lynch Select Pricing
SM
System.
|
|
|
Class
A |
|
Class
B |
|
Class
C |
|
Class
D |
|
| Availability |
|
Limited to
certain
investors including:
Ÿ Current Class A
shareholders
Ÿ Certain Retirement
Plans
Ÿ Participants in
certain Merrill Lynch
sponsored programs
Ÿ Certain affiliates of
Merrill Lynch. |
|
Generally
available
through Merrill Lynch.
Limited availability
through other
securities dealers. |
|
Generally
available
through Merrill Lynch.
Limited availability
through other
securities dealers. |
|
Generally
available
through Merrill Lynch.
Limited availability
through other
securities dealers. |
|
|
|
Initial Sales
Charge? |
|
Yes. Payable
at time
of purchase. Lower
sales charges available
for larger
investments. |
|
No. Entire
purchase
price is invested in
shares of the Fund. |
|
No. Entire
purchase
price is invested in
shares of the Fund. |
|
Yes. Payable
at time
of purchase. Lower
sales charges available
for larger
investments. |
|
Deferred Sales
Charge? |
|
No. (May be
charged
for purchases over $1
million that are
redeemed within one
year.) |
|
Yes. Payable
if you
redeem within four
years of purchase. |
|
Yes. Payable
if you
redeem within one
year of purchase. |
|
No. (May be
charged
for purchases over
$1 million that are
redeemed within one
year.) |
|
|
|
Account
Maintenance
and Distribution
Fees? |
|
No. |
|
0.25% Account
Maintenance Fee
0.50% Distribution
Fee. |
|
0.25% Account
Maintenance Fee
0.55% Distribution
Fee. |
|
0.25% Account
Maintenance Fee
No Distribution Fee. |
|
Conversion to
Class D shares? |
|
No. |
|
Yes,
automatically
after approximately
ten years. |
|
No. |
|
No. |
|
|
|
MERRILL LYNCH UTILITY INCOME FUND,
INC.
15
[GRAPHIC] Your Account
Right of Accumulation
— permits you to pay the sales charge that would apply
to the cost or value (whichever is higher) of all shares you own
in the Merrill Lynch mutual funds that offer Select Pricing
options.
Letter of Intent
— permits you to pay the sales charge that would be
applicable if you add up all shares of Merrill Lynch Select
Pricing
SM
System funds that you agree to buy within a 13
month period. Certain restrictions apply.
Class A and Class D Shares —
Initial Sales Charge Options
If you select Class A or Class D shares, you will
pay a sales charge at the time of purchase.
| Your
Investment |
|
As a
% of
Offering Price |
|
As a
% of
Your Investment* |
|
Dealer
Compensation
as a % of
Offering Price |
|
|
Less than $25,000 |
|
4.00% |
|
4.17% |
|
3.75% |
|
$25,000 but less than
$50,000 |
|
3.75% |
|
3.90% |
|
3.50% |
|
$50,000 but less than
$100,000 |
|
3.25% |
|
3.36% |
|
3.00% |
|
$100,000 but less than
$250,000 |
|
2.50% |
|
2.56% |
|
2.25% |
|
$250,000 but less than
$1,000,000 |
|
1.50% |
|
1.52% |
|
1.25% |
|
|
$1,000,000 and over** |
|
0.00% |
|
0.00% |
|
0.00% |
|
*
|
Rounded to the nearest one-hundredth
percent.
|
**
|
If you invest $1,000,000 or more in Class A or
Class D shares, you may not pay an initial sales charge.
However, if you redeem your shares within one year after
purchase, you may be charged a deferred sales charge. This
charge is 1% of the lesser of the original cost of the shares
being redeemed or your redemption proceeds. 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.
|
No initial sales charge applies to Class A or
Class D shares that you buy through reinvestment of dividends or
distributions.
A reduced or waived sales charge on a purchase of
Class A or Class D shares may apply for:
|
Ÿ
|
Purchases under a Right of
Accumulation or
Letter of Intent
|
|
Ÿ
|
Merrill Lynch Blueprint
SM
Program participants
|
|
Ÿ
|
Certain Merrill Lynch investment or central
asset accounts
|
|
Ÿ
|
Certain employer-sponsored retirement or
savings plans
|
|
Ÿ
|
Purchases using proceeds from the sale of
certain Merrill Lynch closed-end funds under certain
circumstances
|
|
Ÿ
|
Certain investors, including directors or
trustees of Merrill Lynch mutual funds and Merrill Lynch
employees
|
|
Ÿ
|
Certain Merrill Lynch fee-based
programs
|
MERRILL LYNCH UTILITY INCOME FUND,
INC.
16
Only certain investors are eligible to buy Class A shares. Your
Financial Consultant can help you determine whether you are
eligible to buy Class A shares or to participate in any of these
programs.
If you decide to buy shares under the initial
sales charge alternative and you are eligible to buy both Class
A and Class D shares, you should buy Class A since Class D
shares are subject to a 0.25% account maintenance fee, while
Class A shares are not.
If you redeem Class A or Class D shares and
within 30 days buy new shares of the same class, you will not
pay a sales charge on the new purchase amount. The amount
eligible for this “Reinstatement Privilege” may not
exceed the amount of your redemption proceeds. To exercise the
privilege, contact your Merrill Lynch Financial Consultant or
the Fund’s Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares —
Deferred Sales Charge Options
If you select Class B or Class C shares, you do
not pay an initial sales charge at the time of purchase.
However, if you redeem your Class B shares within four years
after purchase or your Class C shares within one year after
purchase, you may be required to pay a deferred sales charge.
You will also pay distribution fees of 0.50% for Class B shares
and 0.55% for Class C shares and account maintenance fees of
0.25% for both Class B and Class C shares each year under
distribution plans that the Fund has adopted pursuant to Rule
12b-1. Because these fees are paid out of the Fund’s assets
on an ongoing basis, over time these fees increase the cost of
your investment and may cost you more than paying an initial
sales charge. The Distributor uses the money that it receives
from the deferred sales charges and the distribution fees to
cover the costs of marketing, advertising and compensating the
Merrill Lynch Financial Consultant or other securities dealer
who assists you in purchasing Fund shares.
MERRILL LYNCH UTILITY INCOME FUND,
INC.
17
[GRAPHIC] Your Account
Class B Shares
If you redeem Class B shares within four years
after purchase, you may be charged a deferred sales charge. The
amount of the charge gradually decreases as you hold your shares
over time, according to the following schedule:
| Years Since
Purchase |
|
Sales
Charge* |
|
|
0 – 1 |
|
4.00% |
|
|
1 – 2 |
|
3.00% |
|
|
2 – 3 |
|
2.00% |
|
|
3 – 4 |
|
1.00% |
|
|
4 and thereafter |
|
0.00% |
|
*
|
The percentage charge will apply to the lesser
of the original cost of the shares being redeemed or the
proceeds of your redemption. Shares acquired through
reinvestment of dividends are not subject to a deferred sales
charge. Not all Merrill Lynch funds have identical deferred
sales charge schedules. If you exchange your shares for shares
of another fund, the higher charge will apply.
|
The deferred sales charge relating to Class B
shares may be reduced or waived in certain circumstances, such
as:
|
Ÿ
|
Certain post-retirement withdrawals from an IRA
or other retirement plan if you are over 59
1
/2 years old
|
|
Ÿ
|
Redemption by certain eligible 401(a) and
401(k) plans, certain related accounts, and group plans
participating in the Merrill Lynch Blueprint
SM
Program and certain retirement plan
rollovers
|
|
Ÿ
|
Redemption in connection with participation in
certain Merrill Lynch fee-based programs
|
|
Ÿ
|
Withdrawals resulting from shareholder death or
disability as long as the waiver request is made within one
year of death or disability or, if later, reasonably promptly
following completion of probate, or in connection with
involuntary termination of an account in which Fund shares are
held
|
|
Ÿ
|
Withdrawal through the Merrill Lynch Systematic
Withdrawal Plan of up to 10% per year of your Class B account
value at the time the plan is established
|
Your Class B shares convert automatically into
Class D shares approximately ten years after purchase. Any Class
B shares received through reinvestment of
dividends paid on converting shares will also convert at that
time. Class D shares are subject to lower annual expenses than
Class B shares. The conversion of Class B to Class D shares is
not a taxable event for Federal income tax purposes.
Different conversion schedules apply to Class B
shares of different Merrill Lynch mutual funds. For example,
Class B shares of a fixed-income fund typically convert
approximately ten years after purchase compared to approximately
eight years for equity funds. If you acquire your Class B shares
in an exchange from another fund with a shorter conversion
schedule, the Fund’s ten year conversion schedule will
apply. If you exchange your Class B shares in the Fund for Class
B shares of a fund with a longer conversion schedule, the other
fund’s conversion schedule will apply. The length of time
that you hold both the original and exchanged Class B shares in
both funds will count toward the conversion schedule. The
conversion schedule may be modified in certain other cases as
well.
Class C Shares
If you redeem Class C shares within one year
after purchase, you may be charged a deferred sales charge of
1.00%. The charge will apply to the lesser of the original cost
of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem
shares that you acquire through reinvestment of Fund dividends.
The deferred sales charge relative to Class C shares may be
reduced or waived in connection with participation in certain
Merrill Lynch fee-based programs, involuntary termination of an
account in which Fund shares are held and withdrawals through
the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion
privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
The chart below summarizes how to buy, sell,
transfer and exchange shares through Merrill Lynch or other
securities dealers. You may also buy shares through the Transfer
Agent. To learn more about buying shares through the Transfer
Agent, call 1-800-MER-FUND. Because the selection of a mutual
fund involves many considerations, your Merrill Lynch Financial
Consultant may help you with this decision.
MERRILL LYNCH UTILITY INCOME FUND,
INC.
19
[GRAPHIC] Your Account
| If You Want
To |
|
Your
Choices |
|
Information
Important for You to Know |
|
| Buy
Shares |
|
First, select
the share
class appropriate for you |
|
Refer to the
Merrill Lynch Select Pricing table on page 15. Be sure
to read this prospectus carefully. |
|
|
|
|
Next,
determine the
amount of your investment |
|
The minimum
initial investment for the Fund is $1,000 for all
accounts except:
Ÿ $500 for Employee Access
SM
Accounts
Ÿ $250 for certain Merrill Lynch fee-based
programs
Ÿ $100 for Merrill Lynch
Blueprint
SM
Program
Ÿ $100 for retirement plans |
|
|
|
|
|
|
|
(The minimums
for initial investments may be waived or reduced
under certain circumstances.) |
|
|
|
|
Have your
Merrill Lynch
Financial Consultant or
securities dealer submit
your purchase order |
|
The price of
your shares is based on the next calculation of net
asset value after your order is placed. Any purchase orders
placed
prior to the close of business on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) will be priced at the net
asset
value determined that day. |
|
|
| |
|
|
|
Purchase
orders placed after that time will be priced at the net
asset value determined on the next business day. The Fund may
reject any order to buy shares and may suspend the sale of shares
at any time. Merrill Lynch may charge a processing fee to confirm
a purchase. This fee is currently $5.35. |
|
|
|
|
Or contact the
Transfer
Agent |
|
To purchase
shares directly, call the Transfer Agent at 1-800-
MER-FUND and request a purchase application. Mail the completed
purchase application to the Transfer Agent at the address on the
inside back cover of this Prospectus. |
|
Add to Your
Investment |
|
Purchase
additional shares |
|
The minimum
investment for additional purchases is generally $50
for all accounts except that retirement plans have a minimum
additional purchase of $1 and certain programs, such as automatic
investment plans, may have higher minimums. |
|
|
|
|
|
|
|
(The minimums
for additional purchases may be waived under
certain circumstances.) |
|
|
|
|
Acquire
additional
shares through the
automatic dividend
reinvestment plan |
|
All dividends
are automatically reinvested without a sales
charge. |
|
|
|
|
Participate in
the automatic
investment plan |
|
You may invest
a specific amount on a periodic basis through
certain Merrill Lynch investment or central asset
accounts. |
|
Transfer
Shares to
Another Securities
Dealer |
|
Transfer to a
participating securities
dealer |
|
You may
transfer your Fund shares only to another securities
dealer that has entered into an agreement with Merrill Lynch.
Certain shareholder services may not be available for the
transferred shares. You may only purchase additional shares of
funds previously owned before the transfer. All future trading of
these assets must be coordinated by the receiving
firm. |
|
| |
|
Transfer to a
non-
participating securities
dealer |
|
You must
either:
Ÿ Transfer your shares to an account with
the Transfer Agent; or
Ÿ Sell your shares paying any applicable
CDSC. |
MERRILL LYNCH UTILITY INCOME FUND,
INC.
20
| If You Want
To |
|
Your
Choices |
|
Information
Important for You to Know |
|
| Sell Your
Shares |
|
Have your
Merrill Lynch
Financial Consultant or
securities dealer submit
your sales order |
|
The price of
your shares is based on the next calculation of net
asset value after your order is placed. For your redemption
request
to be priced at the net asset value on the day of your request,
you
must submit your request to your dealer prior to that day’s
close
of business on the New York Stock Exchange (the New York Stock
Exchange generally closes at 4:00 p.m. Eastern time). Any
redemption request placed after that time will be priced at the
net asset value at the close of business on the next business
day.
Dealers must submit redemption requests to the Fund not more
than thirty minutes after the close of business on the New York
Stock Exchange on the day the request was received. |
|
|
|
|
|
|
|
Securities
dealers, including Merrill Lynch, may charge a fee to
process a redemption of shares. Merrill Lynch currently charges a
fee of $5.35. No processing fee is charged if you redeem shares
directly through the Transfer Agent. |
|
|
|
|
|
|
|
The Fund may
reject an order to sell shares under certain
circumstances. |
|
|
|
|
|
|
Sell through
the Transfer
Agent |
|
You may sell
shares held at the Transfer Agent by writing to the
Transfer Agent at the address on the inside back cover of this
prospectus. All shareholders on the account must sign the
letter. A
signature guarantee will generally be required but may be waived
in
certain limited circumstances. You can obtain a signature
guarantee
from a bank, securities dealer, securities broker, credit union,
savings
and loan association, national securities exchange and registered
securities association. A notary public seal will not be
acceptable. If you
hold stock certificates, return the certificates with the
letter. The
Transfer Agent will normally mail redemption proceeds within
seven
days following receipt of a properly completed request. If you
make a
redemption request before the Fund has collected payment for the
purchase of shares, the Fund or the Transfer Agent may delay
mailing
your proceeds. This delay will usually not exceed ten
days. |
|
|
|
|
|
|
|
If you hold
share certificates, they must be delivered to the Transfer
Agent before they can be converted. Check with the Transfer Agent
or your Merrill Lynch Financial Consultant for
details. |
|
|
|
Sell Shares
Systematically |
|
Participate in
the Fund’s
Systematic Withdrawal Plan |
|
You can choose
to receive systematic payments from your Fund
account either by check or through direct deposit to your bank
account on a monthly or quarterly basis. If you hold your Fund
shares
in a Merrill Lynch CMA®, CBA® or Retirement Account you
can
arrange for systematic redemptions of a fixed dollar amount on a
monthly, bi-monthly, quarterly, semi-annual or annual basis,
subject
to certain conditions. Under either method you must have
dividends
automatically reinvested. For Class B and C shares your total
annual
withdrawals cannot be more than 10% per year of the value of your
shares at the time your plan is established. The deferred sales
charge
is waived for systematic redemptions. Ask your Merrill Lynch
Financial
Consultant for details. |
MERRILL LYNCH UTILITY INCOME FUND,
INC.
21
[GRAPHIC] Your Account
| If You Want
To |
|
Your
Choices |
|
Information
Important for You to Know |
|
Exchange Your
Shares |
|
Select the
fund into which
you want to exchange. Be
sure to read that fund’s
prospectus |
|
You can
exchange your shares of the Fund for shares of many
other Merrill Lynch mutual funds. You must have held the shares
used in the exchange for at least 15 calendar days before you can
exchange to another fund. |
|
|
| |
|
|
|
Each class of
Fund shares is generally exchangeable for shares of
the same class of another fund. If you own Class A shares and
wish
to exchange into a fund in which you have no Class A shares (and
are not eligible to purchase Class A shares), you will exchange
into
Class D shares. |
|
|
| |
|
|
|
Some of the
Merrill Lynch mutual funds impose a different initial
or deferred sales charge schedule. If you exchange Class A or D
shares for shares of a fund with a higher initial sales charge
than
you originally paid, you will be charged the difference at the
time
of exchange. If you exchange Class B shares for shares of a fund
with a different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares in
both
funds will count when determining your holding period for
calculating a deferred sales charge at redemption. If you
exchange
Class A or D shares for money market fund shares, you will
receive
Class A shares of Summit Cash Reserves Fund. Class B or C shares
of
the Fund will be exchanged for Class B shares of
Summit. |
|
|
|
|
|
|
|
Although there
is currently no limit on the number of exchanges
that you can make, the exchange privilege may be modified or
terminated at any time in the future. |
MERRILL LYNCH UTILITY INCOME FUND,
INC.
22
Net Asset
Value — the market value of the Fund
’s total assets after deducting liabilities, divided by the
number of shares outstanding.
When you buy shares, you pay the net asset value,
plus any applicable sales charge. This is the offering price.
Shares are also redeemed at their net asset value, minus any
applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the
New York Stock Exchange is open after the close of business on
the Exchange, based on prices at the time of closing. The
Exchange generally closes at 4:00 p.m. Eastern time. The net
asset value used in determining your price is the next one
calculated after your purchase or redemption order is placed.
Foreign securities owned by the Fund may trade on weekends or
other days when the Fund does not price its shares. As a result,
the Fund’s net asset value may change on days when you will
not be able to purchase or redeem the Fund’s shares. If an
event occurs after the close of a foreign exchange that is
likely to significantly affect the Fund’s net asset value,
“fair value” pricing may be used. This means that the
Fund may value its foreign holdings at prices other than their
last closing prices, and the Fund’s net asset value will
reflect this.
Generally, Class A shares will have the highest
net asset value because that class has the lowest expenses, and
Class D shares will have a higher net asset value than Class B
or Class C shares. Also, dividends paid on Class A and Class D
shares will generally be higher than dividends paid on Class B
and Class C shares because Class A and Class D shares have lower
expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
If you participate in certain fee-based programs
offered by Merrill Lynch, you may be able to buy Class A shares
at net asset value, including by exchanges from other share
classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through
a fee-based program into another account. Instead, you will have
to redeem your shares held through the program and purchase
shares of another class, which may be subject to distribution
and account maintenance fees. This may be a taxable event and
you will pay any applicable sales charges.
If you leave one of these programs, your shares
may be redeemed or automatically exchanged into another class of
Fund shares or into a money market fund. The class you receive
may be the class you originally owned
MERRILL LYNCH UTILITY INCOME FUND,
INC.
23
[GRAPHIC] Your Account
Dividends —
ordinary income and capital gains paid to shareholders.
