As filed with the Securities and Exchange Commission on June 7, 1994
Securities Act File No. 33-
Investment Company Act File No. 811-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [ ]
(Check Appropriate Box or Boxes)
--------------------------------
MERRILL LYNCH ASSET ALLOCATION INCOME PORTFOLIO, INC.
(Exact Name of Registrant as Specified in Charter)
800 Scudders Mill Road 08536
Plainsboro, New Jersey (Zip Code)
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code (609) 282-2800
Arthur Zeikel
Merrill Lynch Asset Allocation Income Portfolio, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey
Mailing Address: Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
_____________________________________
Copies to:
Counsel for the Company: Philip L. Kirstein, Esq.
Leonard B. Mackey, Jr., Esq. MERRILL LYNCH ASSET
ROGERS & WELLS MANAGEMENT
200 Park Avenue Box 9011
New York, New York 10166 Princeton, N.J. 08543-9011
________________________
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b), or
[ ] on (date) pursuant to paragraph (b), or
[ ] 60 days after filing pursuant to paragraph (a), or
[ ] on (date) pursuant to paragraph (a) of Rule 485.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed
Proposed Maximum Amount
Amount of Maximum Aggregate of
Title of Securities Shares being Offering Price Offering Registration
being Registered Registered Per Share Price Fee
<S> <C> <C> <C> <C>
(1)Class A Shares of Indefinite* $10.40 Indefinite*
Common Stock, par value
$0.10 per share $500
(2)Class B Shares of
Common Stock, par value Indefinite* $10.00 Indefinite*
$0.10 per share
*The Registrant hereby registers an indefinite number of Class A and Class B
shares of Common Stock under the Securities Act of 1933 pursuant to Rule
24f-2 under the Investment Company Act of 1940.
</TABLE>
<PAGE>
MERRILL LYNCH ASSET ALLOCATION INCOME PORTFOLIO, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
N-1A Item No. Location
PART A
Item 1. Cover Page. . . . . . . . . . . . . . . . . . . Cover Page
Item 2. Synopsis. . . . . . . . . . . . . . . . . . . . Fee Table
Item 3. Condensed Financial Information. . . . . . . . Not Applicable
Item 4. General Description of Registrant . . . . . . . Investment Objective
and Policies;
Additional Information
Item 5. Management of the Fund. . . . . . . . . . . . . Fee Table; Management
of the Fund; Inside
Back Cover Page
Item 5A.Management's Discussion of Fund Performance . . Not Applicable
Item 6. Capital Stock and Other Securities . . . . . . Cover Page; Additional
Information
Item 7. Purchase of Securities Being Offered. . . . . Cover Page;
Shareholder
Services; Purchase
of Shares;
Item 8. Redemption or Repurchase. . . . . . . . . . . . Fee Table;
Alternative
Sales Arrangements;
Shareholder Services;
Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Proceedings . . . . . . . . . . . Not Applicable
PART B
Item 10.Cover Page . . . . . . . . . . . . . . . . . . Cover Page
Item 11.Table of Contents. . . . . . . . . . . . . . . Back Cover Page
Item 12.General Information and History. . . . . . . . Not Applicable
Item 13.Investment Objectives and Policies . . . . . . Investment Objective
and Policies
Item 14.Management of the Fund . . . . . . . . . . . . Management of the Fund
Item 15.Control Persons and Principal Holders of
Securities . . . . . . . . . . . . . . . . . . Management of the Fund
Item 16.Investment Advisory and Other Services . . . . Management of the
Fund; Purchase of
Shares; General
Information
Item 17.Brokerage Allocation and Other Practices. . . . Portfolio Transactions
and Brokerage
Item 18.Capital Stock and Other Securities . . . . . . General Information
Item 19.Purchase, Redemption and Pricing of
Securities Being Offered. . . . . . . . . . . . Purchase of Shares;
Redemption of Shares;
Determination of
Net Asset Value;
Shareholder Services;
General Information
Item 20.Tax Status . . . . . . . . . . . . . . . . . . Dividends and
Distributions;
Taxes
Item 21.Underwriters . . . . . . . . . . . . . . . . . .Purchase of Shares
Item 22.Calculation of Performance Data . . . . . . . . Performance Data
Item 23.Financial Statements . . . . . . . . . . . . . .Statement of Assets
and Liabilities
PART C Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration
Statement.
ii
<PAGE>
PROSPECTUS (Subject to Completion)
Issued , 1994
MERRILL LYNCH ASSET ALLOCATION PORTFOLIO, INCOME INC.
Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
Merrill Lynch Asset Allocation Income Portfolio, Inc. (the
"Fund") is a non-diversified mutual fund seeking [a high level of
current income] [high total investment return], consistent with
prudent risk, through a fully managed investment policy utilizing
United States and foreign debt,equity and money market
securities, the combination of which will be varied from time to
time both with respect to types of securities and markets in
response to changing market and economic trends. Total
investment return is the aggregate of capital value changes and
income. Under normal conditions, at least 65%, and as much as
all, of the Fund's total assets will be invested in debt
securities, and no more than 25% of the Fund's total assets will
be invested in foreign securities. There can be no assurance
that the Fund's investment objective will be achieved. The Fund
may employ a variety of instruments and techniques to enhance
income and to hedge against market and currency risk. Investments
on an international basis involve special considerations. See
"Special Considerations."
The Fund offers two classes of shares which may be purchased
during the subscription offering at $10.00 per share and during
the continuous offering at a price equal to the next determined
net asset value per share, plus in both cases a sales charge
which, at the election of the purchaser, may be imposed (i) at
the time of purchase (the "Class A shares") or (ii) on a deferred
basis (the "Class B shares"). The deferred charges to which the
Class B shares are subject shall consist of a contingent deferred
sales charge which may be imposed on redemptions made within four
years of purchase and an ongoing account maintenance fee and
distribution fee. These alternatives permit an investor to
choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the investor
expects to hold the shares and other circumstances. Class B
shares pay an ongoing account maintenance fee and an ongoing
distribution fee at the annual rates of 0.25% and 0.50%,
respectively, of the Fund's average daily net assets attributable
to the Class B shares. Investors should understand that the
purpose and function of the deferred sales charges with respect
to the Class B shares are the same as those of the initial sales
charge with respect to the Class A shares. Investors also should
understand that over time the deferred charges related to Class
B shares may exceed the initial sales charge and account
maintenance fee with respect to Class A shares. See "Alternative
Sales Arrangements."