Dividends may be reinvested in additional Fund shares as they
are paid.
when you entered the program, or in certain
cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D shares may be
modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a
specified period, you may be charged a fee in accordance with
the terms of the program.
Details about these features and the relevant
charges are included in the client agreement for each fee-based
program and are available from your Merrill Lynch Financial
Consultant.
The Fund will distribute net investment income on
a monthly basis. The Fund attempts to pay a stable monthly
dividend. As a result, some months the Fund will pay a dividend
of less than the full amount of investment income earned during
the particular month, while other months the Fund will pay a
dividend out of accumulated but previously undistributed
investment income. The Fund intends to distribute all of its
investment income earned each fiscal year. The Fund will
distribute any net realized long or short-term capital gains
annually. The Fund may also pay a special distribution at the
end of the calendar year to comply with Federal tax
requirements. If your account is with Merrill Lynch and you
would like to receive dividends in cash, contact
your Merrill Lynch Financial Consultant. If your account is with
the Transfer Agent and you would like to receive dividends in
cash, contact the Transfer Agent.
You will pay tax on dividends from the Fund
whether you receive them in cash or additional shares. If you
redeem Fund shares or exchange them for shares of another fund,
any gain on the transaction may be subject to tax. The Fund
intends to make distributions that will either be taxed as
ordinary income or capital gains. Capital gain dividends paid to
individuals are generally taxed at different rates than ordinary
income dividends.
If you are neither a lawful permanent resident
nor a citizen of the U.S. or if you are a foreign entity, the
Fund’s ordinary income dividends (which include
distributions of net short-term capital gains) will generally be
subject to a 30% U.S. withholding tax, unless a lower treaty
rate applies.
MERRILL LYNCH UTILITY INCOME FUND,
INC.
24
“BUYING A DIVIDEND”
Unless your investment is in a tax-deferred
account, you may want to avoid buying shares shortly before the
Fund pays a dividend. The reason? If you buy shares when a fund
has realized but not yet distributed ordinary income or capital
gains, you will pay the full price for the shares and then
receive a portion of the price back in the form of a taxable
dividend. Before investing you may want to consult your tax
adviser.
Dividends and interest received by the Fund may
give rise to withholding and other taxes imposed by foreign
countries. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes.
By law, the Fund must withhold 31% of your
distributions and gross redemption proceeds if you have not
provided a taxpayer identification number or social security
number or if the number you have provided is
incorrect.
This section summarizes some of the consequences
under current Federal tax law of an investment in the Fund. It
is not a substitute for personal tax advice. Consult your
personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax
laws.
MERRILL LYNCH UTILITY INCOME FUND,
INC.
25
[GRAPHIC] Management of the Fund
MERRILL LYNCH ASSET MANAGEMENT
Merrill Lynch Asset Management, the Fund’s Investment
Adviser, manages the Fund’s investments and its business
operations under the overall supervision of the Fund’s
Board of Directors. The Investment Adviser has the
responsibility for making all investment decisions for the Fund.
The Investment Adviser has a sub-advisory agreement with Merrill
Lynch Asset Management, U.K. Limited, an affiliate, under which
the Investment Adviser may pay a fee for services it receives.
For the fiscal year ended August 31, 1999 the Investment Adviser
received a fee equal to 0.55% of the Fund’s average daily
net assets, all of which was voluntarily waived.
Merrill Lynch Asset Management was organized as
an investment adviser in 1977 and offers investment advisory
services to more than 40 registered investment companies.
Merrill Lynch Asset Management is part of the Asset Management
Group of ML & Co., which had approximately $518 billion in
investment company and other portfolio assets under management
as of October 1999. This amount includes assets managed for
Merrill Lynch affiliates.
A Note About Year 2000
Many computer systems were designed using only
two digits to designate years. These systems may not be able to
distinguish the year 2000 from the year 1900 (commonly known as
the “Year 2000 Problem”). The Fund could be adversely
affected if the computer systems used by Fund management or
other Fund service providers do not properly address this
problem before January 1, 2000. Fund management expects to have
addressed this problem before then and does not anticipate that
the services it provides will be adversely affected. The Fund
’s other service providers have told Fund management that
they also expect to resolve the Year 2000 Problem, and Fund
management will continue to monitor the situation as the Year
2000 approaches. However, if the problem has not been fully
addressed, the Fund could be negatively affected. The Year 2000
Problem could also have a negative impact on the companies in
which the Fund invests. This negative impact may be greater for
smaller companies and companies in foreign markets, particularly
emerging markets, since they may be less prepared for the Year
2000 problem than larger domestic companies and markets. If the
companies in which the Fund invests have Year 2000 Problems, the
Fund’s returns could be adversely affected.
MERRILL LYNCH UTILITY INCOME FUND,
INC.
26
The Financial Highlights table is intended to
help you understand the Fund’s financial performance for
the periods shown. Certain information reflects financial
results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an
investment in the Fund (assuming reinvestment of all dividends
and distributions.) This information has been audited by
Deloitte & Touche LLP
, whose report, along with the Fund’s financial statements,
is included in the Fund’s annual report to shareholders,
which is available upon request.
|
|
|
Class A
|
|
Class B
|
Increase
(Decrease) in
Net Asse Value: |
|
For the Year Ended August 31,
|
|
For the Year Ended August 31,
|
| |
1999†† |
|
1998†† |
|
1997†† |
|
1996 |
|
1995 |
|
1999†† |
|
1998†† |
|
1997†† |
|
1996 |
|
1995 |
|
| Per Share Operating PerFormance: |
|
| Net
asset value, beginning of year |
|
$11.04 |
|
|
$
9.46 |
|
|
$
9.17 |
|
|
$
9.15 |
|
|
$
8.44 |
|
|
$
11.03 |
|
|
$
9.45 |
|
|
$
9.17 |
|
|
$
9.15 |
|
|
$
8.44 |
|
|
| Investment income — net |
|
.56 |
|
|
.57 |
|
|
.55 |
|
|
.60 |
|
|
.60 |
|
|
.47 |
|
|
.49 |
|
|
.47 |
|
|
.46 |
|
|
.49 |
|
|
Realized and unrealized gain (loss) on investments
and foreign currency transactions —
net |
|
(.07 |
) |
|
1.60 |
|
|
.29 |
|
|
.02 |
|
|
.59 |
|
|
(.05 |
) |
|
1.60 |
|
|
.28 |
|
|
.09 |
|
|
.63 |
|
|
| Total
from investment operations |
|
.49 |
|
|
2.17 |
|
|
.84 |
|
|
.62 |
|
|
1.19 |
|
|
.42 |
|
|
2.09 |
|
|
.75 |
|
|
.55 |
|
|
1.12 |
|
|
| Less
dividends and distributions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income — net |
|
(.52 |
) |
|
(.59 |
) |
|
(.55 |
) |
|
(.60 |
) |
|
(.48 |
) |
|
(.44 |
) |
|
(.51 |
) |
|
(.47 |
) |
|
(.53 |
) |
|
(.41 |
) |
|
Realized gain on investments —
net |
|
(.23 |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(.23 |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
| Total
dividends and distributions |
|
(.75 |
) |
|
(.59 |
) |
|
(.55 |
) |
|
(.60 |
) |
|
(.48 |
) |
|
(.67 |
) |
|
(.51 |
) |
|
(.47 |
) |
|
(.53 |
) |
|
(.41 |
) |
|
| Net
asset value, end of year |
|
$10.78 |
|
|
$11.04 |
|
|
$
9.46 |
|
|
$
9.17 |
|
|
$
9.15 |
|
|
$
10.78 |
|
|
$
11.03 |
|
|
$
9.45 |
|
|
$
9.17 |
|
|
$
9.15 |
|
|
| Total Investment Return:* |
|
| Based
on net asset value per share |
|
4.40 |
% |
|
23.30 |
% |
|
9.36 |
% |
|
6.61 |
% |
|
14.68 |
% |
|
3.70 |
% |
|
22.38 |
% |
|
8.39 |
% |
|
5.86 |
% |
|
13.72 |
% |
|
| Ratios to Average Net Assets: |
|
| Expenses, net of reimbursement |
|
.81 |
% |
|
.59 |
% |
|
.59 |
% |
|
.56 |
% |
|
.49 |
% |
|
1.59 |
% |
|
1.37 |
% |
|
1.36 |
% |
|
1.34 |
% |
|
1.27 |
% |
|
| Expenses |
|
1.16 |
% |
|
1.29 |
% |
|
1.51 |
% |
|
1.52 |
% |
|
1.87 |
% |
|
1.93 |
% |
|
2.06 |
% |
|
2.28 |
% |
|
2.29 |
% |
|
2.66 |
% |
|
| Investment income — net |
|
4.93 |
% |
|
5.26 |
% |
|
5.79 |
% |
|
5.56 |
% |
|
6.60 |
% |
|
4.15 |
% |
|
4.52 |
% |
|
5.00 |
% |
|
4.79 |
% |
|
5.75 |
% |
|
| Supplemental Data: |
|
| Net
assets, end of year (in thousands) |
|
$2,967 |
|
|
$2,110 |
|
|
$1,376 |
|
|
$2,108 |
|
|
$3,253 |
|
|
$43,903 |
|
|
$32,540 |
|
|
$27,259 |
|
|
$35,702 |
|
|
$37,498 |
|
|
| Portfolio turnover |
|
7.92 |
% |
|
13.36 |
% |
|
5.50 |
% |
|
25.98 |
% |
|
12.59 |
% |
|
7.92 |
% |
|
13.36 |
% |
|
5.50 |
% |
|
25.98 |
% |
|
12.59 |
% |
|
*
|
Total investment returns exclude the effects of
sales charges.
|
†
†
|
Based on average shares
outstanding.
|
MERRILL LYNCH UTILITY INCOME FUND,
INC.
27
[GRAPHIC] Management of the Fund
FINANCIAL HIGHLIGHTS (concluded)
|
|
|
Class C
|
|
Class D
|
|
|
|
For the Year Ended August 31,
|
|
For the
Period
October 21,
1994†
to August 31,
1995 |
|
For the Year Ended August 31,
|
|
For the
Period
October 21,
1994†
to August 31,
1995 |
Increase
(Decrease) In
Net Asset Value: |
|
1999†† |
|
1998†† |
|
1997†† |
|
1996 |
|
|
1999†† |
|
1998†† |
|
1997†† |
|
1996 |
|
| Per Share Operating Performance: |
|
| Net
asset value, beginning of period |
|
$11.01 |
|
|
$
9.44 |
|
|
$
9.15 |
|
|
$
9.14 |
|
|
$
8.17 |
|
|
$11.06 |
|
|
$
9.47 |
|
|
$
9.18 |
|
|
$
9.15 |
|
|
$8.17 |
|
|
| Investment income — net |
|
.46 |
|
|
.48 |
|
|
.47 |
|
|
.43 |
|
|
.42 |
|
|
.53 |
|
|
.54 |
|
|
.52 |
|
|
.47 |
|
|
.51 |
|
|
Realized and unrealized gain (loss) on
investments and foreign currency
transactions — net |
|
(.05 |
) |
|
1.59 |
|
|
.29 |
|
|
.10 |
|
|
.90 |
|
|
(.06 |
) |
|
1.61 |
|
|
.29 |
|
|
.13 |
|
|
.85 |
|
|
| Total
from investment operations |
|
.41 |
|
|
2.07 |
|
|
.76 |
|
|
.53 |
|
|
1.32 |
|
|
.47 |
|
|
2.15 |
|
|
.81 |
|
|
.60 |
|
|
1.36 |
|
|
| Less
dividends and distributions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income — net |
|
(.43 |
) |
|
(.50 |
) |
|
(.47 |
) |
|
(.52 |
) |
|
(.35 |
) |
|
(.50 |
) |
|
(.56 |
) |
|
(.52 |
) |
|
(.57 |
) |
|
(.38 |
) |
|
Realized gain on investments —
net |
|
(.23 |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(.23 |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
| Total
dividends and distributions |
|
(.66 |
) |
|
(.50 |
) |
|
(.47 |
) |
|
(.52 |
) |
|
(.35 |
) |
|
(.73 |
) |
|
(.56 |
) |
|
(.52 |
) |
|
(.57 |
) |
|
(.38 |
) |
|
| Net
asset value, end of period |
|
$10.76 |
|
|
$11.01 |
|
|
$
9.44 |
|
|
$
9.15 |
|
|
$
9.14 |
|
|
$10.80 |
|
|
$11.06 |
|
|
$
9.47 |
|
|
$
9.18 |
|
|
$9.15 |
|
|
| Total Investment Return:** |
|
| Based
on net asset value per share |
|
3.67 |
% |
|
22.19 |
% |
|
8.48 |
% |
|
5.65 |
% |
|
16.50 |
%# |
|
4.13 |
% |
|
23.08 |
% |
|
9.08 |
% |
|
6.46 |
% |
|
17.03 |
%# |
|
| Ratios to Average Net Assets: |
|
| Expenses, net of reimbursement |
|
1.66 |
% |
|
1.40 |
% |
|
1.42 |
% |
|
1.40 |
% |
|
1.32 |
%* |
|
1.08 |
% |
|
.84 |
% |
|
.84 |
% |
|
.82 |
% |
|
.74 |
%* |
|
| Expenses |
|
1.99 |
% |
|
2.08 |
% |
|
2.30 |
% |
|
2.34 |
% |
|
2.77 |
%* |
|
1.41 |
% |
|
1.54 |
% |
|
1.76 |
% |
|
1.75 |
% |
|
2.10 |
%* |
|
| Investment income — net |
|
4.07 |
% |
|
4.39 |
% |
|
4.79 |
% |
|
4.75 |
% |
|
5.56 |
%* |
|
4.66 |
% |
|
4.97 |
% |
|
5.47 |
% |
|
5.37 |
% |
|
6.14 |
%* |
|
| Supplemental Data: |
|
| Net
assets, end of period (in thousands) |
|
$5,111 |
|
|
$2,846 |
|
|
$4,104 |
|
|
$2,107 |
|
|
$1,377 |
|
|
$4,139 |
|
|
$2,362 |
|
|
$1,633 |
|
|
$1,416 |
|
|
$558 |
|
|
| Portfolio turnover |
|
7.92 |
% |
|
13.36 |
% |
|
5.50 |
% |
|
25.98 |
% |
|
12.59 |
% |
|
7.92 |
% |
|
13.36 |
% |
|
5.50 |
% |
|
25.98 |
% |
|
12.59 |
% |
|
|
|
† Commencement of
operations.
|
†
†
|
Based on average shares
outstanding.
|
|
|
# Aggregate total
investment return.
|
**
|
Total investment returns exclude the effects of
sales charges.
|
MERRILL LYNCH UTILITY INCOME FUND,
INC.
28
[This page intentionally left blank]
MERRILL LYNCH UTILITY INCOME FUND,
INC.
[This page intentionally left blank]
MERRILL LYNCH UTILITY INCOME FUND,
INC.
POTENTIAL INVESTORS
Open an account (two options)
|
_________________________|_____________________
| |
1 2
\|/ \|/
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT Financial Data Services, Inc.
OR SECURITIES DEALER ADMINISTRATIVE OFFICES
4800 Deer Lake Drive East
Advisors shareholders on Jacksonville, Florida 32246-6484
their Fund investments. MAILING ADDRESS
/|\ P.O. Box 45289
| Jacksonville, Florida 32232-5289
| Performs recordkeeping and reporting
| services.
| /|\
| |
| DISTRIBUTOR |
| |
|_____\ Merrill Lynch Funds Distributor, /______|
/ a division of Princeton Funds \
Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
|
COUNSEL | CUSTODIAN
\|/
Swidler Berlin ____________\THE FUND /______________ State Street Bank and
Shereff Friedman, LLP / \ Trust Company
The Chrysler Building The Board of Directors One Heritage Drive P2N
405 Lexington Avenue oversees the Fund. North Quincy, Massachusetts 02171
New York, New York 10174 /|\ /|\ Holds the Fund's assets
Provides legal advice to | | for safekeeping.
the Fund | |
| |
| |
INDEPENDENT AUDITORS _______| |__________ INVESTMENTS ADVISER
Deloitte & Touche LLP Merrill Lynch Asset Management, L.P.
Princeton Forrestal Village ADMINISTRATIVE OFFICES
116-300 Village Boulevard 800 Scudders Mill Road
Princeton, New Jersey Plainsboro, New Jersey 08536
08540-6400 MAILING ADDRESS
Audits the financial P.O. Box 9011
statements of the Fund on Princeton, New Jersey 08543-9011
behalf of TELEPHONE NUMBER
the shareholders. 1-800-MER-FUND
Manages the Fund's day-to-day activities.
MERRILL LYNCH UTILITY INCOME FUND,
INC.
[GRAPHIC] For More Information
Additional information about the Fund’s
investments is available in the Fund’s annual and
semi-annual reports to shareholders. In the Fund’s annual
report you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund
’s performance during its last fiscal year. You may obtain
these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each
shareholder report and certain other mailings, regardless of the
number of Fund accounts you have. To receive separate
shareholder reports for each account, call your Merrill Lynch
Financial Consultant or write to the Transfer Agent at its
mailing address. Include your name, address, tax identification
number and Merrill Lynch brokerage or mutual fund account
number. If you have any questions, please call your Merrill
Lynch Financial Consultant or the Transfer Agent at
1-800-MER-FUND.
Statement of Additional Information
The Fund’s Statement of Additional
Information contains further information about the Fund and is
incorporated by reference (legally considered to be part of this
prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville,
Florida 32232-5289 or by calling
1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant
or the Fund at the telephone number or address indicated above,
if you have any questions.
Information about the Fund (including the
Statement of Additional Information) can be reviewed and copied
at the SEC’s Public Reference Room in Washington, D.C. Call
1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC
’s Internet site at http://www.sec.gov and copies may be
obtained upon payment of a duplicating fee by writing the Public
Reference Section of the SEC, Washington, D.C.
20549-6009.
You should rely only on the information
contained in this Prospectus. No one is authorized to provide
you with information that is different from information
contained in this Prospectus.
Investment Company Act file #811-7071
Code #16855-1299
©
Merrill Lynch Asset Management, L.P.
[LOGO] Merrill Lynch
|
Utility Income Fund, Inc.
|
December 8, 1999
STATEMENT OF ADDITIONAL
INFORMATION
Merrill Lynch Utility Income Fund,
Inc.
P.O. Box 9011, Princeton, New Jersey
08543-9011 Ÿ 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
“Investment Adviser” 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 realized. For more
information on the Fund’s investment objectives and
policies, see “Investment Objective and Policies.
”
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. See “Purchase of Shares.”
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 8, 1999 (the
“Prospectus”), which has been filed with the
Securities and Exchange Commission (the “Commission”)
and can be obtained, without charge, by calling (800) MER-FUND
or by writing the Fund at the above address. The Prospectus is
incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information has
been incorporated by reference into the Prospectus. The Fund
’s audited financial statements are incorporated in this
Statement of Additional Information by reference to its 1999
annual report to shareholders. You may request a copy of the
annual report at no charge by calling (800) 456-4587 ext. 789
between 8:00 a.m. and 8:00 p.m. on any business day.
Merrill Lynch Asset Management —
Investment Adviser
Merrill Lynch Funds Distributor —
Distributor
The date of this Statement of Additional
Information is December 8, 1999.
TABLE OF CONTENTS
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 that
are, in the opinion of the Investment Adviser, 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 realized. Reference is made to
“How the Fund Invests” and “Investment Risks
” in the Prospectus.
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 securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (“U.S.
Government securities”), money market securities, including
repurchase agreements, or cash in such proportions as, in the
opinion of the Investment Adviser, 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 Investment Adviser’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 (“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 Investment Adviser.
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
Investment Adviser. The Fund may also invest up to 5% of its
total assets at the time of the 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.
The Fund may invest in the securities of foreign issuers
in the form of American Depositary Receipts (“ADRs”),
European Depositary 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 that evidence ownership of underlying securities issued
by a foreign corporation. EDRs are receipts issued in Europe
that 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 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 “Portfolio Strategies Involving Options, Futures and
Foreign Exchange Transactions.”
Because of its emphasis on securities of companies in the
utilities industries, the Fund should be considered as a vehicle
for diversification and not as a balanced investment program.
The suitability for any particular investor of a purchase of
shares of the Fund will depend upon, among other things, such
investor’s investment objectives and such investor’s
ability to accept the risks of investing in such securities
including the risk of a loss of principal.
Other Investment Policies, Practices and Risk
Factors
Utility Industries
Under normal circumstances, the Fund will invest at least
65% of its total assets in common stock (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 Investment
Adviser, 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 that 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 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 Investment Adviser 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. Reduced profitability, as well as
new uses of funds (such as for expansion, operations or stock
buybacks) could result in cuts in dividend payout rates. The
Investment Adviser 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 Investment Adviser 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
are 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.
Moreover, the rating agencies are taking a closer look at the
business profile of utilities. Ratings for companies are
expected to be impacted to a greater extent in the future by the
division of their asset base. Electric utility companies that
focus more on the generation of electricity may be assigned less
favorable ratings as this business is expected to be competitive
and the least regulated. On the other hand, companies that focus
on transmission and distribution which is expected to be the
least competitive and the more regulated part of the business
may see higher ratings given the greater predictability of cash
flow.
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 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 removed regulatory restrictions on entry
that prevented local and long-distance telephone companies and
cable television companies from competing against one another.
The Act also removed most cable rate controls and allows
broadcasters to own more radio and television stations.
Litigation concerning the constitutionality of certain major
provisions of the Act has slowed the implementation of such
provisions.
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 Investment Adviser,
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 Investment Adviser, there
may be opportunities for certain companies to acquire other
water utility companies and for foreign acquisition of domestic
companies. The Investment Adviser believes that favorable
investment opportunities may result from consolidation of this
segment.
There can be no assurance that the positive developments
noted above, including those relating to privatization and
changing regulation, 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 below.
The Fund is also permitted to invest in 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 Associates. 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, the Federal Home Loan Mortgage Corporation, the
Student Loan Marketing Association, and the Farm Credit
Bank.
Convertible Securities
Convertible securities entitle the holder to receive
interest payments paid on corporate debt securities or the
dividend preference on a preferred stock until such time as the
convertible security matures or is redeemed or until the holder
elects to exercise the conversion privilege.
The characteristics of convertible securities include the
potential for capital appreciation as the value of the
underlying common stock increases, the relatively high yield
received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in value
relative to the underlying common stock due to their
fixed-income nature. As a result of the conversion feature,
however, the interest rate or dividend preference on a
convertible security is generally less than would be the case if
the securities were issued in nonconvertible form.
In analyzing convertible securities, the Investment
Adviser will consider both the yield on the convertible security
and the potential capital appreciation that is offered by the
underlying common stock.
Convertible securities are issued and traded in a number
of securities markets. Even in cases where a substantial portion
of the convertible securities held by the Fund are denominated
in United States dollars, the underlying equity securities may
be quoted in the currency of the country where the issuer is
domiciled. With respect to convertible securities denominated in
a currency different from that of the underlying equity
securities, the conversion price may be based on a fixed
exchange rate established at the time the security is issued. As
a result, fluctuations in the exchange rate between the currency
in which the debt security is denominated and the currency in
which the share price is quoted will affect the value of the
convertible security.
Apart from currency considerations, the value of
convertible securities is influenced by both the yield of
nonconvertible securities of comparable issuers and by the value
of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature
(i.e., strictly on the basis of its yield) is sometimes
referred to as its “investment value.” To the extent
interest rates change, the investment value of the convertible
security typically will fluctuate. However, at the same time,
the value of the convertible security will be influenced by its
“conversion value,” which is the market value of the
underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates
directly with the price of the underlying common stock. If,
because of a low price of the common stock the conversion value
is substantially below the investment value of the convertible
security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible
security increases to a point that approximates or exceeds its
investment value, the price of the convertible security will be
influenced principally by its conversion value. A convertible
security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the
underlying common stock while holding a fixed-income
security.
Holders of convertible securities generally have a claim
on the assets of the issuer prior to the common stockholders but
may be subordinated to other debt securities of the same issuer.
A convertible security may be subject to redemption at the
option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to
which the convertible security was issued. If a convertible
security held by the Fund is called for redemption, the Fund
will be required to redeem the security, convert it into the
underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the
holder which entitles the holder to cause the security to be
redeemed by the issuer at a premium over the stated principal
amount of the debt security under certain
circumstances.
Foreign Investment Risks
Foreign Market Risk. Since the
Fund may invest up to 20% of its total assets in foreign
securities, it offers the potential for more diversification
than an investment only in the United States. This is because
securities traded on foreign markets have often (though not
always) performed differently than securities in the United
States. However, such investments involve special risks not
present in U.S. investments that can increase the chances that
the Fund will lose money. In particular, the Fund is subject to
the risk that because there are generally fewer investors on
foreign exchanges and a smaller number of shares traded each
day, it may make it difficult for the Fund to buy and sell
securities on those exchanges. In addition, prices of foreign
securities may fluctuate more than prices of securities traded
in the United States.
Foreign Economy Risk. The
economies of certain foreign markets often do not compare
favorably with that of the United States with respect to such
issues as growth of gross national product, reinvestment of
capital, resources, and balance of payments position. Certain
such economies may rely heavily on particular industries or
foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a
particular country or countries, changes in international
trading patterns, trade barriers, and other protectionist or
retaliatory measures. Investments in foreign markets may also be
adversely affected by governmental actions such as the
imposition of capital controls, nationalization of companies or
industries, expropriation of assets, or the imposition of
punitive taxes. In addition, the governments of certain
countries may prohibit or impose substantial restrictions on
foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security
prices, impair the Fund’s ability to purchase or sell
foreign securities or transfer the Fund’s assets or income
back into the United States, or otherwise adversely affect the
Fund’s operations. Other foreign market risks include
foreign exchange controls, difficulties in pricing securities,
defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to
investors in certain foreign countries may be less extensive
than those available to investors in the United States or other
foreign countries.
Currency Risk and Exchange Risk.
Securities in which the Fund invests may be denominated or
quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the Fund
’s portfolio. Generally, when the U.S. dollar rises in
value against a foreign currency, a security denominated in that
currency loses value because the currency is worth fewer U.S.
dollars. Conversely, when the U.S. dollar decreases in value
against a foreign currency, a security denominated in that
currency gains value because the currency is worth more U.S.
dollars. This risk, generally known as “currency risk,
” means that a stronger U.S. dollar will reduce returns for
U.S. investors while a weak U.S. dollar will increase those
returns.
Governmental Supervision and Regulation/Accounting
Standards. Many foreign governments
supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may
not have laws to protect investors the way that the U.S.
securities laws do. For example, some foreign countries may have
no laws or rules against insider trading. Insider trading occurs
when a person buys or sells a company’s securities based on
non-public information about that company. Accounting standards
in other countries are not necessarily the same as in the United
States. If the accounting standards in another country do not
require as much detail as U.S. accounting standards, it may be
harder for Fund management to completely and accurately
determine a company’s financial condition. Also, brokerage
commissions and other costs of buying or selling securities
often are higher in foreign countries than they are in the
United States. This reduces the amount the Fund can earn on its
investments.
Certain Risks
of Holding Fund Assets Outside the United States.
The Fund generally holds its foreign securities and
cash in foreign banks and securities depositories. Some foreign
banks and securities depositories may be recently organized or
new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also,
the laws of certain countries may put limits on the Fund’s
ability to recover its assets if a foreign bank or depository or
issuer of a security or any of their agents goes bankrupt. In
addition, it is often more expensive for the Fund to buy, sell,
and hold securities in certain foreign markets than in the U.S.
The increased expense to invest in foreign market reduces the
amount the Fund can earn on its investments and typically
results in a higher operating expense ratio for the Fund than
investment companies invested only in the U.S.
Settlement Risk. Settlement and
clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign
settlement procedures and trade regulations also may involve
certain risks (such as delays in payment for or delivery of
securities) not typically generated by the settlement of U.S.
investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk
of delayed settlements or losses of security certificates.
Settlements in certain foreign countries at times have not kept
pace with the number of securities transactions; these problems
may make it difficult for the Fund to carry out transactions. If
the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and
certain of its assets may be uninvested with no return earned
thereon for some period. If the Fund cannot settle or is delayed
in settling a sale of securities, it may lose money if the value
of the security then declines or, if it has contracted to sell
the security to another party, the Fund could be liable to that
party for any losses incurred.
Dividends or interest on, or proceeds from the sale of,
foreign securities may be subject to foreign withholding
taxes.
European Economic and Monetary Union.
For a number of years, certain European countries have
been seeking economic unification that would, among other
things, reduce barriers between countries, increase competition
among companies, reduce government subsidies in certain
industries, and reduce or eliminate currency fluctuations among
these European countries. The Treaty on European Union (the
“Maastricht Treaty”) set out a framework for the
European Economic and Monetary Union (“EMU”) among the
countries that comprise the European Union (“EU”). EMU
established a single common European currency (the “euro
”) that was introduced on January 1, 1999 and is expected
to replace the existing national currencies of all EMU
participants by July 1, 2002. EMU took effect for the initial
EMU participants on January 1, 1999. Certain securities issued
in participating EU countries (beginning with government and
corporate bonds) were redenominated in the euro, and are listed,
traded, and make dividend and other payments only in
euros.
No assurance can be given that EMU will continue to
proceed as planned, that the changes planned for the EU can be
successfully implemented, or that these changes will result in
the economic and monetary unity and stability intended. There is
a possibility that EMU will not be completed, or will be
completed but then partially or completely unwound. Because any
participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could
choose to abandon EMU, which would diminish its credibility and
influence. Any of these occurrences could have adverse effects
on the markets of both participating and non-participating
countries, including sharp appreciation or depreciation of the
participants’ national currencies and a significant
increase in exchange rate volatility, a resurgence in economic
protectionism, an undermining of confidence in the European
markets, an undermining of European economic stability, the
collapse or slowdown of the drive toward European economic
unity, and/or reversion of the attempts to lower government debt
and inflation rates that were introduced in anticipation of EMU.
Also, withdrawal from EMU by an initial participant could cause
disruption of the financial markets as securities that have been
redenominated in euros are transferred back into that country
’s national currency, particularly if the withdrawing
country is a major economic power. Such developments could have
an adverse impact on the Fund’s investments in Europe
generally or in specific countries participating in EMU. Gains
or losses resulting from the euro conversion may be taxable to
Fund shareholders under foreign or, in certain limited
circumstances, U.S. tax laws.
When-Issued Securities and Forward Commitments.
The Fund may purchase or sell securities that
it is entitled to receive on a when-issued basis. The Fund may
also purchase or sell securities through a forward
commitment. These transactions involve the purchase or sale of
securities by the Fund at an established price with payment and
delivery taking place in the future. The Fund enters into these
transactions to obtain what is considered an advantageous price
to the Fund at the time of entering into the transaction. The
Fund has not established any limit on the percentage of its
assets that may be committed in connection with these
transactions. When the Fund is purchasing securities in these
transactions, the Fund maintains a segregated account with its
custodian of cash, cash equivalents, U.S. Government securities
or other liquid securities in an amount equal to the amount of
its purchase commitments.
There can be no assurance that a security purchased on a
when-issued basis will be issued, or a security purchased or
sold through a forward commitment will be delivered. The value
of securities in these transactions on the delivery date may be
more or less than the Fund’s purchase price. The Fund may
bear the risk of a decline in the value of the security in these
transactions and may not benefit from an appreciation in the
value of the security during the commitment period.
Illiquid or Restricted Securities.
The Fund may invest up to 15% of its net assets in
securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security
relates to the ability to dispose easily of the security and the
price to be obtained upon disposition of the security, which may
be less than would be obtained for a comparable more liquid
security. Illiquid securities may trade at a discount from
comparable, more liquid investments. Investment of the Fund
’s assets in illiquid securities may restrict the ability
of the Fund to dispose of its investments in a timely fashion
and for a fair price as well as its ability to take advantage of
market opportunities. The risks associated with illiquidity will
be particularly acute where the Fund’s operations require
cash, such as when the Fund redeems shares or pays dividends,
and could result in the Fund borrowing to meet short-term cash
requirements or incurring capital losses on the sale of illiquid
investments.
The Fund may invest in securities that are not registered (
“restricted securities.”) under the Securities Act of
1933, as amended (the “Securities Act”). Restricted
securities may be sold in private placement transactions between
the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases,
privately placed securities may not be freely transferable under
the laws of the applicable jurisdiction or due to contractual
restrictions on resale. As a result of the absence of a public
trading market, privately placed securities may be less liquid
and more difficult to value than publicly traded securities. To
the extent that privately placed securities may be resold in
privately negotiated transactions, the prices realized from the
sales, due to illiquidity, could be less than those originally
paid by the Fund or less than their fair market value. In
addition, issuers whose securities are not publicly traded may
not be subject to the disclosure and other investor protection
requirements that may be applicable if their securities were
publicly traded. If any privately placed securities held by the
Fund are required to be registered under the securities laws of
one or more jurisdictions before being resold, the Fund may be
required to bear the expenses of registration. Certain of the
Fund’s investments in private placements may consist of
direct investments and may include investments in smaller,
less-seasoned issuers, which may involve greater risks. These
issuers may have limited product lines, markets or financial
resources, or they may be dependent on a limited management
group. In making investments in such securities, the Fund may
obtain access to material non-public information which may
restrict the Fund’s ability to conduct portfolio
transactions in such securities.
144A Securities. The Fund may
purchase restricted securities that can be offered and sold to
“qualified institutional buyers” under Rule 144A under
the Securities Act. The Board of Directors has determined to
treat as liquid Rule 144A securities that are either freely
tradable in their primary markets offshore or have been
determined to be liquid in accordance with the policies and
procedures adopted by the Fund’s Board. The Board of
Directors has adopted guidelines and delegated to the Investment
Adviser the daily function of determining and monitoring
liquidity of restricted securities. The Board of Directors,
however, will retain sufficient oversight and be 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 continue to
develop, the Board of Directors will carefully monitor the Fund
’s investments in these securities. This investment
practice could have the effect of increasing the level of
illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in
purchasing these securities.
Standby Commitment Agreements.
The Fund may enter into standby commitment agreements.
These agreements commit the Fund, for a stated period of time,
to purchase a stated amount of securities that may be issued and
sold to the Fund at the option of the issuer. The price 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.
The Fund will enter into such agreements for the purpose of
investing in the security underlying the commitment at a price
that 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 securities subject to such
commitments, together with the value of portfolio securities
subject to legal restrictions on resale that affect their
marketability, will not exceed 15% of its net assets taken at
the time of the commitment. The Fund will maintain a segregated
account with its custodian of cash, cash equivalents, U.S.
Government securities or other liquid securities 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, thereby
determining the yield during the term of the agreement. This
insulates the Fund from fluctuations in the market value of the
underlying security during such period, although, to the extent
the repurchase agreement is not denominated in U.S. dollars, the
Fund’s return may be affected by currency fluctuations. The
Fund may not invest more than 15% of its net assets in
repurchase agreements maturing in more than seven days.
Repurchase agreements may be construed to be collateralized
loans by the purchaser to the seller secured by the securities
transferred to the 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 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
shall be dependent upon intervening fluctuations of the market
value of such security and the accrued interest on the security.
In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from
market fluctuations following the failure of the seller to
perform.
Securities Lending. The Fund
may lend securities with a value not exceeding 33
1
/3% of its total assets. In
return, the Fund receives collateral in an amount equal to at
least 100% of the current market value of the loaned securities
in cash or securities issued or guaranteed by the U.S.
Government. If cash collateral is received by the Fund, it is
invested in short-term money market securities, and a portion of
the yield received in respect of such investment is retained by
the Fund. Alternatively, if securities are delivered to the Fund
as collateral, the Fund and the borrower negotiate a rate for
the loan premium to be received by the Fund for lending its
portfolio securities. In either event, the total yield on the
Fund’s portfolio is increased by loans of its portfolio
securities. The Fund may receive a flat fee for its loans. The
loans are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business
days. The Fund may pay reasonable finder’s, administrative
and custodial fees in connection with its loans. In the event
that the borrower defaults on its obligation to return
borrowed securities because of insolvency or for any other reason,
the Fund could experience delays and costs in gaining access to
the collateral and could suffer a loss to the extent the value
of the collateral falls below the market value of the borrowed
securities.
Junk 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 S&P or 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 Investment Adviser. The Fund is authorized to
invest up to 5% of its total assets at the time of purchase in
junk bonds.
Junk bonds are debt securities that are rated below
investment grade by the major rating agencies or are unrated
securities that Fund management believes are of comparable
quality. Although junk bonds generally pay higher rates of
interest than investment grade bonds, they are high-risk
investments that may cause income and principal losses for the
Fund. The major risk in junk bond investments
include:
Junk bonds may be issued by less creditworthy companies.
These securities are vulnerable to adverse changes in the issuer
’s industry and to general economic conditions. Issuers of
junk bonds may be unable to meet their interest or principal
payment obligations because of an economic downturn, specific
issuer developments or the unavailability of additional
financing.
The issuers of junk bonds may have a larger amount of
outstanding debt relative to their assets than issuers of
investment grade bonds. If the issuer experiences financial
stress, it may be unable to meet its debt obligations. The issuer
’s ability to pay its debt obligations also may be lessened
by specific issuer developments, or the unavailability of
additional financing.
Junk bonds are frequently ranked junior in claims by other
creditors. If the issuer cannot meet its obligations, the senior
obligations are generally paid off before the junior
obligations.
Junk bonds frequently have redemption features that permit
an issuer to repurchase the security from the Fund before it
matures. If the issuer redeemed the junk bonds, the Fund may
have to invest the proceeds in bonds with lower yields and may
lose income.
Prices of junk bonds are subject to extreme price
fluctuations. Negative economic developments may have a greater
impact on the prices of junk bonds than on other higher rated
fixed-income securities.