Each Class A share and Class B share represents identical
interests in the investment portfolio of the Fund and has the
same rights, except that Class B shares bear the expenses of the
account maintenance fee and distribution fee and certain other
costs resulting from the deferred sales charge arrangement, which
will cause Class B shares to have a higher expense ratio and to
pay lower dividends than Class A shares. The two classes also
have different exchange privileges.
Merrill Lynch Funds Distributor, Inc. (the "Distributor"),
Box 9011, Princeton, New Jersey 08543-9011 ((609) 282-2800), and
other securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), will solicit
subscriptions for shares of the Fund during a period expected to
end on ____________, 1994, unless extended. On the fifth
business day after the conclusion of the subscription period, the
subscriptions will be payable, the shares will be issued and the
Fund will commence operations. The public offering price of the
shares during the subscription offering will be $10.00 per share
in the case of Class B shares and $10.00 per share plus a sales
charge of 4.00%, subject to reductions on purchases in single
transactions of $25,000 or more, in the case of Class A shares.
After the completion of the initial subscription offering, the
Fund will engage in a continuous offering of its shares at a
price equal to the next determined net asset value per share in
the case of Class B shares and the next determined net asset
value per share, plus a sales charge subject to reductions as
noted above, in the case of Class A shares. Shareholders may
redeem their shares at any time at the next determined asset
value. The Class B shares may be subject to a contingent deferred
sales charge if redeemed within four years of purchase and are
subject to ongoing account maintenance and distribution fees. The
minimum initial purchase during the subscription and continuous
offerings is $1,000 and the minimum subsequent purchase in the
continuous offering is $50. Merrill Lynch may charge its customers
a processing fee (presently $4.85) for confirming purchases and
repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares."
_________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
__________________
This Prospectus is a concise statement of information about the
Fund that is relevant to making an investment in the Fund. This
Prospectus should be retained for future reference. A statement
containing additional information about the Fund, dated July ,
1994 (the "Statement of Additional Information"), has been filed
with the Securities and Exchange Commission and is available,
without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this
Prospectus.
__________________
Merrill Lynch Asset Management-Manager
Merrill Lynch Funds Distributor,Inc.-Distributor
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any
sale of these securities in any State in which such offer, solicitation
or sale would be unlawful prior to registration or qualification under the
securities laws of any such State.
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other
nonrecurring and recurring expenses applicable to Class A shares
and Class B shares follows.
Class A
Shares Class B Shares
Initial Sales Deferred Sales
Charge Charge
Alternative Alternative
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price). . . . . . . 4.00%(a) None
Sales Charge Imposed on Dividend
Reinvestments . . . . . . . . None None
4.0% during the first
Deferred Sales Charge (as a year, decreasing 1.0%
percentage of original purchase annually to 0.0%
price or redemption proceeds, after the fourth
whichever is lower). . . . . . . None(f) year(b)
Exchange Fee. . . . . . . . . . . None None
Annual Fund Operating Expenses
(as a percentage of average
net assets):
Management Fees (c) . . . . . . 0.75% 0.75%
Rule 12b-1 Fees . . . . . . . . None 0.75%(d)
Custodial Fees . . . . . . . . 0.-% 0.-%
Shareholder Servicing Costs(e) 0.-% 0.-%
Other . . . . . . . . . . . . 0.-% 0.-%
---- ----
Total Other Expenses 0.-% 0.-%
---- ----
Total Fund Operating Expenses 0.-% 0.-%
==== ====
- ----------------
(a) Reduced for purchases of $25,000 and over, decreasing to 0.50% for
purchases of $1,000,000 and over. Certain investors making purchases
of $1,000,000 and over may, however, pay a contingent deferred sales
charge ranging from a high of 1.00% to a low of 0.25% of amounts
redeemed within the first year after purchase in lieu of the 0.50%
initial sales charge. See "Purchase of Shares - Initial Sales
Charge Alternative - Class A Shares" - page ____.
(b) See "Purchase of Shares - Deferred Sales Charge Alternative - Class
B Shares" - page _____.
(c) See "Management of the Fund - Management and Advisory Arrangements" -
page _____.
(d) See "Purchase of Shares - Deferred Sales Charge Alternative - Class
B Shares - Distribution Plan" - page ____. This amount represents the
0.25% account maintenance fee and the 0.50% distribution fee applicable
to Class B shares of the Fund.
(e) See "Management of the Fund - Transfer Agency Services" - page ____.
(f) Certain investors making purchases of $1,000,000 and over may,
however, pay a contingent deferred sales charge ranging from a high
of 1.00% to a low of 0.25% of amounts redeemed within the first year
after purchase in lieu of the 0.50% initial sales charge. See "Purchase
of Shares - Initial Sales Charge Alternative - Class A Shares" -
page ____.
"Management Fees," "12b-1 Fees" and "Other Expenses," as shown above,
are based upon estimated amounts of expenses of the Fund expected to
be incurred during its current fiscal period ending December 31, 1994.
Cumulative Expenses Paid
for the Period of:
----------------------------------------
1 Year 3 Years 5 Years 10 Years
Example: ------ ------- ------- --------
An investor would pay the following
expenses on a $1,000 investment
including, for Class A shares, the
maximum $40 front-end sales charge
and assuming (1) an operating
expense ratio of 0.-% for Class
A shares and -% for Class B shares,
(2) a 5% annual return throughout
the periods and (3) redemption at
the end of the period:
Class A . . . . . . . . . . . . . $ $ $ $
Class B . . . . . . . . . . . . . $ $ $ $
An investor would pay the following
expenses on the same $1,000
investment assuming no redemption
at the end of the period:
Class A . . . . . . . . . . . . $ $ $ $
Class B . . . . . . . . . . . . $ $ $ $
2
<PAGE>
The foregoing Fee Table is intended to assist investors in
understanding the costs and expenses that a shareholder in the Fund
will bear directly or indirectly. The Example set forth above
assumes reinvestment of all dividends and distributions and
utilizes a 5% annual rate of return as mandated by Securities and
Exchange Commission regulations. The example should not be
considered a representation of past or future expenses or annual
rates of return, and actual expenses or annual rates of return may
be more or less than those assumed for purposes of the example.