Junk bonds may be less liquid than higher rated
fixed-income securities even under normal economic conditions.
There are fewer dealers in the junk bond market, and there may
be significant differences in the prices quoted for junk bonds
by the dealers. Because they are less liquid, judgment may play
a greater role in valuing certain of the Fund’s portfolio
securities than in the case with securities trading in a more
liquid market.
The Fund may incur expenses to the extent necessary to
seek recovery upon default or to negotiate a new terms with a
defaulting issuer.
Investments in junk bonds will be made only when, in the
judgment of the Investment Adviser, such securities provide
attractive total return potential, relative to the risk of such
securities, as compared to higher quality debt 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 Investment Adviser 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.
Borrowing and Leverage. The use
of leverage by the Fund creates an opportunity for greater total
return, but, at the same time, creates special risks. For
example, leveraging may exaggerate changes in the net asset
value of Fund shares and in the yield on the Fund’s
portfolio. Although the principal of such borrowings will be
fixed, the Fund’s assets may change in value during the
time the borrowings are outstanding. Borrowings will create
interest expenses of the Fund that can exceed the income from
the assets purchased with the borrowings. To the
extent the income or capital appreciation derived from securities
purchased with borrowed funds exceeds the interest the Fund will
have to pay on the borrowings, the Fund’s return will be
greater than if leverage had not been used. Conversely, if the
income or capital appreciation from the securities purchased
with such borrowed funds is not sufficient to cover the cost of
borrowing, the return to the Fund will be less than if leverage
had not been used, and therefore the amount available for
distribution to shareholders as dividends and other
distributions will be reduced. In the latter case, the
Investment Adviser in its best judgment nevertheless may
determine to maintain the Fund’s leveraged position if it
expects that the benefits to the Fund’s shareholders of
maintaining the leveraged position will outweigh the current
reduced return.
Certain types of borrowings by the Fund may result in the
Fund being subject to covenants in credit agreements relating to
asset coverage, portfolio composition requirements and other
matters. It is not anticipated that observance of such covenants
would impede the Investment Adviser from managing the Fund
’s portfolio in accordance with the Fund’s investment
objectives and policies. However, a breach of any such covenants
not cured within the specified cure period may result in
acceleration of outstanding indebtedness and require the Fund to
dispose of portfolio investments at a time when it may be
disadvantageous to do so.
The Fund at times may borrow from affiliates of the
Investment Adviser, provided that the terms of such borrowings
are no less favorable than those available from comparable
sources of funds in the marketplace.
Portfolio Strategies Involving Options, Futures and Foreign
Exchange Transactions
The Fund is authorized to use certain derivative
instruments (“Derivatives”), including options and
futures, and to purchase and sell foreign exchange, as described
below. Although certain risks are involved in options and
futures transactions (as discussed below in “Risk Factors
in Options, Futures and Currency Instruments”), the
Investment Adviser believes that, because the Fund will (i) use
derivatives to enhance income only through writing covered
options on portfolio securities and (ii) engage in any 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.
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 increases beyond a
specified level on or before the expiration date, in the case of
an option on a security 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 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.
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 write only 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; Limitations on the Use of OTC
Derivatives” below.
Futures
The Fund may engage in transactions in futures and options
thereon. Futures are standardized, exchange-traded contracts
that 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 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;
Limitations on the Use of OTC Derivatives”
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 enter into a cross hedge
only if the Investment Adviser 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 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 Derivatives for hedging purposes involves the risk
of imperfect correlation in movements in the value of the
Derivatives and the value of the instruments being hedged. If
the value of the Derivatives 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 Derivatives 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; Limitations
on the Use of OTC Derivatives.” However, there can be no
assurance that, at any specific time, either a liquid secondary
market will exist for a Derivative 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 Derivative
without incurring substantial losses, if at all.
Certain transactions in Derivatives (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.
Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC Derivatives
Certain Derivatives 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 Investment Adviser 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 Derivatives 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 Derivatives 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
Derivatives
The Fund may not use any Derivative to gain exposure to an
asset or class of assets that it would be prohibited by its
investment restrictions from purchasing directly.
The Fund has adopted the following restrictions and
policies relating to the investment of its assets and its
activities, which are fundamental policies and may not be
changed without the approval of the holders of a majority of the
Fund’s outstanding voting securities (which for this
purpose and under the Investment Company Act means the lesser of
(i) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (ii) more
than 50% of the outstanding shares). The Fund may
not:
|
1. Make 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 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.
|
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 net assets would be invested in such
securities. This restriction shall not apply to securities
which mature within seven days or securities which the Board
of Directors of the Fund has otherwise determined to be liquid
pursuant to applicable law. Securities purchased in accordance
with Rule 144A under the Securities Act and determined to be
liquid by the Fund’s Board of Directors are not subject
to the limitations set forth in this investment
restriction.
|
|
d. Notwithstanding fundamental 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.
|
In addition, to comply with tax requirements for
qualification as a “regulated investment company,” the
Fund’s investments will be limited in a manner such that,
at the close of each quarter of each fiscal year, (a) no more
than 25% of the Fund’s total assets are invested in the
securities of a single issuer, and (b) with regard to at least
50% of the Fund’s total assets, no more than 5% of its
total assets are invested in the securities of a single issuer.
For purposes of this restriction, the Fund will regard each
state and each political subdivision, agency or instrumentality
of such state and each multi-state agency of which such state is
a member and each public authority which issues securities on
behalf of a private entity as a separate issuer, except that if
the security is backed only by the assets and revenues of a
non-government entity then the entity with the ultimate
responsibility for the payment of interest and principal may be
regarded as the sole issuer. These tax-related limitations may
be changed by the Board of Directors of the Fund to the extent
necessary to comply with changes to the Federal tax
requirements.
Notwithstanding the provisions of Investment Restriction
(b) above, the Fund does not currently intend to engage in short
sales.
Because of the affiliation of Merrill Lynch, Pierce,
Fenner & Smith Incorporated (“Merrill Lynch”) with
the Investment Adviser, the Fund is prohibited from engaging in
certain transactions involving 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 that are not registered under the
Securities Act in which such firms or any of their affiliates
participate as an underwriter or dealer.
While the Fund generally does not expect to engage in
trading for short-term gains, the Investment Adviser 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.
The Directors, executive officers and portfolio manager 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 the portfolio manager and of each
executive officer and Director is P.O. Box 9011, Princeton, New
Jersey 08543-9011.
TERRY
K. GLENN
(59) — President and Director(1)(2)
— Executive Vice President of the Investment Adviser
and Fund Asset Management, L.P. (“FAM”) (which terms
as used herein includes their corporate predecessors) since
1983; Executive Vice President and Director of Princeton
Services, Inc. (“Princeton Services”) since 1993;
President of Princeton Funds Distributor, Inc. (“PFD”)
since 1986 and Director thereof since 1991; President of
Princeton Administrators, L.P. since 1988.
RONALD
W. FORBES
(58) — 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
(46) — 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
(67) — 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 from 1986 to 1997.
KEVIN
A. RYAN
(67) — Director(2) — 127
Commonwealth Avenue, Chestnut Hill, Massachusetts 02167. Founder
and Director Emeritus of The Boston University Center for the
Advancement of Ethics and Character and Director thereof until
1999; Professor until 1999 and currently Professor Emeritus 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
(61) — 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
Realty Trust, Inc. (real estate holding company) and Alexander
’s Inc. (real estate company).
ARTHUR
ZEIKEL
(67) — Director(1)(2) — 300
Woodland Avenue, Westfield, New Jersey 07090-1826. Chairman of
the Investment Adviser and FAM from 1997 to 1999; President of
the Investment Adviser and FAM from 1977 to 1997; Chairman of
Princeton Services from 1997 to 1999 and Director thereof from
1993 to 1999; President of Princeton Services from 1993 to 1997;
Executive Vice President of Merrill Lynch & Co., Inc. (
“ML & Co.”) from 1990 to 1999.
NORMAN
R. HARVEY
(65) — Senior Vice President(1)(2)
— Senior Vice President of the Investment Adviser and
FAM since 1982; Senior Vice President of Princeton Services
since 1993.
WALTER
D. ROGERS
(56) — Senior Vice President and Portfolio
Manager(1)(2) — First Vice President of the
Investment Adviser since 1997; Vice President of the Investment
Adviser from 1987 to 1997.
DONALD
C. BURKE
(39) — Vice President and Treasurer(1)(2)
— Senior Vice President and Treasurer of the
Investment Adviser and MLAM since 1999; Director of Taxation of
MLAM since 1990; Senior Vice President and Treasurer of
Princeton Services since 1999; Vice President of PFD since 1999;
First Vice President of MLAM from 1997 to 1999; Vice President
of MLAM from 1990 to 1997.
IRA
P. SHAPIRO
(36) — Secretary(1)(2) —
First Vice President of the Investment Adviser since 1998;
Director (Legal Advisory) of the Investment Adviser from 1997 to
1998; Vice President of the Investment Adviser from 1996 to
1997; Attorney with the Investment Adviser and FAM from 1993 to
1996.
(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
Investment Adviser or FAM acts as investment adviser or
manager.
|
As of December 1, 1999, the officers and Directors of the
Fund as a group (11 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.
Compensation of Directors
Pursuant to the terms of the investment advisory agreement
with the Fund, the Investment Adviser pays all compensation of
officers of the Fund as well as the fees of all Directors who
are affiliated persons of the Investment Adviser. The Fund pays
each non-interested Director a fee of $1,000 per year plus $400
per meeting attended. The Fund also compensates each member of
its Audit and Nominating Committee (the “Committee”),
which consists of the non-interested Directors at a rate of $400
per year. The Fund pays the Chairman of the Committee an
additional fee of $1,000 per year. The Fund reimburses each
non-interested Director for his out-of-pocket expenses relating
to attendance at Board and Committee meetings.
The following table sets forth the compensation earned by
non-affiliated Directors from the Fund for the fiscal year ended
August 31, 1999 and the aggregate compensation paid to
non-affiliated Directors from all registered investment
companies advised by MLAM and its affiliate FAM, (“MLAM/FAM
Advised Funds”) for the calendar year ended December 31,
1998.
Director
|
|
Aggregate
Compensation
from the Fund
|
|
Pension or
Retirement Benefit
Accrued as Part of
Fund Expense
|
|
Total
Compensation
from Fund and
MLAM/FAM
Advised Funds
Paid to Director(1)
|
| Ronald W. Forbes |
|
$2,600 |
|
None |
|
192,567 |
| Cynthia A. Montgomery |
|
$2,600 |
|
None |
|
192,867 |
| Charles C. Reilly |
|
$3,600 |
|
None |
|
362,858 |
| Kevin
A. Ryan |
|
$2,600 |
|
None |
|
192,567 |
| Richard R. West |
|
$2,600 |
|
None |
|
346,125 |
(1)
|
The Directors serve on the boards of MLAM/FAM
Advised Funds as follows: Mr. Forbes (42 registered investment
companies consisting of 52 portfolios); Ms. Montgomery (42
registered investment companies consisting of 55 portfolios);
Mr. Reilly (60 registered investment companies consisting of
75 portfolios); Mr. Ryan (42 registered investment companies
consisting of 55 portfolios); and Mr. West (62 registered
investment companies consisting of 86 portfolios).
|
Directors of the Fund, members of the Boards of other
MLAM/FAM Advised Funds, ML & Co. and its subsidiaries (the
term “subsidiaries,” when used herein with respect to
ML & Co., includes MLAM, the Investment Adviser 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. See “Purchase of Shares —
Initial Sales Charge Alternatives — Class A
and Class D Shares — Reduced Initial Sales Charges
— Purchase Privilege of Certain Persons.
”
Management and Advisory Arrangements
Investment Advisory Services.
The Investment Adviser provides the Fund with investment
advisory and management services. Subject to the supervision of
the Directors, the Investment Adviser is responsible for the
actual management of the Fund’s portfolio and constantly
reviews the Fund’s holdings in light of its own research
analysis and that from other relevant sources. The
responsibility for making decisions to buy, sell or hold a
particular security rests with the Investment Adviser. The
Investment Adviser performs certain of the other
administrative services and provides all the office space,
facilities, equipment and necessary personnel for management of
the Fund.
Securities held by the Fund may also be held by, or be
appropriate investments for, other funds or investment advisory
clients for which the Investment Adviser or its affiliates
act(s) as an adviser. Because of different objectives or other
factors, a particular security may be bought for one or more
clients when one or more clients are selling the same security.
If purchases or sales of securities by the Investment Adviser
for the Fund or other funds for which it acts as investment
adviser or for its advisory clients arise for consideration at
or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds and clients
in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment
Adviser or its affiliates during the same period may increase
the demand for securities being purchased or the supply of
securities being sold there may be an adverse effect on
price.
Investment Advisory Fee. The
Fund has entered into a management agreement with the Investment
Adviser (the “Investment Advisory Agreement”) pursuant
to which the Investment Adviser receives for its services to the
Fund monthly compensation at the annual rate of 0.55% of the Fund
’s average daily net assets. The table below sets forth
information about the total investment advisory fees paid by the
Fund to the Investment Adviser for the periods indicated, all of
which were voluntarily waived.
Fiscal Year
Ended August 31,
|
|
Investment
Advisory Fee
|
| 1999 |
|
$336,800 |
| 1998 |
|
$213,013 |
| 1997 |
|
$207,552 |
The Investment Adviser has entered into a sub-advisory
agreement with Merrill Lynch Asset Management U.K. Limited (
“MLAM U.K.”) pursuant to which MLAM U.K. provides
investment advisory services to the Investment Adviser with
respect to the Fund. For the fiscal years ended August 31, 1999,
1998 and 1997, the Investment Adviser paid no fees to MLAM U.K.
pursuant to this agreement.
Payment of Fund Expenses. The
Investment Advisory Agreement obligates the Investment Adviser
to provide investment advisory services and to pay all
compensation of and furnish office space for officers and
employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well
as the fees of all Directors of the Fund who are affiliated
persons of the Investment Adviser. The Fund pays all other
expenses incurred in the operation of the Fund, including, among
other things, taxes; expenses for legal and auditing services;
costs of printing proxies, stock certificates, shareholder
reports and prospectuses and statements of additional
information (except to the extent paid by the Distributor);
charges of the custodian, any sub-custodian and transfer agent;
expenses of redemption of shares; SEC fees; expenses of
registering the shares under Federal, state or foreign laws;
fees and expenses of non-interested Directors; accounting and
pricing costs (including the daily calculation of net asset
value); insurance, interest, brokerage costs, litigation and
other extraordinary or non-recurring expenses, and other
expenses properly payable by the Fund. Accounting services are
provided to the Fund by the Investment Adviser and the Fund
reimburses the Investment Adviser for its costs in connection
with such services on a semi-annual basis. The Distributor will
pay certain promotional expenses of the Fund incurred in
connection with the offering of shares of the Fund. Certain
expenses will be financed by the Fund pursuant to distribution
plans in compliance with Rule 12b-1 under the Investment Company
Act. See “Purchase of Shares—Distribution Plans.
”
Organization of the Investment Adviser.
The Investment Adviser is a limited partnership, the
partners of which are ML & Co., a financial services holding
company and the parent of Merrill Lynch, and Princeton Services.
ML & Co. and Princeton Services are “controlling persons
” of the Investment Adviser as defined under the Investment
Company Act because of their ownership of its voting securities
or their power to exercise a controlling influence over its
management or policies.
The following entities may be considered “controlling
persons” of MLAM U.K.: Merrill Lynch Europe PLC (MLAM U.K.
’s parent), a subsidiary of Merrill Lynch International
Holdings, Inc., a subsidiary of Merrill Lynch International,
Inc., a subsidiary of ML & Co.
Duration and
Termination. Unless earlier
terminated as described below, the Investment Advisory Agreement
and Sub-Advisory Agreement will continue in effect from year to
year if approved annually (a) by the Directors of the Fund or by
a majority of the outstanding shares of the Fund and (b) by a
majority of the Directors who are not parties to such contract
or interested persons (as defined in the Investment Company Act)
of any such party. Such 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.
Transfer Agency Services.
Financial Data Services, Inc. (the “Transfer Agent
”), 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 a fee of
$11.00 per Class A or Class D account and $14.00 per Class B or
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 the fee will commence the month following the
month the account is closed. At the end of the calendar year, no
further fee 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 record keeping system, provided the
record keeping system is maintained by a subsidiary of ML &
Co.
Distribution Expenses. The Fund
has entered into four separate distribution agreements with the
Distributor in connection with the continuous offering of each
class of shares of the Fund (the “Distribution Agreements
”). The Distribution Agreements obligate the Distributor to
pay certain expenses in connection with the offering of each
class of shares of the Fund. After the prospectuses, statements
of additional information and periodic reports have been
prepared, set in type and mailed to shareholders, the
Distributor pays for the printing and distribution of copies
thereof used in connection with the offering to dealers and
investors. The Distributor also pays for other supplementary
sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and
termination provisions as the Investment Advisory Agreement
described above.
The Board of Directors of the Fund has adopted a Code of
Ethics under Rule 17j-1 of the Investment Company Act which
incorporates the Code of Ethics of the Investment Adviser
(together, the “Codes”). The Codes significantly
restrict the personal investing activities of all employees of
the Investment Adviser and, as described below, impose
additional, more onerous, restrictions on fund investment
personnel.
The Codes require that all employees of the Investment
Adviser pre-clear any personal securities investment (with
limited exceptions, such as government securities). The
pre-clearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions
applicable to all employees of the Investment Adviser include a
ban on acquiring any securities in a “hot” initial
public offering and a prohibition from profiting on short-term
trading in securities. In addition, no employee may purchase or
sell any security that at the time is being purchased or sold
(as the case may be), or to the knowledge of the employee is
being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for
trading “blackout periods” which prohibit trading by
investment personnel of the Fund within periods of trading by
the Fund in the same (or equivalent) security (15 or 30 days
depending upon the transaction).
Reference is made to “How to Buy, Sell, Transfer and
Exchange Shares” in the Prospectus.
The Fund offers 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 or
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 (also known as service
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 contingent deferred sales charges (“CDSCs
”), distribution fees and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account
maintenance fees that are imposed on Class D shares, are imposed
directly against those classes and not against all assets of the
Fund and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors
choosing another sales charge option. 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). Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and 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.
The Merrill Lynch Select Pricing
SM
System is used by more than 50 registered
investment companies advised by the Investment Adviser or its
affiliate, FAM. Funds advised by the Investment Adviser or FAM
that use the Merrill Lynch Select Pricing
SM
System are referred to herein as “Select
Pricing Funds.”
The Fund or the Distributor may suspend the continuous
offering of the Fund’s shares of any class at any time in
response to conditions in the securities markets or otherwise
and may thereafter resume such offering from time to time. Any
order may be rejected by the Fund or the Distributor. 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 Transfer Agent are not subject to the
processing fee.
Initial Sales Charge Alternatives — Class A and Class D
Shares
Investors who prefer an initial sales charge alternative
may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales
charge alternative who are eligible to purchase Class A shares
should purchase Class A shares rather than Class D shares
because there is an account maintenance fee imposed on Class D
shares. Investors qualifying for significantly reduced initial
sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions
are not available with respect to the deferred sales charges
imposed in connection with purchases of Class B or Class C
shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D
shares, because over time the accumulated ongoing account
maintenance and distribution fees on Class B or Class C shares
may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors who
previously purchased Class A shares may no longer be eligible to
purchase Class A shares of other Select Pricing 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 charge 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.
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, 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.
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 who currently own Class A
shares 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 and U.S. branches of foreign banking institutions
provided that the program has $3 million or more initially
invested in Select Pricing 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. 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 are met. In addition, Class A shares of the Fund and
certain other Select Pricing Funds are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate
Fund, Inc. and, if certain conditions are met, to shareholders
of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the
net proceeds form a sale of certain of their shares of common
stock pursuant to a tender offer conducted by such funds in
shares of the Fund and certain other Select Pricing
Funds.
Class A and Class D Sales Charge
Information
| Class A Shares |
|
|
For the Fiscal
Year
Ended
August 31
|
|
Gross Sales
Charges
Collected
|
|
Sales Charges
Retained by
Distributor
|
|
Sales Charges
Paid to
Merrill Lynch
|
|
CDSCs Received
on
Redemption of
Load-Waived Shares
|
| 1999
|
|
$ 472
|
|
$ 32
|
|
$ 440
|
|
$0
|
| 1998
|
|
$ 855
|
|
$ 79
|
|
$ 776
|
|
0
|
| 1997
|
|
$ 1,730
|
|
$ 119
|
|
$ 1,611
|
|
0
|
|
| Class D Shares |
|
|
For the Fiscal
Year
Ended
August 31
|
|
Gross Sales
Charges
Collected
|
|
Sales Charges
Retained by
Distributor
|
|
Sales Charges
Paid to
Merrill Lynch
|
|
CDSCs Received
on
Redemption of
Load-Waived Shares
|
| 1999
|
|
$19,464
|
|
$1,599
|
|
$17,865
|
|
$0
|
| 1998
|
|
$ 7,828
|
|
$ 735
|
|
$ 7,093
|
|
0
|
| 1997
|
|
$ 6,613
|
|
$ 446
|
|
$ 6,167
|
|
0
|
The Distributor may reallow discounts to selected dealers
and retain the balance over such discounts. At times the
Distributor may reallow the entire sales charge to such dealers.
Since securities dealers selling Class A and Class D shares of
the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the
Securities Act.
Reduced Initial Sales Charges
Reductions in or exemptions from the imposition of a sales
load are due to the nature of the investors and/or the reduced
sales efforts that will be needed to obtain such
investments.
Reinvested Dividends. No
initial sales charges are imposed upon Class A and Class D
shares issued as a result of the automatic reinvestment of
dividends.
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 Select Pricing 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 Intent. 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 Select
Pricing Funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intent. The Letter of
Intent is available only to investors whose accounts are
maintained at the Fund’s Transfer Agent. The Letter of
Intent is not available to employee benefit plans for which
Merrill Lynch provides plan participant record keeping services.
The Letter of Intent 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 Intent may be included under a
subsequent Letter of Intent 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 Select Pricing Funds presently
held, at cost or maximum offering price (whichever is higher),
on the date of the first purchase under the Letter of Intent,
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 Intent (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 Intent 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 Intent will be deducted from the total purchases made
under such Letter. An exchange from the Summit Cash Reserves
Fund (“Summit”) into the Fund that creates a sales
charge will count toward completing a new or existing Letter of
Intent 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 A or 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 $300 at
4.25%, $300.01 up to $5,000 at 3.25% plus $3 and $5,000.01 or
more at the standard sales charge rates disclosed in the
Prospectus). In addition, Class A or Class D shares of the Fund
are being offered at net asset value plus a sales charge of
0.50% of 1% for corporate or group IRA programs placing orders
to purchase their Class A or Class D shares through Blueprint.
Services, including the exchange privilege, available to Class A
and Class D investors through Blueprint, however, may differ
from those available to other investors in Class A or Class D
shares.
Class A and Class D shares are offered at net asset value
to participants in Blueprint through the Merrill Lynch Directed
IRA Rollover Program (“IRA Rollover Program”)
available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is
available to custodian rollover assets from employer sponsored
retirement and savings plans whose trustee and/or plan sponsor
has entered into a Merrill Lynch Directed IRA Rollover Program
Service Agreement.
Orders for purchases and redemptions of Class A or Class D
shares of the Fund may be grouped for execution purposes which,
in some circumstances, may involve the execution of such orders
two business days following the day such orders are placed. The
minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who
are part of an automatic investment plan. Additional information
concerning purchases through 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.
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.
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.
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. 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.
Purchase Privileges of Certain Persons.
Directors of the Fund, members of the Boards of
other MLAM/ FAM-advised investment companies, ML & Co., and
its subsidiaries 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. The Fund realizes economies of scale and reduction of
sales-related expenses by virtue of the familiarity of these
persons with the Fund. Employees and directors or trustees
wishing to purchase shares of the Fund must satisfy the Fund
’s suitability standards.
Class D shares of the Fund are offered at net asset value,
without a sales charge, to an investor who has a business
relationship with a Financial Consultant who joined Merrill
Lynch from another investment firm within six months prior to
the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise
Merrill Lynch that it will purchase Class D shares of the Fund
with proceeds from a redemption of a mutual fund that was
sponsored by the Financial Consultant’s previous firm and
was subject to a sales charge either at the time of purchase or
on a deferred basis; and second, the investor must establish
that such redemption
had been made within 60 days prior to the investment in the Fund
and the proceeds from the redemption had been maintained in the
interim in cash or a money market fund.
Class D shares of the Fund are also offered at net asset
value, without 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 the shares of
such other fund were subject to a sales charge either at the
time of purchase or on a deferred basis; second, such purchase
of Class D shares must be made within 90 days after such
notice.
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 shares of such other mutual funds and that such
shares have been outstanding for a period of no less than 6
months; and second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the
redemption must be maintained in the interim in cash or a money
market fund.
Closed-End Fund Investment Option.
Class A shares of the Fund and certain other Select
Pricing Funds (“Eligible Class A shares”) are offered
at net asset value to shareholders of certain closed-end funds
advised by MLAM or FAM who purchased such closed-end fund shares
prior to October 21, 1994 (the date the Merrill Lynch Select
Pricing
SM
System commenced operations) and wish to
reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in Eligible Class A shares, if the
conditions set forth below are satisfied. Alternatively,
closed-end fund shareholders who purchased such shares on or
after October 21, 1994 and wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class A
shares (if eligible to buy Class A shares) or Class D shares of
the Fund and other Select Pricing 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 Eligible 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 Charge or CDSC (each as defined in the eligible
fund’s prospectus) is applicable. Purchase orders from
eligible fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related tender
offer terminates and will be effected at the net asset value of
the designated class of the Fund on such day.
Acquisition of Certain Investment Companies.
Class D shares may be offered at net asset
value 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.
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 Select Pricing Funds.
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 that do not qualify
for the 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.
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. See
“Pricing of Shares — Determination of Net
Asset Value” below.
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. In
determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the
lowest applicable rate being charged. 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. It will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to
reinvestment of dividends and then of shares held longest during
the four-year period. 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.
The following table sets forth the Class B
CDSC:
| Year Since Purchase Payment
Made
|
|
CDSC as a
Percentage
of Dollar Amount
Subject to Charge
|
| 0
–1 |
|
4.0% |
| 1
–2 |
|
3.0% |
| 2
–3 |
|
2.0% |
| 3
–4 |
|
1.0% |
| 4 and
thereafter |
|
None |
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
upon 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
charge is applied only to the original cost of $10 per share and
not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged
at a rate of 2.0% (the applicable rate in the third year after
purchase).
The Class B CDSC may be 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 (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 or, if later, reasonably promptly
following
completion of probate. The Class B CDSC also may be waived on
redemptions of shares by certain eligible 401(a) and eligible
401(k) plans. The CDSC may also be 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. The Class B CDSC may also be 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 may also be waived or
its terms may be modified in connection with certain fee-based
programs. The Class B CDSC may also be waived in connection with
involuntary termination of an account in which Fund shares are
held or for withdrawals through the Merrill Lynch Systematic
Withdrawal Plan. See “Shareholder Services—Fee-Based
Programs” and “—Systematic Withdrawal Plan.
”
Employer-Sponsored Retirement or Savings Plans and Certain
Other Arrangements. Certain
employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class B shares with a waiver of the
CDSC upon redemption, 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. Such Class B
shares will convert into Class D shares approximately ten years
after the plan purchases the first share of any Select Pricing
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.
Merrill Lynch Blueprint
SM
Program. Class
B shares are offered to certain participants in Blueprint.
Blueprint is directed to small investors, group IRAs 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 investors 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.
Conversion of Class B Shares to Class D Shares.
After approximately ten years (the
“Conversion Period”), Class B shares will be converted
automatically into Class D shares of the Fund. Class D shares
are subject to an ongoing account maintenance fee of 0.25% of
average daily net assets but are not subject to the distribution
fee that is borne by Class B shares. Automatic conversion of
Class B shares into Class D shares will occur at least once each
month (on the “Conversion Date”) on the basis of the
relative net asset value 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 the 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.
In general, Class B shares of equity Select Pricing Funds
will convert approximately eight years after initial purchase
and Class B shares of taxable and tax-exempt fixed income Select
Pricing Funds will convert approximately ten years after the
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 on to the holding period for the shares
acquired. The Conversion Period also may be modified for
investors that participate in certain fee-based programs. See
“Shareholder Services—Fee-Based Programs.
”
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.
The Conversion Period is modified for shareholders who
purchased Class B shares through certain retirement plans that
qualified for a waiver of the CDSC normally imposed or purchases
of Class B shares (“Class B Retirement Plans”). When
the first share of any Select Pricing Fund purchased by a Class
B Retirement Plan has been held for ten years (i.e., ten
years from the date the relationship between Select Pricing
Funds and the Class B Retirement Plan was established), all
Class B shares of all Select Pricing 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.
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.
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. 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. 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. It will be
assumed that the redemption is first of shares held for over one
year or shares acquired pursuant to reinvestment of dividends
and then of shares held longest during the one-year period. 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. The Class C CDSC may be waived in connection with
involuntary termination of an account in which Fund shares are
held and withdrawals through the Merrill Lynch Systematic
Withdrawal Plans.
Class B and Class C Sales Charge
Information
Class B Shares*
|
For the Fiscal
Year Ended
August 31
|
|
CDSCs Received
by
Distributor
|
|
CDSCs Paid to
Merrill Lynch
|
| 1999 |
|
$111,664 |
|
$111,664 |
| 1998 |
|
$
44,814 |
|
$
44,814 |
| 1997 |
|
$109,154 |
|
$109,154 |
|
|
*
Additional Class B 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. |
|
Class C Shares
|
For the Fiscal
Year Ended
August 31
|
|
CDSCs Received
by
Distributor
|
|
CDSCs Paid to
Merrill Lynch
|
| 1999 |
|
$
6,409 |
|
$
6,409 |
| 1998 |
|
$
18,888 |
|
$
18,888 |
| 1997 |
|
$
669 |
|
$
669 |
Merrill Lynch
compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds.
Proceeds from the CDSC and the ongoing distribution fee are paid
to the Distributor and are used in whole or in part by the
Distributor to defray the expenses of dealers (including Merrill
Lynch) related to providing distribution-related services to the
Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial
consultants for selling Class B and Class C shares, from the
dealers’ 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. See “Distribution Plans
” below. Imposition of the CDSC and the distribution fee on
Class B and Class C shares is limited by the National
Association of Securities Dealers, Inc. (the “NASD”)
asset-based sales charge rule. See “Limitations on the
Payment of Deferred Sales Charges” below.
Reference is made to “Fees and Expenses” 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.
The Distribution Plans for each of the Class B, Class C
and Class D shares provides 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
with respect to Class B, Class C and Class D shares. Each of
those classes has exclusive voting rights with respect to the
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).
The Distribution Plans for each of the Class B and Class C
shares provides 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.
The Fund’s Distribution Plans are subject to the
provisions of Rule 12b-1 under the Investment Company Act. 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 each related class of shareholders. Each Distribution
Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of
non-interested Directors shall be committed to the discretion of
the non-interested Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the
non-interested Directors concluded that there is reasonable
likelihood that each 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 non-interested Directors or by the vote of the
holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without
the approval of the related class of shareholders and all
material amendments are required to be approved by the vote of
Directors, including a majority of the non-interested Directors
who have no direct or indirect financial interest in the
Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Fund preserve
copies of the Distribution Plan and any report made pursuant to
such plan for a period of not less than six years from the date
of the Distribution Plan or such report, the first two years in
an easily accessible place.
Among other things, each Distribution Plan provides that
the Distributor shall provide and the Directors shall review
quarterly reports of the disbursement of the account maintenance
and/or distribution fees paid to the
Distributor. Payments under the Distribution Plans are based on a
percentage of average daily net assets attributable to the
shares regardless of the amount of expenses incurred and,
accordingly, distribution-related revenues from the Distribution
Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues
and expenses is presented to the Directors for their
consideration in connection with their deliberations as to the
continuance of the Class B and Class C Distribution Plans
annually, as of December 31 of each year, on a “fully
allocated accrual” basis and quarterly on a “direct
expense and revenue/cash” basis. On the fully allocated
accrual basis, revenues consist of the account maintenance fees,
distribution fees, the CDSCs and certain other related revenues,
and expenses consist of financial consultant compensation,
branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion
and marketing expenses, corporate overhead and interest expense.
On the direct expense and revenue/cash basis, revenues consist
of the account maintenance fees, distribution fees and CDSCs and
the expenses consist of financial consultant
compensation.
As of December 31, 1998, the last date for which fully
allocated accrual data is available, the fully allocated accrual
expenses incurred by the Distributor and Merrill Lynch for the
period since the commencement of operations of Class B shares
exceeded fully allocated accrual revenues by approximately
$671,000 (1.24% of Class B net assets at that date). As of
August 31, 1999, direct cash revenues for the period since the
commencement of operations of Class B shares exceeded direct
cash expenses by $1,063,876 (2.42% of Class B net assets at that
date). As of December 31, 1998, the fully allocated accrual
expenses incurred by the Distributor and Merrill Lynch for the
period since the commencement of operations of Class C shares
exceeded the fully allocated revenues by approximately $20,000
(.32% of Class C net assets at that date). As of August 31,
1999, direct cash revenues for the period since the commencement
of operations of Class C shares exceeded direct cash expenses by
$95,930 (1.88% of Class C net assets at that date).
For the fiscal year ended August 31, 1999, the Fund paid
the Distributor $358,903 pursuant to the Class B Distribution
Plan (based on average daily net assets subject to such Class B
Distribution Plan of approximately $47.6 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, 1999, the
Fund paid the Distributor $43,460 pursuant to the Class C
Distribution Plan (based on average daily net assets subject to
such Class C Distribution Plan of approximately $5.4 million),
all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in
connection with Class C shares. For the fiscal year ended August
31, 1999, the Fund paid the Distributor $11,226 pursuant to the
Class D Distribution Plan (based on average daily net assets
subject to such Class D Distribution Plan of approximately $4.5
million), all of which was paid to Merrill Lynch for providing
account maintenance activities in connection with Class D
shares.
Limitations on the Payment of Deferred Sales
Charges
The maximum sales charge rule in the Conduct Rules of the
NASD imposes a limitation on certain asset-based sales charges
such as the distribution fee and the CDSC borne by the Class B
and Class C shares, but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class.
As applicable to the Fund, the maximum sales charge rule limits
the aggregate of distribution fee payments and CDSCs payable by
the Fund to (1) 6.25% of eligible gross sales of Class B shares
and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges),
plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the
unpaid balance being the maximum amount payable minus amounts
received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales.
Consequently, the maximum amount payable to the Distributor
(referred to as the “voluntary maximum”) in connection
with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest
charges at any time. To the extent payments would exceed the
voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares, and any
CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account
maintenance 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, 1999 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, 1999
|
|
|
|
(in
thousands) |
|
|
|
Eligible
Gross
Sales(1)
|
|
Allowable
Aggregate
Sales Charges(2)
|
|
Allowable
Interest on
Unpaid
Balance(3)
|
|
Maximum
Amount
Payable to
Distributor
|
|
Amounts
Previously
Paid to
Distributor(4)
|
|
Aggregate
Unpaid
Balance
|
|
Annual
Distribution
Fee at
Current Net
Asset
Level(5)
|
| Class B Shares |
| Under
NASD Rule as Adopted |
|
$69,663 |
|
$4,374 |
|
$1,566 |
|
$5,940 |
|
$1,692 |
|
$4,248 |
|
$220 |
| Under
Distributor’s Voluntary Waiver |
|
$69,663 |
|
$4,374 |
|
$
328 |
|
$4,702 |
|
$1,692 |
|
$3,010 |
|
$220 |
|
|
| Class C Shares |
| Under
NASD Rule as Adopted |
|
$
3,966 |
|
$
554 |
|
$
114 |
|
$
668 |
|
$
109 |
|
$
559 |
|
$
28 |
(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)
|
Includes amounts attributable to exchanges from
Summit Cash Reserves Fund (“Summit”) which are not
reflected in Eligible Gross Sales. Shares of Summit can only
be purchased by exchange from another fund (the “redeemed
fund”). Upon such an exchange, the maximum allowable
sales charge payment to the redeemed fund is reduced in
accordance with the amount of the redemption. This amount is
then added to the maximum allowable sales charge payment with
respect to Summit. Upon an exchange out of Summit, the
remaining balance of this amount is deducted from the maximum
allowable sales charge payment to Summit and added to the
maximum allowable sales charge payment to the fund into which
the exchange is made.
|
(3)
|
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.
|
(4)
|
Consists of CDSC payments, distribution fee
payments and accruals. See “What are the Fund’s fees
and expenses?” 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 Fund Advisor
(Merrill Lynch MFA
SM
) Program (the “MFA Program”). The
CDSC is booked as a contingent obligation that may be payable
if the shareholder terminates participation in the MFA
Program.
|
(5)
|
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 (with respect to Class B shares)
or the NASD maximum (with respect to Class B and Class C
shares).
|
Reference is made to “How to Buy, Sell, Transfer and
Exchange Shares” in the Prospectus.
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 that may be applicable, there
will be no charge for redemption if the redemption request is
sent directly to the Transfer Agent. Shareholders liquidating
their holdings will receive upon redemption all dividends
reinvested through the date of redemption.
The right to redeem shares or to receive payment with
respect to any such redemption may be suspended for more than
seven days only for periods during which trading on the New York
Stock Exchange (the “NYSE”) is restricted as
determined by the Commission or during which the NYSE is closed
(other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the
Commission as a result of which disposal of portfolio securities
or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the
Commission may by order permit for the protection of
shareholders of the Fund.