Class B shareholders who hold their shares for an extended period
of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges
permitted under the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. Merrill Lynch may charge
its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly
through the Fund's transfer agent are not subject to the processing
fee. See "Purchase of Shares" and "Redemption of Shares."
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased at a price equal to the
next determined net asset value per share, plus a sales charge
which, at the election of the purchaser, may be imposed either (i)
at the time of the purchase (the "initial sales charge
alternative") or (ii) on a deferred basis (the "deferred sales
charge alternative").
Class A Shares. An investor who elects the initial sales
charge alternative acquires Class A shares. Class A shares incur
a sales charge when they are purchased and are subject to an
ongoing account maintenance fee of 0.25% of the Fund's average net
assets attributable to the Class A shares. Although Class A shares
incur a sales charge when they are purchased, they enjoy the
benefit of not being subject to the ongoing account maintenance fee
or distribution fee to which Class B shares are subject or any
sales charge when they are redeemed. Certain purchasers of Class
A shares qualify for reduced initial sales charges. See "Purchase
of Shares."
Class B Shares. An investor who elects the deferred sales
charge alternative acquires Class B shares. Class B shares do not
incur a sales charge when they are purchased, but they are subject
to ongoing account maintenance and distribution fees of 0.25% and
0.50%, respectively, of the Fund's average net assets attributable
to the Class B shares and a sales charge if they are redeemed
within four years of purchase. Class B shares enjoy the benefit of
permitting all of the investor's dollars to work from the time the
investment is made. The ongoing account maintenance and
distribution fees paid by Class B shares will cause such shares to
have a higher expense ratio and to pay lower dividends than Class
A shares. Payment of the distribution fee is subject to certain
limits as set forth under "Purchase of Shares - Deferred Sales
Charge Alternative - Class B Shares."
As an illustration, investors who qualify for significantly
reduced sales charges might elect the initial sales charge
alternative because similar sales charge reductions are not
available for purchases under the deferred sales charge
alternative. Moreover, shares acquired under the initial sales
charge alternative would not be subject to ongoing account
maintenance and distribution fees. However, because initial sales
charges are deducted at the time of purchase, such investors would
not have all their funds invested initially. Investors not
qualifying for reduced initial sales charges who expect to maintain
their investment for an extended period of time might also elect
the initial sales charge alternative because over time the
accumulated continuing account maintenance and distribution fees
may exceed the initial sales charge. Again, however, such
investors must weigh this consideration against the fact that not
all their funds will be invested initially. Furthermore, the
ongoing account maintenance and distribution fees will be offset to
the extent any return is realized on the additional funds initially
invested under the deferred sales charge alternative. However,
there can be no assurance as to the return, if any, which will be
realized on such additional funds. Certain other investors might
determine it to be more advantageous to have all their funds
invested initially, although remaining subject to continued account
maintenance and distribution fees and, for a four-year period of
time, a contingent deferred sales charge.
The distribution expenses incurred by the Distributor and
dealers (primarily Merrill Lynch) in connection with the sale of
the shares will be paid, in the case of the Class A shares, from
the proceeds of the initial sales charge, and in the case of the
Class B shares, such distribution expenses will be paid from the
3
<PAGE>
proceeds of the ongoing distribution fees and the contingent
deferred sales charge incurred upon redemption within four years of
purchase. Sales personnel may receive different compensation for
selling Class A or Class B shares. Investors should understand
that the purpose and function of the deferred sales charges and
account maintenance fee with respect to the Class B shares are the
same as those of the initial sales charge with respect to the Class
A shares.
Dividends paid by the Fund with respect to Class A and Class
B shares, to the extent any dividends are paid, will be calculated
in the same manner at the same time on the same day and will be in
the same amount, except that account maintenance and distribution
fees and any incremental transfer agency costs relating to Class B
shares will be borne exclusively by that class. See "Additional
Information - Determination of Net Asset Value." Class A and Class
B shareholders of the Fund each have an exchange privilege for
Class A and Class B shares, respectively, of certain other mutual
funds sponsored by Merrill Lynch. Class A and Class B shareholders
of the Fund also may exchange their shares for shares of certain
money market funds sponsored by Merrill Lynch. See "Shareholder
Services - Exchange Privilege."
The Directors of the Fund have determined that currently no
conflict of interest exists between the Class A and Class B shares.
On an ongoing basis, the Directors of the Fund, pursuant to their
fiduciary duties under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), and state laws, will seek
to assure that no such conflict arises.
The alternative sales arrangements permit an investor to
choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the
investor expects to hold the shares and other circumstances.
Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales
charge and not be subject to ongoing account maintenance and
distribution fees or to have the entire initial purchase price
invested in the fund with the investment thereafter being
subject to ongoing account maintenance and distribution fees.
To assist investors in making this determination, the Fee Table
on page 2 sets forth the charges applicable to each class of
shares, and a discussion of factors relevant to making such
determination is set forth under "Purchase of Shares -
Alternative Sales Arrangements" on page ____.
4
<PAGE>
SPECIAL CONSIDERATIONS
The Fund may invest in U.S. and foreign securities, although
no more than 25% of the Fund's total assets will be invested in
foreign securities. Investments in securities of foreign entities
and securities denominated in foreign currencies involve risks not
typically involved in domestic investment, including fluctuations
in foreign exchange rates, future foreign political and economic
developments, and the possible imposition of exchange controls or
other foreign or U.S. governmental laws or restrictions applicable
to such investments. Since the Fund may invest in securities
denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may affect the value of
investments in the portfolio and the unrealized appreciation or
depreciation of investments insofar as U.S. investors are
concerned. Changes in foreign currency exchange rates relative to
the U.S. dollar will affect the U.S. dollar value of the Fund's
assets denominated in those currencies and the Fund's yield on such
assets. Foreign currency exchange rates are determined by forces
of supply and demand on the foreign exchange markets. These forces
are, in turn, affected by the international balance of payments and
other economic and financial conditions, government intervention,
speculation, and other factors. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy
in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resources, self-sufficiency and
balance of payments position.
With respect to certain foreign countries, there is the
possibility of expropriation of assets, confiscatory taxation,
political or social instability or diplomatic developments which
could affect investment in those countries. There may be less
publicly available information about a foreign financial instrument
than about a U.S. instrument, and foreign entities may not be
subject to accounting, auditing and financial reporting standards
and requirements comparable to those to which U.S. entities are
subject. In addition, certain foreign investments may be subject
to foreign withholding taxes. Investors will be able to deduct
such taxes in computing their taxable income or to use such amounts
as credits against their U.S. income taxes if more than 50% of the
Fund's total assets at the close of any taxable year consists of
stock or securities in foreign corporations. However, certain
retirement accounts cannot claim foreign tax credits on investments
in foreign securities held in the Fund. See "Additional
Information - Taxes." Foreign financial markets, while generally
growing in volume, typically have substantially less volume than
U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable
domestic companies. Foreign markets also have different clearance
and settlement procedures and in certain markets there have been
times when settlements have been unable to keep pace with the
volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in temporary
periods when assets of the Fund are uninvested and no return is
earned thereon. The inability of the Fund to make intended
security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result
either in losses to the Fund due to subsequent declines in value of
the portfolio security or, if the Fund has entered into a contract
to sell the security, could result in possible liability to the
purchaser. Costs associated with transactions in foreign
securities are generally higher than with transactions in U.S.
securities. There is generally less government supervision and
regulation of exchanges, financial institutions and issuers in
foreign countries than there is in the U.S.
The operating expense ratio of the Fund can be expected to be
higher than that of an investment company investing exclusively in
U.S. securities because the expenses of the Fund, such as custodial
costs, are higher.
The Fund may engage in various portfolio strategies to seek to
increase its return through the use of options on portfolio
securities and to hedge its portfolio against movements in the
securities markets and exchange rates between currencies by the use
of options, futures and options thereon. Utilization of options
and futures transactions involves the risk of imperfect correlation
in movements in the price of options and futures and movements in
the price of the securities or currencies which are the subject of
the hedge. There can be no assurance that a liquid secondary
market for options and futures contracts will exist at any specific
time. See "Investment Objective and Policies - Portfolio
Strategies Involving Options and Futures."
The net asset value of the Fund's shares, to the extent the
Fund invests in fixed income securities, will be affected by
5
<PAGE>
changes in the general level of interest rates. When interest
rates decline, the value of a portfolio of fixed income securities
can be expected to rise. Conversely, when interest rates rise, the
value of a portfolio of fixed income securities can be expected to
decline.
As a non-diversified investment company, the Fund may invest
a larger percentage of its assets in individual issuers than a
diversified investment company. In this regard, the Fund is not
subject to the general limitation that it not invest more than 5%
of its total assets in the securities of any one issuer. To the
extent the Fund makes investments in excess of 5% of its assets in
a particular issuer, its exposure to credit and market risks
associated with that issuer is increased.
6
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a non-diversified, open-end management investment
company. The Fund's investment objective is to seek a high [level
of current income] [total investment return], consistent with
prudent risk, through a fully managed investment policy utilizing
United States and foreign debt, equity and money market securities
the combination of which will be varied from time to time both with
respect to types of securities and markets in response to changing
market and economic trends. Total investment return is the
aggregate of capital value changes and income. 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. There
can be no assurance that the Fund's investment objective will be
achieved. Under normal conditions, at least 65%, and as much as
all, of the Fund's total assets will be invested in debt
securities, and no more than 25% of the Fund's total assets will be
invested in foreign securities. The Fund may employ a variety of
instruments and techniques to enhance income and to hedge against
market and currency risk, as described under "Portfolio Strategies
Involving Options and Futures" below.
The Fund will invest in a portfolio of U.S. and foreign debt,
equity and money market securities. The composition of the
portfolio among these securities and markets will be varied from
time to time by the Fund's manager, Merrill Lynch Asset Management,
L.P., doing business as Merrill Lynch Asset Management (the
"Manager"), in response to changing market and economic trends.
This fully managed investment approach provides the Fund with the
opportunity to benefit from anticipated shifts in the relative
performance of different types of securities and different capital
markets. For example, at times the Fund may increase its emphasis
on debt securities in anticipation of significant declines in
interest rates and at other times the Fund's investments in equity
securities may be increased in anticipation of significant advances
in stock markets. Similarly, the Fund may invest a larger portion
of its assets, not to exceed 25%, in foreign markets when such
markets are expected to outperform, in U.S. dollar terms, the U.S.
markets. The Fund will seek to identify longer-term structural or
cyclical changes in the various economies and markets of the world
which are expected to benefit certain capital markets and certain
securities in those markets to a greater extent than other
investment opportunities.
In determining the allocation of assets among capital markets,
the Manager will consider, among other factors, the relative
valuation, condition and growth potential of the various economies,
including current and anticipated changes in the rates of economic
growth, rates of inflation, corporate profits, capital
reinvestment, resources, self-sufficiency, balance of payments,
governmental deficits or surpluses and other pertinent financial,
social and political factors which may affect such markets. In
allocating among debt, equity and money market securities within
each market, the Manager also will consider the relative
opportunity for capital appreciation of equity and debt securities,
dividend yields, and the level of interest rates paid on debt
securities of various maturities.
In selecting securities denominated in foreign currencies, the
Manager will consider, among other factors, the effect of movement
in currency exchange rates on the U.S. dollar value of such
securities. An increase in the value of a currency will increase
the total return to the Fund of securities denominated in such
currency. Conversely, a decline in the value of the currency will
reduce the total return. The Manager may seek to hedge all or a
portion of the Fund's foreign securities through the use of forward
foreign currency contracts, currency options, futures contracts and
options thereon. See "Portfolio Strategies Involving Options and
Futures" below.
The Manager anticipates that it will invest that portion of
the Fund's portfolio consisting of foreign securities primarily in
the securities of corporate and governmental issuers domiciled or
located in Canada, Western Europe and the Far East. In addition,
the Manager anticipates that a portion of the Fund's assets
normally will be invested in the U.S. securities markets and three
other major capital markets. Under normal conditions, the Fund's
investments will be denominated in at least three currencies or
multinational currency units. However, the Fund reserves the right
to invest substantially all of its assets in U.S. markets or U.S.
dollar-denominated obligations when market conditions warrant.
Although up to 100% of the Fund's total assets may be invested
in debt securities, the Manager anticipates that the Fund's
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portfolio generally will include both equity and debt securities.