The value of
shares at the time of redemption may be more or less than the
shareholder’s cost, depending on the market value of the
securities held by the Fund at any such time.
A shareholder wishing to redeem shares held with the
Transfer Agent may do so without charge by tendering the shares
directly to the Transfer Agent at Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to
Financial Data Services, Inc. 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. Proper notice of redemption in
the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper
notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written
letter as noted above accompanied by certificates for the shares
to be redeemed. Redemption requests should not be sent to the
Fund. The redemption request in either event requires the
signature(s) of all persons in whose name(s) the shares are
registered, signed exactly as such name(s) appear(s) on the
Transfer Agent’s register. The signature(s) on the
redemption requests must be guaranteed by an “eligible
guarantor institution” as such is defined in Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), the existence and validity of which
may be verified by the Transfer Agent through the use of
industry publications. In the event a signature guarantee is
required, notarized signatures are not sufficient. In general,
signature guarantees are waived on redemptions of less than
$50,000 as long as the following requirements are met: (i) all
requests require the signatures(s) of all persons whose name(s)
are recorded on the Transfer Agent’s register; (ii) all
checks must be mailed to the stencil address of record on the
Transfer Agent’s register and (iii) the stencil address
must not have changed with 30 days. Certain rules may apply
regarding certain account types such as, but not limited to,
UGMA/UTMA accounts, Joint Tenancies With Rights of Survivorship,
contra broker transactions and institutional accounts. 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, payments 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
(e.g., cash, Federal funds or certified check drawn on a
U.S. bank). 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, Federal funds or
certified check drawn on a U.S. bank) has been collected for the
purchase of such Fund shares, which will usually not exceed 10
days.
The Fund also will repurchase Fund shares through a
shareholder’s listed securities dealer. The Fund normally
will accept orders to repurchase Fund shares by wire or
telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be
priced at the net asset value calculated on the day the request
is received, provided that the request for repurchase is
submitted to the dealer prior to the regular close of business
on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern
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 30 minutes after the close of business on
the NYSE, in order to obtain that day’s closing
price.
The foregoing repurchase arrangements are for the
convenience of shareholders and do not involve a charge by the
Fund (other than any applicable CDSC). Securities firms that 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 Transfer Agent on accounts held at the
Transfer Agent are not subject to the processing fee. The Fund
reserves the right to reject any order for repurchase, which
right of rejection might adversely affect shareholders seeking
redemption through the
repurchase procedure. However, a shareholder whose order for
repurchase is rejected by the Fund may redeem Fund shares as set
forth above.
Reinstatement Privilege — Class A and Class D
Shares
Shareholders who have redeemed their Class A or Class D
shares of the Fund have a privilege to reinstate their accounts
by purchasing Class A or Class D shares, as the case may be, of
the Fund at net asset value without a sales charge up to the
dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for
the amount to be reinstated to the Transfer Agent within 30 days
after the date the request for redemption was accepted by the
Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor
’s Merrill Lynch Financial Consultant within 30 days after
the date the request for redemption was accepted by the Transfer
Agent or the Distributor. The reinstatement will be made at the
net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the
redemption proceeds.
Determination of Net Asset Value
Reference is made to “How Shares are Priced” in
the Prospectus.
The net asset value of the shares of all classes of the
Fund is determined once daily Monday through Friday after the
close of business on the NYSE on each day the NYSE is open for
trading, based on prices at the time of closing. The NYSE
generally closes at 4:00 p.m., Eastern time. 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 NYSE is not open for trading 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.
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, rounded to the
nearest cent. Expenses, including the fees payable to the
Investment Adviser and Distributor, are accrued
daily.
The per share net asset value of Class B, Class C and
Class D shares generally will be lower than the per share net
asset value of Class A shares, reflecting the daily expense
accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and
Class C shares, and the daily expense accruals of the account
maintenance fees applicable with respect to 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 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, which will
differ by approximately the amount of the expense accrual
differentials between the classes.
Portfolio securities that are traded on stock exchanges
are valued at the last sale price (regular way) on the exchange
on which such securities are traded as of the close of business
on the day the securities are being valued or, lacking any
sales, at the last available bid price for long positions and at
the last available ask price for short positions. 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 Directors as the primary market. Long positions in
securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of
valuation. Short positions in securities traded in the OTC
market are valued at the last available ask price in the OTC
market prior to the time of valuation. Portfolio securities that
are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market.
When the Fund writes an option, the amount of the premium
received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the
option written, based upon the last
sale price in the case of exchange-traded options or, in the case
of options traded in the OTC market, the last asked price.
Options purchased by the Fund are valued at their last sale
price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the last bid price. Other
investments, including financial futures contracts and related
options, are stated at market value. Securities and assets for
which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction
of the 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
Directors.
Generally, trading in non-U.S. securities, as well as U.S.
Government securities and money market instruments, is
substantially completed each day at various times prior to the
close of business on the NYSE. The values of such securities
used in computing the net asset value of the Fund’s shares
are determined as of such times. Foreign currency exchange rates
are also generally determined prior to the close of business on
the NYSE. Occasionally, events affecting the values of such
securities and such exchange rates may occur between the times
at which they are determined and the close of business on the
NYSE that will not be reflected in the computation of the Fund
’s net asset value. If events materially affecting the
value of such securities occur during such period, then these
securities will be valued at their fair value as determined in
good faith by the Directors.
Computation of Offering Price Per Share
An illustration of the computation of the offering price
for Class A, Class B, Class C and Class D shares of the Fund
based on the value of the Fund’s net assets and number of
shares outstanding as of August 31, 1999, is set forth
below.
|
|
|
Class
A
|
|
Class
B
|
|
Class
C
|
|
Class
D
|
| Net
Assets |
|
$
2,966,793 |
|
$
43,903,341 |
|
$
5,110,798 |
|
$
4,139,017 |
| |
|
|
|
|
|
|
|
|
| Number of Shares Outstanding |
|
275,198 |
|
4,073,552 |
|
475,177 |
|
383,155 |
| |
|
|
|
|
|
|
|
|
Net
Asset Value Per Share (net assets divided by
number of shares
outstanding) |
|
$
10.78 |
|
$
10.78 |
|
$
10.76 |
|
$
10.80 |
Sales
Charge (for Class A and Class D shares: 4.00%
of offering price (4.17% of net
asset value per
share))* |
|
0.45 |
|
** |
|
** |
|
0.45 |
| |
|
|
|
|
|
|
|
|
| Offering Price |
|
$
11.23 |
|
$
10.78 |
|
$
10.76 |
|
$
11.25 |
| |
|
|
|
|
|
|
|
|
*
|
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” above.
|
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors
of the Fund, the Investment Adviser is primarily responsible for
the execution of the Fund’s portfolio transactions and the
allocation of brokerage. The Fund has no obligation to deal with
any broker or group of brokers in the execution of transactions
in portfolio securities and does not use any particular broker
or dealer. In executing transactions with brokers and dealers,
the Investment Adviser 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 and operation of facilities of
the firm and the firm’s risk in positioning a block of
securities. While the Investment Adviser generally seeks
reasonably competitive commission rates, the Fund does not
necessarily pay the lowest spread or commission available. In
addition, consistent with the Conduct Rules of the NASD and
policies established by the Board of 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; however, whether or not a particular
broker or dealer sells shares of the Fund neither qualifies nor
disqualifies such broker or dealer to execute transactions for
the Fund.
Subject to
obtaining the best net results, brokers who provide supplemental
investment research services to the Investment Adviser may
receive orders for transactions by the Fund. Such supplemental
research services ordinarily consist of assessments and analyses
of the business or prospects of a company, industry or economic
sector. Information so received will be in addition to and not
in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement, and
the expenses of the Investment Adviser will not necessarily be
reduced as a result of the receipt of such supplemental
information. If in the judgment of the Investment Adviser, the
Fund will benefit from supplemental research services, the
Investment Adviser is authorized to pay brokerage commissions to
a broker furnishing such services that are in excess of
commissions that another broker may have charged for effecting
the same transaction. Certain supplemental research services may
primarily benefit one or more other investment companies or
other accounts for which the Investment Adviser exercises
investment discretion. Conversely, the Fund may be the primary
beneficiary of the supplemental research services received as a
result of portfolio transactions effected for such other
accounts or investment companies.
The Fund anticipates that its brokerage transactions
involving securities of issuers domiciled in countries other
than the United States generally will be conducted primarily on
the principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock
exchange transactions generally are higher than in the United
States, although the Fund will endeavor to achieve the best net
results in effecting its portfolio transactions. There generally
is less government supervision and regulation of foreign stock
exchanges and brokers than in the United States.
Information about the brokerage commissions paid by the
Fund, including commissions paid to Merrill Lynch, is set forth
in the following table:
Fiscal Year
Ended August 31
|
|
Brokerage
Commissions
Paid
|
| 1999 |
|
$29,970 |
| 1998 |
|
$26,951 |
| 1997 |
|
$23,190 |
For the fiscal year ended August 31, 1999, the brokerage
commissions paid to Merrill Lynch represented 0% of the
aggregate brokerage commissions paid and involved 0% of the Fund
’s dollar amount of transactions involving payment of
brokerage commissions.
The Fund may invest in certain securities traded in the
OTC market and intends to deal directly with the dealers who
make a market in 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 and persons who are affiliated with such persons
are prohibited from dealing with the Fund as principal in the
purchase and sale of securities unless a permissive order
allowing such transactions is obtained from the Commission.
Since transactions in the OTC market usually involve
transactions with dealers acting as principal for their own
accounts, the Fund will not deal with affiliated persons,
including Merrill Lynch and its affiliates, in connection with
such transactions. However, an affiliated person of the Fund may
serve as its broker in OTC 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. In addition,
the Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill
Lynch is a member or in a private placement in which Merrill
Lynch serves as placement agent except pursuant to procedures
approved by the Board of Directors of the Fund that either
comply with rules adopted by the Commission or with
interpretations of the Commission staff. See “Investment
Objective and Policies—Investment Restrictions.
”
Section 11(a) of the Exchange Act generally prohibits
members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional
accounts that they manage unless the member (i) has obtained
prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with
a statement setting forth the aggregate compensation received by
the member in effecting such transactions, and (iii) complies
with any rules the Commission has prescribed with respect to the
requirements of clauses (i) and (ii). To the extent Section 11(a)
would apply to Merrill Lynch acting as a broker for the Fund in
any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate
consents have been obtained from the Fund and annual statements
as to aggregate compensation will be provided to the
Fund.
The Board of Directors of the Fund has considered the
possibility of seeking to recapture for the benefit of the Fund
brokerage commissions and other expenses of possible portfolio
transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received
by affiliated brokers could be offset against the advisory fee
paid by the Fund to the Investment Adviser. After considering
all factors deemed relevant, the Board of Directors made a
determination not to seek such recapture. The Board will
reconsider this matter from time to time.
Because of different objectives or other factors, a
particular security may be bought for one or more clients of the
Investment Adviser or an affiliate when one or more clients of
the Investment Adviser or an affiliate are selling the same
security. If purchases or sales of securities arise for
consideration at or about the same time that would involve the
Fund or other clients or funds for which the Investment Adviser
or an affiliate acts as manager, transactions in such securities
will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Investment
Adviser or an affiliate 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 offers a number of shareholder services and
investment plans described below that are designed to facilitate
investment in its shares of the Fund. Full details as to each of
such services and copies of the various plans and instructions
as to how to participate in the various services or plans, or
how to change options with respect thereto, can be obtained from
the Fund, by calling the telephone number on the cover page
hereof, or from the Distributor or Merrill Lynch. Certain of
these services are available only to U.S. investors and certain
of these services are not available to investors who place
orders through the Merrill Lynch Blueprint
SM
Program.
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 dividends. The
statements will also show any other activity in the account
since the preceding statement. Shareholders will receive
separate confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment
of dividends. A shareholder with an account held at the Transfer
Agent may make additions to his or her Investment Account at any
time by mailing a check directly to the Transfer Agent. A
shareholder may also maintain an account through Merrill Lynch.
Upon the transfer of shares out of a Merrill Lynch brokerage
account, an Investment Account in the transferring shareholder
’s name may be opened automatically at the Transfer
Agent.
Share certificates are issued only for full shares and
only upon the specific request of a shareholder who has an
Investment Account. 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 may transfer their Fund shares from Merrill
Lynch to another securities dealer that has entered into a
selected dealer agreement with Merrill Lynch. Certain
shareholder services may not be available for the transferred
shares. After the transfer, the shareholder may purchase
additional shares of funds owned before the transfer and all
future trading of these assets must be coordinated by the new
firm. If a shareholder wishes to transfer his or her shares to a
securities dealer that has not entered into a selected dealer
agreement with Merrill Lynch, the shareholder must either (i)
redeem his or her shares, paying any applicable CDSC or (ii)
continue to maintain an Investment Account at the Transfer Agent
for those shares. The shareholder may also request the new
securities dealer to maintain the shares in an account at the
Transfer Agent registered in the name of the securities
dealer for the benefit of the shareholder whether the securities
dealer has entered into a selected dealer agreement or
not.
Shareholders considering transferring a tax-deferred
retirement account, such as an individual retirement account,
from Merrill Lynch to another securities dealer 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.
U.S. shareholders of each class of shares of the Fund have
an exchange privilege with certain other Select Pricing Funds
and Summit Cash Reserves Fund (“Summit”), a series of
Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated for
exchange by holders of Class A, Class B, Class C and Class D
shares of Select Pricing Funds. Shares with a net asset value of
at least $100 are required to qualify for the exchange privilege
and any shares utilized in an exchange must have been held by
the shareholder for at least 15 days. Before effecting an
exchange, shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made.
Exercise of the exchange privilege is treated as a sale of the
exchanged shares and a purchase of the acquired shares for
Federal income tax purposes.
Exchanges of Class A and Class D Shares.
Class A shareholders may exchange Class A shares of
the Fund for Class A shares of a second Select Pricing Fund if
the shareholder holds any Class A shares of the second fund in
the 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 Select Pricing Fund, but
does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a
result of the exchange. Class D shares also may be exchanged for
Class A shares of a second Select Pricing 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 D shares are exchangeable with
shares of the same class of other Select Pricing
Funds.
Exchanges of Class A or Class D shares outstanding (
“outstanding Class A or Class D shares”) for Class A
or Class D shares of other Select Pricing Funds or Class A
shares of Summit (“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, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales
charge equal to the sales charge previously paid on the Class A
or Class D shares on which the dividend was paid. Based on this
formula, Class A and Class D shares generally may be exchanged
into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales
charge.
Exchanges of Class B and Class C Shares.
Certain Select Pricing Funds with Class B or Class C
shares outstanding (“outstanding Class B or Class C shares
”) offer to exchange their Class B or Class C shares for
Class B or Class C shares, respectively, of certain other Select
Pricing Funds or for Class B shares of Summit (“new Class B
or Class C Shares”) on the basis of relative net asset
value per Class B or Class C share, without the payment of any
CDSC that might otherwise be due on redemption of the
outstanding shares. Class B shareholders of the Fund exercising
the exchange privilege will continue to be subject to the Fund
’s CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B or Class C 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 CDSC that may be payable on a disposition of
the new Class B or Class C shares, the holding period for the
outstanding Class B or Class C shares is “tacked” to
the holding period 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
CDSC due on this redemption, since by “tacking” the
two and a half year holding period of the Fund’s Class B
shares to the three year holding period for the 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 of Merrill Lynch Senior Floating Rate Fund
II, Inc. have the option to exchange their shares of common
stock into Class C shares of certain Merrill Lynch-sponsored
open-end funds (“Eligible Class C shares”) at their
net value, without the imposition of any contingent deferred
sales charge upon any subsequent redemption of eligible Class C
Shares. This investment option is available only with respect to
eligible shares of Merrill Lynch Senior Floating Rate Fund II,
Inc. as to which no Early Withdrawal Charge 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 Class C shares of the fund on such
day.
Exchanges for Shares of a Money Market Fund.
Class A and Class D shares are exchangeable
for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of
Summit have an exchange privilege back into Class A or Class D
shares of Select Pricing Funds; Class B shares of Summit have an
exchange privilege back into Class B or Class C shares of Select
Pricing Funds and, in the event of such an exchange, the period
of time that Class B shares of Summit are held will count toward
satisfaction of the holding period requirement for purposes of
reducing any CDSC and toward satisfaction of any Conversion
Period with respect to Class B shares. Class B shares of Summit
will be subject to a distribution fee at an annual rate of 0.75%
of average daily net assets of such Class B shares. This
exchange privilege does not apply with respect to certain
Merrill Lynch fee-based programs for which alternative exchange
arrangements may exist. Please see your Merrill Lynch Financial
Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and
other Select Pricing Funds into a money market fund were
directed to certain Merrill Lynch-sponsored money market funds
other than Summit. Shareholders who exchanged Select Pricing
Fund shares for shares of such other money market funds and
subsequently wish to exchange those money market fund shares for
shares of the Fund will be subject to the CDSC schedule
applicable to such Fund shares, if any. The holding period for
the money market fund shares will not count toward satisfaction
of the holding period requirement for reduction of the CDSC
imposed on such shares, if any, and, with respect to Class B
shares, toward satisfaction of the Conversion Period. However,
the holding period for Class B or Class C shares received in
exchange for such money market fund shares will be aggregated
with the holding period for the fund shares originally exchanged
for such money market fund shares for purposes of reducing the
CDSC or satisfying the Conversion Period.
Exchanges by Participants in the MFA Program.
The exchange privilege is modified with
respect to certain retirement plans which participate in the MFA
Program. Such retirement plans may exchange Class B, Class C or
Class D shares that have been held for at least one year for
Class A shares of the same fund on the basis of relative net
asset values in connection with commencement of participation in
the MFA Program, i.e., no CDSC will apply. The one year
holding period does not apply to shares acquired through
reinvestment of dividends. Upon termination of participation in
the MFA Program. Class A shares will be re-exchanged for the
class of shares originally held. For purposes of computing any
CDSC that may be payable upon redemption of Class B or Class C
shares so reacquired, or the Conversion Period for Class B
shares so reacquired, the holding period for the Class A shares
will be “tacked” to the holding period for the Class B
or Class C shares originally held. The Fund’s exchange
privilege is also modified with respect to purchases of Class A
and Class D shares by non-retirement plan investors under the
MFA Program. First, the initial allocation of assets is made
under the MFA Program. Then, any subsequent exchange under the
MFA Program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made
solely on the basis of the relative net asset
values of the shares being exchanged. Therefore, there will not be
a charge for any difference between the sales charge previously
paid on the shares of the other Select Pricing Fund and the
sales charge payable on the shares of the Fund being acquired in
the exchange under the MFA Program.
Exercise of the Exchange Privilege.
To exercise the exchange privilege, shareholders
should contact their Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund,
and shareholders of the other MLAM-advised mutual funds with
shares for which certificates have not been issued, may exercise
the exchange privilege by wire through their securities dealers.