Debt Securities
The debt securities in which the Fund may invest include
securities issued or guaranteed by the U.S. Government and its
agencies or instrumentalities, by foreign governments (including
foreign states, provinces and municipalities) and agencies or
instrumentalities thereof and debt obligations issued by U.S. and
foreign corporations. Such securities may include mortgage-backed
securities issued or guaranteed by governmental entities or by
private issuers. In addition, the Fund may invest in debt
securities issued or guaranteed by international organizations
designed or supported by multiple governmental entities (which are
not obligations of the U.S. Government or foreign governments) to
promote economic reconstruction or development ("supranational
entities") such as the International Bank for Reconstruction and
Development (the "World Bank").
U.S. Government securities include: (i) U.S. Treasury
obligations (bills, notes and bonds), which differ in their
interest rates, maturities and times of issuance, all of which are
backed by the full faith and credit of the U.S.; and (ii)
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related
securities, some of which are backed by the full faith and credit
of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association), some of which are
supported by the right of the issuer to borrow from the U.S.
Government (e.g., obligations of Federal Home Loan Banks) and some
of which are backed only by the credit of the issuer itself (e.g.,
obligations of the Student Loan Marketing Association).
In the case of mortgage-related securities, prepayments occur
when the holder of an individual mortgage prepays the remaining
principal before the mortgage's scheduled maturity date. As a
result of the pass-through of prepayments of principal on the
underlying securities, a mortgage-related security is often subject
to more rapid prepayment of principal than its stated maturity
would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately
the realized yield or average life of a particular issue of pass-
through certificates. Prepayment rates are important because of
their effect on the yield and price of the securities. Accelerated
prepayments adversely impact yields for pass-through securities
purchased at a premium (i.e., a price in excess of principal
amount) and may involve additional risk of loss of principal
because the premium may not have been fully amortized at the time
the obligation is repaid. The opposite is true for pass-through
securities purchased at a discount. The Fund may purchase
mortgage-related securities at a premium or at a discount.
The obligations of foreign governmental entities have various
kinds of government support and include obligations issued or
guaranteed by foreign governmental entities with taxing power.
These obligations may or may not be supported by the full faith and
credit of a foreign government. The Fund will invest in foreign
government securities of issuers considered stable by the Manager.
The Manager does not believe that the credit risk inherent in the
obligations of stable foreign governments is significantly greater
than that of U.S. Government securities.
The Fund will invest the portion of its assets allocated to
debt obligations in the securities of governmental issuers and in
corporate debt securities, including convertible debt securities,
rated A or better by Standard & Poor's Corporation ("S&P") or by
Moody's Investors Service, Inc. ("Moody's") or which, in the
Manager's judgment, possess similar credit characteristics. See
the Statement of Additional Information for more information
regarding ratings of debt securities. The Manager considers the
ratings assigned by S&P and Moody's as one of several factors in
its independent credit analysis of issuers. If a debt security in
the Fund's portfolio is downgraded below investment grade, the
Manager will consider factors such as price, credit risk, market
conditions and interest rates and will sell such security only if,
in the Manager's judgment, it is advantageous to do so.
The average maturity of the Fund's portfolio of debt
securities will vary based on the Manager's assessment of pertinent
economic market conditions. As with all debt securities, changes
in market yields will affect the value of such securities. Prices
generally increase when interest rates decline and decrease when
interest rates rise. Prices of longer term securities generally
fluctuate more in response to interest rate changes than do shorter
term securities.
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Equity Securities
Within the portion, if any, of the Fund's portfolio allocated
to equity securities, the Manager will seek to identify the
securities of companies and industry sectors which are expected to
provide high total return relative to alternative equity
investments. The Fund generally will seek to invest in securities
the Manager believes to be undervalued. Undervalued issues include
securities selling at a discount from the price-to-book value
ratios and price/earnings ratios computed with respect to the
relevant stock market averages. The Fund may also consider as
undervalued, securities selling at a discount from their historic
price-to-book value or price/earnings ratios, even though these
ratios may be above the ratios for the stock market averages.
Securities offering dividend yields higher than the yields for the
relevant stock market averages or higher than such securities'
historic yield may also be considered to be undervalued. The Fund
may also invest in the securities of small and emerging growth
companies when such companies are expected to provide a higher
total return than other equity investments. Such companies are
characterized by rapid historical growth rates, above-average
returns on equity or special investment value in terms of their
products or services, research capabilities or other unique
attributes. The Manager will seek to identify small and emerging
growth companies that possess superior management, marketing
ability, research and product development skills and sound balance
sheets. Investment in the securities of small and emerging growth
companies involves greater risk than investment in larger, more
established companies. Such risks include the fact that securities
of small or emerging growth companies may be subject to more abrupt
or erratic market movements than larger, more established companies
or the market average in general. Also, these companies may have
limited product lines, markets or financial resources, or they may
be dependent on a limited management group.
There may be periods when market and economic conditions exist
that favor certain types of tangible assets as compared to other
types of investments. For example, the value of precious metals
can be expected to benefit from such factors as rising inflationary
pressures or other economic, political or financial uncertainty or
instability. Real estate values, which are influenced by a variety
of economic, financial and local factors, tend to be cyclical in
nature. During periods when the Manager believes that conditions
favor a particular real asset as compared to other investment
opportunities, the Fund may emphasize, within the portion of its
portfolio allocated to equity securities, investments related to
that asset such as investments in precious or industrial metal-
related securities or real estate-related securities as described
below. The Fund may invest up to 25% of its total assets in any
particular industry sector.
Precious and Industrial Metal-Related Securities. Precious
and industrial metal-related securities are equity securities of
companies that explore for, extract, process or deal in precious or
industrial metals, i.e., gold, silver, platinum, iron, copper and
aluminum, and asset-based securities indexed to the value of such
metals. Based on historical experience, during periods of economic
or financial instability the securities of such companies may be
subject to extreme price fluctuations, reflecting the high
volatility of precious and industrial metal prices during such
periods. In addition, the instability of precious and industrial
metal prices may result in volatile earnings of precious and
industrial metal-related companies which, in turn, may affect
adversely the financial condition of such companies. Asset-based
securities are debt securities, preferred stock or convertible
securities, the principal amount, redemption terms or conversion
terms of which are related to the market price of some precious or
industrial metal such as gold bullion. The Fund will purchase only
asset-based securities which are rated, or are issued by issuers
that have outstanding debt obligations rated, A or better by S&P or
Moody's or commercial paper rated A-1 by S&P or Prime-1 by Moody's
or of issuers that the Manager has determined to be of similar
creditworthiness. If the asset-based security is backed by a bank
letter of credit or other similar facility, the Manager may take
such backing into account in determining the creditworthiness of
the issuer.
Real Estate-Related Securities. The real estate-related
securities which will be emphasized are equity securities of real
estate investment trusts, which own income-producing properties,
and mortgage real estate investment trusts which make various types
of mortgage loans often combined with equity features. The
securities of such trusts generally pay above average dividends and
may offer the potential for capital appreciation. Such securities
will be subject to the risks customarily associated with the real
estate industry, including declines in the value of the real estate
9
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investments of the trusts. Real estate values are affected by
numerous factors including (i) governmental regulation (such as
zoning and environmental laws) and changes in tax laws; (ii)
operating costs; (iii) the location and the attractiveness of the
properties; (iv) changes in economic conditions (such as
fluctuations in interest and inflation rates and business
conditions); and (v) supply and demand for improved real estate.
Such trusts also are dependent on management skill and may not be
diversified in their investments.
Money Market Securities
Money market securities in which the Fund may invest consist
of short-term securities issued or guaranteed by the U.S.
Government and its agencies and instrumentalities; commercial
paper, including variable amount master demand notes, rated at
least "A" by S&P or "Prime" by Moody's; and repurchase agreements,
purchase and sale contracts, and money market instruments issued by
commercial banks, domestic savings banks, and savings and loan
associations with total assets of at least one billion dollars.
The obligations of commercial banks may be issued by U.S. banks,
foreign branches of U.S. banks ("Eurodollar" obligations) or U.S.
branches of foreign banks ("Yankeedollar" obligations).
Portfolio Strategies Involving Options and Futures
The Fund may engage in various portfolio strategies to seek to
increase its return through the use of options on portfolio
securities and to hedge its portfolio against adverse movements in
the equity, debt and currency markets. The Fund has authority to
write (i.e., sell) covered put and call options on its portfolio
securities, purchase put and call options on securities and engage
in transactions in stock index options, stock index futures and
financial futures, and related options on such futures. The Fund
may also deal in forward foreign exchange transactions and foreign
currency options and futures, and related options on such futures.
Each of these portfolio strategies is described below. Although
certain risks are involved in options and futures transactions (as
discussed below and in "Risk Factors in Options and Futures
Transactions" further below), the Manager believes that, because
the Fund will (i) write only covered options on portfolio
securities and (ii) engage in other options and futures
transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the
risks frequently associated with the speculative use of options and
futures transactions. While the Fund's use of hedging strategies
is intended to reduce the volatility of the net asset value of its
shares, the net asset value of the Fund's shares 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 and currency
markets occur. Reference is made to the Statement of Additional
Information for further information concerning these strategies.
Writing Covered Options. The Fund is authorized to write
(i.e., sell) covered call options on the securities in which it may
invest and to enter into closing purchase transactions with respect
to certain of such options. A covered call option is an option
where the Fund in return for a premium gives another party a right
to buy specified securities owned by the Fund at a specified future
date and price set at the time of the contract. The principal
reason for writing call options is to attempt to realize, through
the receipt of premiums, a greater return than would be realized on
the securities alone. By writing covered call options, the Fund
gives up the opportunity, while the option is in effect, to profit
from any price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the
underlying security will be limited while the option is in effect
unless the Fund effects a closing purchase transaction. A closing
purchase transaction cancels out the Fund's position as the writer
of an option by means of an offsetting purchase of an identical
option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of
the underlying security declining.
The Fund also may write put options which give the holder of
the option the right to sell the underlying security to the Fund at
the stated exercise price. The Fund will receive a premium for
writing a put option which increases the Fund's return. The Fund
writes only covered put options which means that so long as the
Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents,
U.S. Government securities or other high grade liquid debt or
equity securities denominated in U.S. dollars or non-U.S.
currencies with a securities depository with a value equal to or
greater than the exercise price of the underlying securities. By
writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market
value of that security at the time of exercise for as long as the
option is outstanding. The Fund may engage in closing transactions
in order to terminate put options that it has written.
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Purchasing Options. The Fund is authorized to purchase put
options to hedge against a decline in the market value of its
securities. By buying a put option the Fund has a right to sell
the underlying security at the stated exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of
the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be
partially offset by the amount of the premium paid for the put
option and any related transaction costs. Prior to its expiration,
a put option may be sold in a closing sale transaction and profit
or loss from the sale will depend on whether the amount received is
more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out
the Fund's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund
may purchase call options on securities held in its portfolio on
which it has written call options or on securities which it intends
to purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if as a result of
such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of
the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The
Fund is authorized to engage in transactions in stock index options
and futures and financial futures, and related options on such
futures. The Fund may purchase or write put and call options on
stock indices to hedge against the risks of market-wide stock price
movements in the securities in which the Fund invests. Options on
indices are similar to options on securities except that on
exercise or assignment, the parties to the contract pay or receive
an amount of cash equal to the difference between the closing value
of the index and the exercise price of the option times a specified
multiple. The Fund may invest in stock index options based on a
broad market index, e.g., the S&P 500 Index, or on a narrow index
representing an industry or market segment, e.g., the AMEX Oil &
Gas Index.
The Fund may also purchase and sell stock index futures
contracts and financial futures contracts ("futures contracts") as
a hedge against adverse changes in the market value of its
portfolio securities as described below. A futures contract is an
agreement between two parties which obligates the purchaser of the
futures contract to buy and the seller of a futures contract to
sell a security for a set price on a future date. Unlike most
other futures contracts, a stock index futures contract does not
require actual delivery of securities but results in cash
settlement based upon the difference in value of the index between
the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index
futures contracts in connection with the equity securities in which
it invests and in financial futures contracts in connection with
the debt securities in which it invests. Transactions by the Fund
in stock index futures and financial futures are subject to
limitations as described below under "Restrictions on the Use of
Futures Transactions."