The Fund reserves the right to require a properly completed
Exchange Application. This exchange privilege may be modified or
terminated in accordance with the rules of the Commission. The
Fund reserves the right to limit the number of times an investor
may exercise the exchange privilege. Certain funds may suspend
the continuous offering of their shares 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.
It is contemplated that the exchange privilege may be applicable
to other new mutual funds whose shares may be distributed by the
Distributor.
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 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 1-800-MER-FUND or
(1-(800)-637-3863).
Retirement and Education Savings Plans
Individual retirement accounts and other retirement and
education savings 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 may charge an initial
establishment fee and an annual custodial fee for each account.
Information with respect to these plans is available on request
from Merrill Lynch.
Dividends received in each of the plans referred to above
are exempt from Federal taxation until distributed from the
plans. Different tax rules apply to Roth IRA plans and education
savings plans. Investors considering participation in any
retirement or education savings 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.
Automatic Investment Plans
A shareholder may make additions to an Investment Account
at any time by purchasing Class A shares (if he or she is an
eligible Class A investor) or Class B, Class C, or Class D
shares at the applicable public offering price. These purchases
may be made either through the shareholder’s securities
dealer, or by mail directly to the Transfer Agent, acting as
agent for such securities dealer. Voluntary accumulation also
can be made through a
service known as the Fund’s Automatic Investment Plan. The
Fund would be authorized, on a regular basis, to provide
systematic additions to the Investment Account of such
shareholder through charges of $50 or more to the regular bank
account of the shareholder by either pre-authorized checks or
automated clearing house debits. Alternatively, an investor that
maintains a CMA® or CBA® account may arrange to have
periodic investments made in the Fund in amounts of $100 ($1 or
more for retirement accounts) or more through the CMA® or CBA
® Automatic Investment Program.
Automatic Dividend Reinvestment Plan
Unless specific instructions are given as to the method of
payment, dividends will be automatically reinvested, without
sales charge, in additional full and fractional shares of the
Fund. Such reinvestment will be at the net asset value of shares
of the Fund as of the close of business on the NYSE on the
monthly payment date for such dividends. No CDSC will be imposed
upon redemption of shares issued as a result of the automatic
reinvestment of dividends.
Shareholders may, at any time, by written notification to
Merrill Lynch if the shareholder’s account is maintained
with Merrill Lynch, or by written notification or by telephone
(1-800-MER-FUND) to the Transfer Agent, if the shareholder
’s account is maintained with the Transfer Agent, elect to
have subsequent dividends, paid in cash, rather than reinvested,
in which event payment will be mailed on or about the payment
date (provided that, in the event that a payment on an account
maintained at the Transfer Agent would amount to $10.00 or less,
a shareholder will not receive such payment in cash and such
payment will be automatically reinvested in additional shares).
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 dividend checks. Cash payments can also
be directly deposited to the shareholder’s bank
account.
Systematic Withdrawal Plan
A
shareholder may elect to receive systematic withdrawals from his
or her Investment Account by check or through automatic payment
by direct deposit to his or her bank account on either a monthly
or quarterly basis as provided below. Quarterly withdrawals are
available for shareholders that 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 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
the class of shares to be redeemed. Redemptions will be made at
net asset value as determined after the close of business on the
NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) on
the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the NYSE is not open
for business on such date, the 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 on all shares in the Investment Account
are reinvested automatically in shares of the Fund. A shareholder
’s Systematic Withdrawal Plan may be terminated at any
time, without charge or penalty, by the shareholder, the Fund,
the Transfer Agent or the Distributor.
With respect to redemptions of Class B or 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.” 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 be applied thereafter
to Class D shares if the shareholder so elects. If an investor
wishes to change the amount being withdrawn in a systematic
withdrawal plan, the investor should contact his or her Merrill
Lynch Financial Consultant.
Withdrawal payments should not be considered as dividends.
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 that maintain a
Systematic Withdrawal Plan unless such purchase is equal to at
least one year’s scheduled withdrawals or $1,200, whichever
is greater. Automatic 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® or CBA® Account may elect to have shares redeemed
on a monthly, bimonthly, quarterly, semiannual or annual basis
through the CMA® or CBA® 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
bimonthly 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® or CBA® Systematic
Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automated
Investment Program. For more information on the CMA® or CBA
® Systematic Redemption Program, eligible shareholders
should contact their Merrill Lynch Financial
Consultant.
Capital gains and ordinary income received in each of the
retirement 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.
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 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 Dividend
Reinvestment Plan” for information concerning the manner in
which dividends may be reinvested automatically in shares of the
Fund. Shareholders may elect in writing to receive any such
dividends in cash. Dividends are taxable to shareholders as
described below whether they are invested in shares of the Fund
or received in cash. The per share dividends on Class B and
Class C shares will be lower than the per share dividends 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 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 “Pricing of Shares—
Determination of Net Asset Value.”
The Fund intends to continue to qualify for the special
tax treatment afforded regulated investment companies (“RICs
”) under the Code. As long as it so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income
tax on the part of its net ordinary income and net realized
capital gains which it distributes to Class A, Class B, Class C
and Class D shareholders (together, the “shareholders
”). The Fund intends to distribute substantially all of
such income.
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) distribute at least 90% of its dividend,
interest and certain other taxable income each year; (iii) at
the end of each fiscal quarter maintain at least 50% of the
value of its total assets in cash, government securities,
securities of other RICs, and other securities of issuers which
represent, with respect to each issuer, no more than 5% of the
value of the Fund’s total assets and 10% of the outstanding
voting securities of such issuer; and (iv) 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.
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 long-term capital
gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or
her shares. Any loss upon the sale or exchange of Fund shares
held for six months or less will be treated as long-term capital
loss to the extent of any capital gain dividends received by the
shareholder. Generally not later than 60 days after the close of
its taxable year, the Fund will provide its shareholders with a
written notice designating the amounts of any ordinary income
dividends or capital gain dividends, as well as the amount of
capital gain dividends in the different categories of capital
gain referred to above. The maximum capital gains rate for
corporate shareholders currently is the same as the maximum tax
rate for ordinary income.
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 rule 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.
Pursuant to the investment objective 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.
Ordinary income dividends paid by the Fund to shareholders
who are non-resident aliens or foreign entities generally will
be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisers
concerning the applicability of the U.S. 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 and long-term capital gain taxable
at the maximum rate of 20% if such shares were held for more
than 12 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. Distributions in excess of the Fund
’s earnings and profits will first reduce the adjusted tax
basis of a holder’s shares and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). If a
shareholder exercises his exchange privilege within 90 days of
acquiring shares of the Fund, then the loss the shareholder can
recognize on the exchange will be reduced (or the gain
increased) to the extent any sales charge paid to the Fund
reduces any sales charge the shareholder would have owed upon
the purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
The Code requires a RIC to pay a nondeductible 4% excise
tax to the extent the RIC does not distribute, during each
calendar year, 98% of its ordinary income, determined on a
calendar basis, and 98% of its capital gains, determined, in
general, on an October 31 year end, plus certain undistributed
amounts from previous years.
While the Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the
4% excise tax, there can be no assurance that sufficient amounts
of the Fund’s taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In such
event, the Fund will be liable for the tax only on the amount by
which it does not meet the foregoing distribution
requirements.
Tax Treatment of Options and Futures Transactions
The Fund may purchase or sell options or futures. Options
and futures contracts that are “Section 1256 contracts
” will be “marked to market” for Federal income
tax purposes at the end of each taxable year, i.e., each
option or futures contract will be treated as sold for its fair
market value on the last day of the taxable year.
Unless such contract is a forward foreign exchange contract, or is
a non-equity option or a regulated futures contract for a
non-U.S. currency for which the Fund elects to have gain or loss
treated as ordinary gain or loss under Code Section 988 (as
described below), gain or loss from Section 1256 contracts will
be 60% long-term and 40% short-term capital gain or loss. The
marked-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.
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 debt
instruments, 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 income dividend distributions, and all or a portion
of 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 the basis of each shareholder
’s Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than such
shareholder’s basis in Fund shares (assuming the shares
were held as a capital asset).
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.
Ordinary income and capital gains dividends 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.
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 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 as in the case of Class B and Class C shares
and the maximum sales charge in the case of Class A and 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 and distribution
charges and any incremental transfer agency costs relating to
each class of shares will be borne exclusively by that class.
The Fund will include performance data for all classes of shares
of the Fund in any advertisement or information including
performance data of the Fund.
The Fund also may quote annual, average annual and
annualized total return and aggregate total return performance
data, both as a percentage and as a dollar amount based on a
hypothetical $1,000 investment, for various periods other than
those noted below. Such data will be computed as described
above, except that (1) as required by the periods of the
quotations, actual annual, annualized or aggregate data, rather
than average annual data, may be quoted and (2) the maximum
applicable sales charges will not be included with respect to
annual or annualized rates of return calculations. Aside from
the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or
annualized total return data generally will be lower than
average annual total return data since the average rates of
return reflect compounding of return; aggregate total return
data generally will be higher than average annual total return
data since the aggregate rates of return reflect compounding
over a longer period of time. In advertisements distributed 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 loads in the case
of Class A and Class D shares, the performance data may take
into account the reduced, and not the maximum, sales charge or
may take into account the waiver of the CDSC and therefore may
reflect greater total return since, due to the reduced sales
charges or the waiver of the CDSC, a lower amount of expenses is
deducted. The Fund’s total return may be expressed either
as a percentage or as a dollar amount in order to illustrate
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 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.
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 investor’s shares, when redeemed, may be worth more or
less than their original cost.
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.
|
|
|
Class A Shares
|
|
Class B Shares
|
Period
|
|
Expressed as
a percentage
based on a
hypothetical
$1,000 investment
|
|
Redeemable
Value
of a hypothetical
$1,000 investment
at the end of
the period
|
|
Expressed as
a percentage
based on a
hypothetical
$1,000 investment
|
|
Redeemable
Value
of a hypothetical
$1,000 investment
at the end of
the period
|
|
|
|
|
|
Average Annual Total Return |
|
|
|
(including maximum applicable sales
charges) |
| One
Year Ended August 31, 1999 |
|
0.22 |
% |
|
$1,002.20 |
|
(0.20 |
)% |
|
$ 998.00 |
| Five
Year Ended August 31, 1999 |
|
10.57 |
% |
|
$1,652.50 |
|
10.61 |
% |
|
$1,656.00 |
Inception (October 29, 1993) to
August 31, 1999 |
|
6.66 |
% |
|
$1,456.80 |
|
6.59 |
% |
|
$1,451.70 |
|
|
|
|
Annual Total Return |
|
|
|
(excluding maximum applicable sales
charges) |
| Year
Ended August 31, |
|
|
|
|
|
|
|
|
|
|
| 1999 |
|
4.40 |
% |
|
$1,044.00 |
|
3.70 |
% |
|
$1,037.00 |
| 1998 |
|
23.30 |
% |
|
$1,233.00 |
|
22.38 |
% |
|
$1,223.80 |
| 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, 1999 |
|
45.68 |
% |
|
$1,456.80 |
|
45.17 |
% |
|
$1,451.70 |
|
|
|
|
|
Yield |
| 30
Days Ended August 31, 1999 |
|
4.54 |
% |
|
—
|
|
3.96 |
% |
|
—
|
|
|
|
|
Class C Shares
|
|
Class D Shares
|
Period
|
|
Expressed as
a percentage
based on a
hypothetical
$1,000 investment
|
|
Redeemable
Value
of a hypothetical
$1,000 investment
at the end of
the period
|
|
Expressed as
a percentage
based on a
hypothetical
$1,000 investment
|
|
Redeemable
Value
of a hypothetical
$1,000 investment
at the end of
the period
|
|
|
|
|
|
Average Annual Total
Return |
|
|
|
(including maximum applicable sales
charges) |
| One
Year Ended August 31, 1999 |
|
2.69 |
% |
|
$1,026.90 |
|
(0.03 |
)% |
|
$ 999.70 |
Inception (October 21, 1994) to
August 31, 1999 |
|
11.42 |
% |
|
$1,691.20 |
|
11.16 |
% |
|
$1,672.20 |
|
|
|
|
|
Annual Total Return |
|
|
|
(excluding maximum applicable sales
charges) |
| Year
Ended August 31, |
|
|
|
|
|
|
|
|
|
|
| 1999 |
|
3.67 |
% |
|
$1,036.70 |
|
4.13 |
% |
|
$1,041.30 |
| 1998 |
|
22.19 |
% |
|
$1,221.90 |
|
23.08 |
% |
|
$1,230.80 |
| 1997 |
|
8.48 |
% |
|
$1,084.80 |
|
9.08 |
% |
|
$1,090.80 |
| 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, 1999 |
|
69.12 |
% |
|
$1,691.20 |
|
67.22 |
% |
|
$1,672.20 |
|
|
|
|
|
Yield |
| 30
Days Ended August 31, 1999 |
|
3.90 |
% |
|
—
|
|
4.30 |
% |
|
—
|
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,” 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 CDSCs, a lower amount of expenses may
be deducted.
On occasion, the Fund may compare its performance to the
Financial Times — Actuaries Utility Index, Standard
& Poor’s 500 Index, the Value Line Composite Index or
the Dow Jones Industrial Average, other market indices, to data
contained in publications such as Lipper Analytical Services,
Inc., or performance data published by Morningstar Publications,
Inc. (“Morningstar”), Money Magazine, U.S. News and
World Report, Business Week, CDA Investment Technology, Inc.,
Forbes Magazine and Fortune Magazine or other
industry publications. When comparing its performance to a
market index, the Fund may refer to various statistical measures
derived
from the historic performances of the Fund and the index, such as
standard deviation and beta. 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.
Total return figures are based on the Fund’s
historical performance and are not intended to indicate future
performance. The Fund’s total return will vary depending on
market conditions, the securities comprising the Fund’s
portfolio, the Fund’s operating expenses and the amount of
realized and unrealized net capital gains or losses during the
period. The value of an investment in the Fund will fluctuate
and an investor’s shares, when redeemed, may be worth more
or less than their original cost.
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 relating 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 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, conversion and exchange
rights are discussed elsewhere herein and in the Prospectus.
Each share of Class A, Class B, Class C and Class D Common Stock
is entitled to participate equally in dividends and
distributions declared by the Fund and in the net assets of the
Fund upon liquidation or dissolution after satisfaction of
outstanding liabilities. Stock certificates are issued by the
transfer agent only on specific request. Certificates for
fractional shares are not issued in any case.
Deloitte & Touche LLP,
Princeton Forrestal Village, 116-300 Village Boulevard,
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.
State Street Bank and Trust Company (the “Custodian
”), 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, among
other things, 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.
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 “How
to Buy, Sell, Transfer and Exchange Shares” in the
Prospectus.
Swidler Berlin Shereff Friedman, LLP, The
Chrysler Building, 405 Lexington Avenue, New York, New York
10174, is counsel for the Fund.
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.
Shareholder inquiries may be addressed to the Fund at the
address or telephone number set forth on the cover page of this
Statement of 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, ML & Co. has granted the
Fund the right to use the “Merrill Lynch” name and has
reserved the right to withdraw its consent to the use of such
name by the Fund at any time or to grant the use of such name to
any other company, and the Fund has granted ML & Co. under
certain conditions, the use of any other name it might assume in
the future, with respect to any corporation organized by ML
& Co.
To the knowledge of the Fund, the following persons or
entities owned beneficially 5% or more of a class of the Fund
’s shares as of December 1, 1999:
Name/Address
|
|
Class
A
|
| Merrill Lynch Trust Co. |
|
37.49% |
| P.O.
Box 30532 |
|
|
| New
Brunswick, NJ 08989 |
|
|
|
| Merrill Lynch Trust Co. |
|
30.10% |
| Trustee FBO MLSIP |
|
|
| Investment Company |
|
|
| Attn:
Robert Arimenta Jr. |
|
|
| P.O.
Box 30532 |
|
|
| New
Brunswick, NJ 08989 |
|
|
|
| Merrill Lynch Trust Co. |
|
7.62% |
| Trustee FBO MLRAP Plan |
|
|
| Investment Account |
|
|
| Attn:
Robert Arimenta Jr. |
|
|
| P.O.
Box 30532 |
|
|
| New
Brunswick, NJ 08989 |
|
|
|
| 99
Short Term Deferral |
|
6.84% |
| Attn:
Victoria Niles |
|
|
| 400
Atrium Drive |
|
|
| Somerset, NJ 08873 |
|
|
|
Name/Address
|
|
Class
D
|
| Merrill Lynch Trust Co. |
|
18.30% |
| P.O.
Box 30532 |
|
|
| New
Brunswick, NJ 08989 |
|
|
|
| Merrill Lynch Trust Co. |
|
16.86% |
| Trustee FBO McKenzie Tank |
|
|
| Lines, Inc. Savings & Ret. |
|
|
| Attn:
Mary Anne Bulick |
|
|
| P.O.
Box 30532 |
|
|
| New
Brunswick, NJ 08989 |
|
|
|
| New
Mexico Technology Grp. LLC |
|
5.60% |
| D/B/A
Newtec 401K |
|
|
| U/A
1/1/97 |
|
|
| P.O.
Box 398 |
|
|
| White
Sands, NM 88002 |
|
|
The Fund’s audited financial statements are
incorporated in this Statement of Additional Information by
reference to its 1999 annual report to shareholders. You may
request a copy of the annual report at no charge by calling
(800) 456-4587 Ext. 789 between 8:00 a.m. and 8:00 p.m. on any
business day.
RATINGS OF FIXED INCOME
SECURITIES
Description of Moody’s Investors Service
Inc.’s (“Moody’s”) Corporate
Ratings
| Aaa
|
|
Bonds
that 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
that 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
that 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
that 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
that 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
that 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
that 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
that 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
that 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 I indicates that
the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
Description of Moody’s Commercial Paper
Ratings
The term “commercial paper” as used by Moody
’s means promissory obligations not having an original
maturity in excess of nine months. Moody’s makes no
representations as to whether such commercial paper is by any
other definition “commercial paper” or is exempt from
registration under the Securities Act of 1933, as
amended.
Moody’s commercial paper ratings are opinions of the
ability of issuers to repay punctually promissory obligations
not having an original maturity in excess of nine months. Moody
’s makes no representation that such obligations are exempt
from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law.
Moody’s employs the following three designations, all
judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting
institutions) have a superior capacity for repayment of
short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following
characteristics:
|
— Leading market positions in
well established industries
|
|
— High rates of return on funds
employed
|
|
— Conservative capitalization
structures with moderate reliance on debt and ample asset
protection
|
|
— Broad margins in earnings
coverage of fixed financial charges and high internal cash
generation.
|
|
— Well established access to a
range of financial markets and assured sources of alternate
liquidity.
|
Issuers rated Prime-2 (or related supporting
institutions) have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many
of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting
institutions) have an acceptable capacity for repayment of
short-term promissory obligations. The effect of industry
characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes
in level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity
is maintained.
Issuers rated Not Prime do not fall within any of
the Prime rating categories.