The Fund may sell futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market
value of the Fund's securities portfolio that might otherwise
result. When the Fund is not fully invested in the securities
markets and anticipates a significant advance, it may purchase
futures in order to gain rapid market exposure that may in part or
entirely offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, an equivalent
amount of futures contracts will be terminated by offsetting sales.
The Fund does not consider purchases of futures contracts to be a
speculative practice under these circumstances. It is anticipated
that, in a substantial majority of these transactions, the Fund
will purchase such securities upon termination of the long futures
position, whether the long position is the purchase of a futures
contract or the purchase of a call option or the writing of a put
option on a future, but under unusual circumstances (e.g., the Fund
experiences a significant amount of redemptions), a long futures
position may be terminated without the corresponding purchase of
securities.
The Fund also has authority to purchase and write call and put
options on futures contracts and stock indices in connection with
its hedging activities. Generally, these strategies are utilized
under the same market and market sector conditions (i.e.,
conditions relating to specific types of investments) in which the
Fund enters into futures transactions. The Fund may purchase put
options or write call options on futures contracts and stock
indices rather than selling the underlying futures contract in
anticipation of a decrease in the market value of its securities.
Similarly, the Fund may purchase call options, or write put options
on futures contracts and stock indices, as a substitute for the
purchase of such futures to hedge against the increased cost
resulting from an increase in the market value of securities which
the Fund intends to purchase.
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The Fund may engage in options and futures transactions on
U.S. and foreign exchanges and in options in the over-the-counter
markets ("OTC options"). In general, exchange-traded contracts are
third-party contracts (i.e., performance of the parties'
obligations is guaranteed by an exchange or clearing corporation)
with standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with prices and terms
negotiated by the buyer and seller. See "Restrictions on OTC
Options" below for information as to restrictions on the use of OTC
options.
Foreign Currency Hedging. The Fund has authority to deal in
forward foreign exchange among currencies of the different
countries in which it will invest and multinational currency units
as a hedge against possible variations in the foreign exchange
rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at
a specified future date and price set at the time of the contract.
The Fund's dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward
foreign currency with respect to specific receivables or payables
of the Fund accruing in connection with the purchase and sale of
its portfolio securities, the sale and redemption of shares of the
Fund or the payment of dividends and distributions by the Fund.
Position hedging is the sale of forward foreign currency with
respect to portfolio security positions denominated or quoted in
such foreign currency. The Fund will not speculate in forward
foreign exchange. Hedging against a decline in the value of a
currency does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities
decline. Such transactions also preclude the opportunity for gain
if the value of the hedged currency should rise. Moreover, it may
not be possible for the Fund to hedge against a devaluation that is
so generally anticipated that the Fund is not able to contract to
sell the currency at a price above the devaluation level it
anticipates.
The Fund is also authorized to purchase or sell listed or
over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long
hedge against possible variations in foreign exchange rates. Such
transactions may be effected with respect to hedges on non-U.S.
dollar denominated securities owned by the Fund, sold by the Fund
but not yet delivered, or committed or anticipated to be purchased
by the Fund. As an illustration, the Fund may use such techniques
to hedge the stated value in U.S. dollars of an investment in a yen
denominated security. In such circumstances, for example, the Fund
may purchase a foreign currency put option enabling it to sell a
specified amount of yen for dollars at a specified price by a
future date. To the extent the hedge is successful, a loss in the
value of the yen relative to the dollar will tend to be offset by
an increase in the value of the put option. To offset, in whole or
in part, the cost of acquiring such a put option, the Fund may also
sell a call option which, if exercised, requires it to sell a
specified amount of yen for dollars at a specified price by a
future date (a technique called a "straddle"). By selling such a
call option in this illustration, the Fund gives up the opportunity
to profit without limit from increases in the relative value of the
yen to the dollar. The Manager believes that "straddles" of the
type which may be utilized by the Fund constitute hedging
transactions and are consistent with the policies described above.
Certain differences exist between these foreign currency
hedging instruments. Foreign currency options provide the holder
thereof the right to buy or sell a currency at a fixed price on a
future date. A futures contract on a foreign currency is an
agreement between two parties to buy and sell a specified amount of
a currency for a set price on a future date. Futures contracts and
options on futures contracts are traded on boards of trade or
futures exchanges. The Fund will not speculate in foreign currency
options, futures or related options. Accordingly, the Fund will
not hedge a currency substantially in excess of the market value of
securities which it has committed or anticipates to purchase which
are denominated in such currency and, in the case of securities
which have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated currency. The Fund may not
incur potential net liabilities of more than 20% of its total
assets from foreign currency options, futures or related options.
Restrictions on the Use of Futures Transactions. Regulations
of the Commodity Futures Trading Commission ("CFTC") applicable to
the Fund provide that the futures trading activities described
herein will not result in the Fund being deemed a "commodity pool,"
as defined under such regulations if the Fund adheres to certain
restrictions. In particular, the Fund may purchase and sell
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<PAGE>
futures contracts and options thereon (i) for bona fide hedging
purposes, and (ii) for non-hedging purposes, if the aggregate
initial margin and premiums required to establish positions in such
contracts and options does not exceed 5% of the liquidation value
of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts and options.
These restrictions are in addition to other restrictions on the
Fund's hedging activities mentioned herein.
When the Fund purchases a futures contract, or writes a put
option or purchases a call option thereon, an amount of cash and
cash equivalents will be deposited in a segregated account with the
Fund's custodian so that the amount so segregated, plus the amount
of initial and variation margin held in the account of its broker,
equals the market value of the futures contract, thereby ensuring
that the use of such futures contract is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC
options, including over-the-counter stock index options, over-the-
counter foreign currency options and options on foreign currency
futures, only with member banks of the Federal Reserve System and
primary dealers in U.S. Government securities or with affiliates of
such banks or dealers which have capital of at least $50 million or
whose obligations are guaranteed by an entity having capital of at
least $50 million.
The staff of the Securities and Exchange Commission has taken
the position that purchased OTC options and the assets used as
cover for written OTC options are illiquid securities. Therefore,
the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures
contracts) if, as a result of such transaction, the sum of the
market value of OTC options currently outstanding which are held by
the Fund, the market value of the underlying securities covered by
OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on futures
contracts exceeds 10% of the total assets of the Fund, taken at
market value, together with all other assets of the Fund which are
illiquid or are not otherwise readily marketable. However, if the
OTC option is sold by the Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New
York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined
price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money" (i.e., current market
value of the underlying security minus the option's strike price).