If an issuer represents to Moody’s that its
commercial paper obligations are supported by the credit of
another entity or entities, then the name or names of such
supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring
the reader to another page for the name or names of the
supporting entity or entities. In assigning ratings to such
issuers, Moody’s evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as
one factor in the total rating assessment. Moody’s makes no
representation and gives no opinion on the legal validity or
enforceability of any support arrangement. You are cautioned to
review with your counsel any questions regarding particular
support arrangements.
Description of Moody’s Preferred Stock
Ratings
Because of the fundamental differences between preferred
stocks and bonds, a variation of the bond rating symbols is
being used in the quality ranking of preferred stocks. The
symbols, presented below, are designed to avoid comparison with
bond quality in absolute terms. It should always be borne in
mind that preferred stocks occupy a junior position to bonds
within a particular capital structure and that these securities
are rated within the universe of preferred stocks.
Preferred stock rating symbols and their definitions are
as follows:
| aaa
|
|
An
issue that 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 that 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 that 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 that 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 that 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 that 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 that 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 that 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
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 (
“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 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.
|
|
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-l
|
|
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-l.
”
|
|
| 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 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
B, 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.
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.
CODE # 16857-1299
PART C. OTHER
INFORMATION
Item 23.
Exhibits.
Exhibit
Number
|
|
Description
|
|
1(a) |
|
—Articles
of Incorporation of Registrant.(a) |
| |
|
|
(b) |
|
—Articles
of Amendment dated October 21, 1994.(b) |
| |
|
|
(c) |
|
—Articles
Supplementary dated October 21, 1994.(b) |
| |
|
|
2 |
|
—Amended
and Restated By-Laws of Registrant.(c) |
| |
|
|
3 |
|
—Instruments Defining Rights of Shareholders.
Incorporated by reference to Exhibits 1 and 2
above.(c) |
| |
|
|
4(a) |
|
—Management Agreement between Registrant and Merrill
Lynch Investment Management, Inc.
(reorganized and now known as Merrill Lynch Asset Management,
L.P.).(c) |
| |
|
|
(b) |
|
—Sub-Advisory Agreement between Merrill Lynch Asset
Management, L.P. and Merrill Lynch Asset
Management U.K. Limited.(d) |
| |
|
|
5(a) |
|
—Class A
Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.(b) |
| |
|
|
(b) |
|
—Class B
Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.(c) |
| |
|
|
(c) |
|
—Class C
Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.
(including Form of Selected Dealers Agreement).(b) |
| |
|
|
(d) |
|
—Class D
Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.
(including Form of Selected Dealers Agreement).(b) |
| |
|
|
6 |
|
—None. |
| |
|
|
7 |
|
—Custody
Agreement between Registrant and State Street Bank and Trust
Company.(e) |
| |
|
|
8(a) |
|
—Transfer
Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement
between Registrant and Financial Data Services,
Inc.(c) |
| |
|
|
(b) |
|
—License
Agreement relating to Use of Name between Merrill Lynch &
Co., Inc. and Registrant.(e) |
| |
|
|
9 |
|
—Opinion
of Swidler Berlin Shereff Friedman, LLP
, counsel for Registrant.(e) |
| |
|
| 10(a) |
|
—Consent
of Deloitte & Touche LLP
, independent auditors for the Registrant. |
| |
|
| 10(b) |
|
—Consent
of Swidler Berlin Shereff Friedman, LLP
, counsel for Registrant. |
| |
|
| 11 |
|
—None. |
| |
|
| 12 |
|
—Certificate of Merrill Lynch Investment Management,
Inc.(e) |
| |
|
| 13(a) |
|
—Class B
Distribution Plan and Class B Distribution Plan
Sub-Agreement.(c) |
| |
|
|
(b) |
|
—Class C
Distribution Plan and Class C Distribution Plan
Sub-Agreement.(b) |
| |
|
|
(c) |
|
—Class D
Distribution Plan and Class D Distribution Plan
Sub-Agreement.(b) |
| |
|
| 14(a) |
|
—Rule
18f(3) Plan.(f) |
| |
|
|
(b) |
|
—Other
Exhibits |
| |
|
Powers of
Attorney for Officers and Directors. |
| |
|
Terry K.
Glenn |
| |
|
Donald C.
Burke |
| |
|
Ronald W.
Forbes |
| |
|
Cynthia A.
Montgomery |
| |
|
Charles C.
Reilly |
| |
|
Kevin A.
Ryan |
| |
|
Richard R.
West |
| |
|
Arthur
Zeikel |
(a)
|
Incorporated by reference to identically
numbered exhibit to Registrant’s initial Registration
Statement under the Securities Act of 1933 on Form N-1A (File
No. 33-49787).
|
(b)
|
Incorporated by reference to corresponding
exhibit numbers to Post-Effective Amendment No. 3 to Registrant
’s Registration Statement under the Securities Act of
1933 on Form N-1A (File No. 33-49787) as set forth
below:
|
Exhibit
Number
|
|
Incorporated by Reference
to Reference Number
|
|
1(b) |
|
1 |
(b) |
|
1(c) |
|
1 |
(c) |
|
5(a) |
|
6 |
(a) |
|
5(c) |
|
6 |
(c) |
|
5(d) |
|
6 |
(d) |
| 13(b) |
|
15 |
(b) |
| 13(c) |
|
15 |
(c) |
(c)
|
Incorporated by reference to the corresponding
exhibit numbers to Pre-Effective Amendment No. 1 to Registrant
’s Registration Statement under the Securities Act of
1933 on Form N-1A (File No. 33-49787) as set forth
below:
|
Exhibit
Number
|
|
Incorporated by Reference
to Reference Number
|
|
2 |
|
2 |
|
|
3 |
|
4 |
|
|
4(a) |
|
5 |
|
|
5(b) |
|
6 |
(b) |
|
8(a) |
|
9 |
(a) |
|
13(a) |
|
15 |
|
(d)
|
Incorporated by reference to exhibit number
5(b) to Post-Effective Amendment No. 5 to Registrant’s
Registration Statement under the Securities Act of 1933 on
Form N-1A (File No. 33-49787).
|
(e)
|
Incorporated by reference to the corresponding
exhibit numbers to Pre-Effective Amendment No. 2 to Registrant
’s Registration Statement under the Securities Act of
1933 on Form N-1A (File No. 33-49787) as set forth
below:
|
Exhibit
Number
|
|
Incorporated by Reference
to Reference Number
|
|
7 |
|
8 |
|
|
8(b) |
|
9 |
(b) |
|
9 |
|
10 |
|
| 12 |
|
13 |
|
(f)
|
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 24. Persons
Controlled by or under Common Control with
Registrant.
Registrant is not controlled by or under common control
with any person.
Item 25.
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 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 26. Business
and Other Connections of Investment Adviser.
Merrill Lynch Asset Management, L.P. (the “Investment
Adviser” 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 Disciplined
Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
Bond Fund for Investment and Retirement, 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 Technology Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value,
Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund,
Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch 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
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., Merrill Lynch
Senior Floating Rate Fund, Inc. and Merrill Lynch Senior
Floating Rate Fund II, 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 Advisors
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 Corporate
High Yield 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., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III,
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 Fund II, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings California Insured Fund II,
Inc., MuniHoldings California Insured Fund III, Inc.,
MuniHoldings California Insured Fund IV, Inc., MuniHoldings
California Insured Fund V, Inc. MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida
Insured Fund III, MuniHoldings Florida Insured Fund IV,
MuniHoldings Florida Insured Fund V, MuniHoldings Insured Fund,
Inc., MuniHoldings Insured Fund II, Inc., MuniHoldings Insured
Fund III, Inc., MuniHoldings Michigan Insured Fund, Inc.,
MuniHoldings Michigan Insured Fund II, Inc., MuniHoldings New
Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured Fund
II, Inc., MuniHoldings New Jersey Insured Fund III, Inc.,
MuniHoldings New Jersey Insured Fund IV, Inc., MuniHoldings New
York Fund, Inc.,
MuniHoldings New York Insured Fund, Inc., MuniHoldings New York
Insured Fund II, Inc., MuniHoldings New York Insured Fund III,
Inc., MuniHoldings New York Insured Fund IV, Inc., MuniHoldings
Pennsylvania Insured Fund, 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., and Worldwide
DollarVest Fund, Inc.
Mercury Asset Management International Ltd., an affiliate
of MLAM, acts as the investment adviser or sub-adviser for the
following open-end registered investment companies: Mercury
Master Global Balanced Portfolio of Mercury Asset Management
Master Trust (the “Trust”); Mercury Master Gold and
Mining Portfolio of the Trust; Mercury Master International
Portfolio of the Trust; Mercury Master Pan-European Growth
Portfolio of the Trust; Mercury Master U.S. Large Cap Portfolio
of the Trust; Mercury Master U.S. Small Cap Growth Portfolio of
the Trust and Mercury V.I. U.S. Large Cap Fund of Mercury Asset
Management V.I. Funds, Inc.
The address of each of these registered 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
02111-2665. 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 Princeton Funds Distributor, Inc. (“PFD”)
and of Merrill Lynch Funds Distributor (“MLFD”), is
P.O. Box 9081, Princeton, New Jersey 08543- 9081. The address of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (
“Merrill Lynch”) and Merrill Lynch & Co., Inc. (
“ML & Co.”) is World Financial Center, North
Tower, 250 Vesey Street, New York, New York 10281-1201. The
address of the Fund’s transfer agent Financial Data
Services, Inc. (“FDS”) is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and
director of the Investment Adviser indicating each business,
profession, vocation or employment of a substantial nature in
which each such person has been engaged since 1997 for his or
her or its own account or in the capacity of director, officer,
employee, partner or trustee. In addition, Mr. Glenn is
President or Director/Trustee and Mr. Burke is Vice President
and Treasurer of all or substantially all of the investment
companies described in the first three paragraphs of this Item
26, and Messrs. Doll, Giordano, and Monagle are officers of one
or more of such companies.
Name
|
|
Position
with
the Investment Adviser
|
|
Other
Substantial Business,
Profession, Vocation or Employment
|
| ML & Co.
|
|
Limited
Partner |
|
Financial
Services Holding Company;
Limited Partner of FAM |
| |
|
| Princeton
Services |
|
General
Partner |
|
General
Partner of FAM |
| |
|
| Jeffrey M.
Peek |
|
President |
|
President of
FAM; President and
Director of Princeton Services;
Executive Vice President of ML & Co.
Managing Director and Co-Head of the
Investment Banking Division of Merrill
Lynch in 1997 |
| |
|
| Terry K.
Glenn |
|
Executive Vice
President |
|
Executive Vice
President of FAM;
Executive Vice President and Director of
Princeton Services; President and
Director of PFD; Director of FDS;
President of Princeton Administrators |
| |
|
| Gregory A.
Bundy |
|
Chief
Operating Officer and
Managing Director |
|
Chief
Operating Officer and Managing
Director of FAM; Chief Operating
Officer and Managing Director of
Princeton Services; Co-CEO of Merrill
Lynch Australia from 1997 to 1999 |
| |
Name
|
|
Position
with
the Investment Adviser
|
|
Other
Substantial Business,
Profession, Vocation or Employment
|
| Donald C.
Burke |
|
Senior Vice
President,
Treasurer and Director of
Taxation |
|
Senior Vice
President and Treasurer of
FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President of PFD; First Vice President of
the Manager from 1997 to 1999; Vice
President of the Manager from 1990 to
1997 |
| |
|
| Michael G.
Clark |
|
Senior Vice
President |
|
Senior Vice
President of FAM; Senior
Vice President of Princeton Services;
Treasurer and Director of PFD; First
Vice President of the Manager from
1997 to 1999; Vice President of the
Manager from 1996 to 1997 |
| |
|
| Robert C.
Doll |
|
Senior Vice
President |
|
Senior Vice
President of FAM; Senior
Vice President of Princeton Services;
Chief Investment Officer of
Oppenheimer Funds, Inc. in 1999 and
Executive Vice President thereof from
1991 to 1999 |
| |
|
| Linda L.
Federeci |
|
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 |
|
|
| Michael J.
Hennewinkel |
|
Senior Vice
President and
General Counsel |
|
Senior Vice
President of FAM and
General Counsel of FAM; Senior Vice
President of Princeton Services |
|
|
| Philip L.
Kirstein |
|
Senior Vice
President and
Secretary |
|
Senior Vice
President and Secretary of
FAM; Senior Vice President, Director
and Secretary of Princeton Services. |
|
|
| Ronald M.
Kloss |
|
Senior Vice
President |
|
Senior Vice
President of FAM; Senior
Vice President of Princeton Services |
|
|
| Debra
Landsman-Yaros |
|
Senior Vice
President |
|
Senior Vice
President of FAM; Senior
Vice President of Princeton Services;
Vice President of PFD |
|
|
| 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 |
|
|
| Brian A.
Murdock |
|
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 |
Merrill Lynch Asset Management U.K. Limited (“MLAM
U.K.”) acts as sub-adviser for the following registered
investment companies: The Corporate Fund Accumulation Program,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund
II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies
Fund, Inc., Debt
Strategies Fund II, Inc. Debt Strategies Fund III, 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
Convertible Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc.,
Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Disciplined
Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch
Global Allocation Fund Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, 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 Technology 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 Senior Floating Rate Fund, Inc.,
Merrill Lynch Senior Floating Rate Fund II, 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., The Municipal Fund Accumulation Program,
Inc., and Worldwide DollarVest Fund, Inc. The address of each of
these registered investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of MLAM U.K. is 33
King William Street, London EC4R 9AS, 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 July 1, 1997, for his or her
own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Glenn, Burke and Albert are
officers of one or more of the registered investment companies
listed in the first three paragraphs of this Item
26:
Name
|
|
Position
with
MLAM U.K.
|
|
Other
Substantial Business
Profession, Vocation or
Employment
|
| Terry K.
Glenn |
|
Director and
Chairman |
|
Executive Vice
President of MLAM and FAM; Executive
Vice President and Director of Princeton Services;
President and Director of PFD; President of Princeton
Administrators |
|
|
| Alan
J. Albert |
|
Senior
Managing Director |
|
Vice President
of MLAM |
|
|
| Nicholas C.D.
Hall |
|
Director |
|
Director of
Merrill Lynch Europe PLC; General Counsel
of Merrill Lynch International Private Banking Group |
|
|
| Donald C.
Burke |
|
Treasurer |
|
Senior Vice
President and Treasurer of MLAM and FAM;
Director of Taxation of MLAM; Senior Vice President
and Treasurer of Princeton Services; Vice President of
PFD; First Vice President of MLAM from 1997 to 1999;
Vice President of MLAM from 1990 to 1997 |
|
|
| Carol Ann
Langham |
|
Company
Secretary |
|
None |
|
|
| Debra Anne
Searle |
|
Assistant
Company
Secretary |
|
None |
Item 27. Principal
Underwriters.
(a) MLFD, a division of PFD, acts as the principal
underwriter for the Registrant and for each of the open-end
registered investment companies referred to in the first two
paragraphs of Item 26 except CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., and The Municipal
Fund Accumulation Program, Inc.; and MLFD also acts as the
principal underwriter for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond
Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc., Merrill Lynch Senior Floating Rate
Fund II, Inc. and Merrill Lynch Senior Floating Rate Fund II,
Inc. A separate division of PFD acts as the principal
underwriter of a number of other investment
companies.
(b) Set forth below is information concerning each
director and officer of PFD. The principal business address of
each such person is P.O. Box 9011, Princeton, New Jersey
08543-9011, except that the address of Messrs. Breen, Crook,
Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
(1)
Name
|
|
(2)
Positions and Offices
with PFD
|
|
(3)
Positions and Offices
with Registrant
|
| Terry
K. Glenn |
|
President and
Director |
|
President and
Director |
| Michael G. Clark |
|
Treasurer and
Director |
|
None |
| Thomas J. Verage |
|
Director |
|
None |
| Robert W. Crook |
|
Senior Vice
President |
|
None |
| Michael J. Brady |
|
Vice
President |
|
None |
| William M. Breen |
|
Vice
President |
|
None |
| Donald C. Burke |
|
Vice
President |
|
Vice President
and Treasurer |
| James
T. Fatseas |
|
Vice
President |
|
None |
| Debra
W. Landsman-Yaros |
|
Vice
President |
|
None |
| Michelle T. Lau |
|
Vice
President |
|
None |
| Salvatore Venezia |
|
Vice
President |
|
None |
| William Wasel |
|
Vice
President |
|
None |
| Robert Harris |
|
Secretary |
|
None |
(c) Not Applicable.
Item 28. Location of
Accounts and Records.
All accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act, and
the rules thereunder are maintained at the offices of the
Registrant 800 Scudders Mill Road, Plainsboro, New Jersey 08536,
and its transfer agent, Financial Data Services, Inc., 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484.
Item 29. Management
Services.
Other than as set forth under the caption “Management
of the Fund — Merrill Lynch Asset Management
” 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 30.
Undertakings.
None.
SIGNATURES
Pursuant to the requirements of the Securities Act and the
Investment Company Act, the Registrant certifies that it meets
all of the requirements for effectiveness of this Registration
Statement under Rule 485(b) under the Securities Act and has
duly caused this Registration Statement to be signed on its
behalf by the undersigned, duly authorized, in the Township of
Plainsboro, and State of New Jersey, on the 8th of December,
1999.
|
MERRILL
LYNCH
UTILITY
INCOME
FUND
, INC
.
|
|
|
(Donald C. Burke,
Vice President and Treasurer)
|
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed below by the following
persons in the capacities and on the dates
indicated.
Signature
|
|
Title
|
|
Date
|
|
|
TERRY
K. GLENN
*
(Terry K. Glenn) |
|
President and
Director
(Principal Executive Officer) |
|
|
|
|
/s/
DONALD
C. BURKE
(Donald C. Burke) |
|
Vice President
and Treasurer
(Principal Financial and
Accounting Officer) |
|
December 8,
1999 |
|
|
RONALD
W. FORBES
*
(Ronald W. Forbes) |
|
Director |
|
|
|
|
CYNTHIA
A. MONTGOMERY
*
(Cynthia A. Montgomery) |
|
Director |
|
|
|
|
CHARLES
C. REILLY
*
(Charles C. Reilly) |
|
Director |
|
|
|
|
KEVIN
A. RYAN
*
(Kevin A. Ryan) |
|
Director |
|
|
|
|
RICHARD
R. WEST
*
(Richard R. West) |
|
Director |
|
|
|
|
ARTHUR
ZEIKEL
*
(Arthur Zeikel) |
|
Director |
|
|
|
|
|
|
/s/
DONALD
C. BURKE
*By:
(Donald C. Burke, Attorney-in-Fact) |
|
|
|
December 8,
1999 |
INDEX TO EXHIBITS
Exhibit
Number
|
|
Description
|
| 10(a) |
|
Consent of Deloitte & Touche
LLP, independent auditors for
Registrant. |
| 10(b) |
|
Consent of Swidler Berlin Shereff Friedman,
LLP, counsel for the Registrant. |
| 14(b) |
|
Power
of Attorney for Officers and Trustees. |
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