The repurchase price with the primary dealers is typically a
formula price which is generally based on a multiple of the premium
received for the option, plus the amount by which the option is
"in-the-money." This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Directors of the Fund
without the approval of the Fund's shareholders. However, the Fund
will not change or modify this policy prior to the change or
modification by the Securities and Exchange Commission staff of its
position.
Risk Factors in Options and Futures Transactions.
Utilization of options and futures transactions to hedge the
portfolio involves the risk of imperfect correlation in movements
in the price of options and futures and movements in the price of
the securities or currencies which are the subject of the hedge.
If the price of the options or futures moves more or less than the
price of the hedged securities or currencies, the Fund will
experience a gain or loss which will not be completely offset by
movements in the price of the subject of the hedge. The successful
use of options and futures also depends on the Manager's ability to
correctly predict price movements in the market involved in a
particular options or futures transaction. To compensate for
imperfect correlations, the Fund may purchase or sell stock index
options or futures contracts in a greater dollar amount than the
hedged securities if the volatility of the hedged securities is
historically greater than the volatility of the stock index options
or futures contracts. Conversely, the Fund may purchase or sell
fewer stock index options or futures contracts if the volatility of
the price of the hedged securities is historically less than that
of the stock index options or futures contracts. The risk of
imperfect correlation generally tends to diminish as the maturity
date of the stock index option or futures contract approaches.
The Fund intends to enter into options and futures
transactions, on an exchange or in the over-the-counter market,
only if there appears to be a liquid secondary market for such
options or futures or, in the case of over-the-counter
transactions, the Manager believes the Fund can receive on each
business day at least two independent bids or offers. However,
there can be no assurance that a liquid secondary market will exist
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<PAGE>
at any specific time. Thus, it may not be possible to close an
options or futures position. The inability to close options and
futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its portfolio. There is also the risk
of loss by the Fund of margin deposits or collateral in the event
of bankruptcy of a broker with whom the Fund has an open position
in an option, a futures contract or related option.
The exchanges on which the Fund intends to conduct options
transactions have generally established limitations governing the
maximum number of call or put options on the same underlying
security or currency (whether or not covered) which may be written
by a single investor, whether acting alone or in concert with
others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more
accounts or through one or more brokers). "Trading limits" are
imposed on the maximum number of contracts which any person may
trade on a particular trading day. The Manager does not believe
that these trading and position limits will have any adverse impact
on the portfolio strategies for hedging the Fund's portfolio.
Other Investment Policies and Practices
Non-Diversified Status. The Fund is classified as non-
diversified within the meaning of the Investment Company Act, which
means that the Fund is not limited by such Act in the proportion of
its assets that it may invest in securities of a single issuer.
However, the Fund's investments will be limited so as to qualify as
a "regulated investment company" for purposes of the Internal
Revenue Code of 1986, as amended. See "Additional Information -
Taxes." To qualify, among other requirements, the Fund will limit
its investments so that, at the close of each quarter of the
taxable year, (i) not more than 25% of the market value of the
Fund's total assets will be invested in the securities of a single
issuer and (ii) with respect to 50% of the market value of its
total assets, not more than 5% of the market value of its total
assets will be invested in the securities of a single issuer, and
the Fund will not own more than 10% of the outstanding voting
securities of a single issuer. A fund which elects to be
classified as "diversified" under the Investment Company Act must
satisfy the foregoing 5% and 10% requirements with respect to 75%
of its total assets. To the extent that the Fund assumes large
positions in the securities of a small number of issuers, the
Fund's yield may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial
condition or in the market's assessment of the issuers.
Portfolio Transactions. Since portfolio transactions may be
effected on foreign securities exchanges, the Fund may incur
settlement delays on certain of such exchanges. See "Special
Considerations" above. Where possible, the Fund will deal directly
with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are
available elsewhere. Such dealers usually are acting as principal
for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally
traded on a net basis and do not normally involve either brokerage
commissions or transfer taxes. Securities firms may receive
brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the
purchase and sale of underlying securities upon exercise of
options. The Fund has no obligation to deal with any broker in the
execution of transactions in portfolio securities. Under the
Investment Company Act, persons affiliated with the Fund, including
Merrill Lynch, are prohibited from dealing with the Fund as a
principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the
Securities and Exchange Commission. Affiliated persons of the
Fund, and affiliated persons of such affiliated persons, may serve
as its broker in transactions conducted on an exchange and in over-
the-counter transactions conducted on an agency basis. In
addition, consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., the Fund may
consider sales of shares of the Fund as a factor in the selection
of brokers or dealers to execute portfolio transactions for the
Fund. It is expected that the majority of the shares of the Fund
will be sold by Merrill Lynch. Costs associated with transactions
in foreign securities are generally higher than with transactions
in U.S. securities, although the Fund will endeavor to achieve the
best net results in effecting such transactions.
When-Issued Securities and Delayed Delivery Transactions. The
Fund may purchase securities on a when-issued basis, and it may
purchase or sell securities for delayed delivery. These
transactions occur when securities are purchased or sold by the
Fund with payment and delivery taking place in the future to secure
what is considered an advantageous yield and price to the Fund at
the time of entering into the transaction. Although the Fund has
not established any limit on the percentage of its assets that may
14
<PAGE>
be committed in connection with such transactions, the Fund will
maintain a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other high grade liquid
debt or equity securities denominated in U.S. dollars or non-U.S.
currencies in an aggregate amount equal to the amount of its
commitment in connection with such purchase transactions.
Indexed and Inverse Floating Obligations. The Fund may
invest in debt securities the return on which is based on a
particular index of value or interest rates. For example, the Fund
may invest in debt securities that pay interest based on an index
of interest rates or based on the value of gold or some other
product. The principal amount payable upon maturity of certain
debt securities also may be based on the value of an index. To the
extent the Fund invests in debt securities of these sorts, the
Fund's return on such debt securities will be subject to risk with
respect to the value of the particular index. Also, the Fund may
invest in so-called "inverse floating obligations" or "residual
interest bonds" on which the interest rates typically vary
inversely with a short-term floating rate (which may be reset
periodically by a dutch auction, a remarketing agent, or by
reference to a short-term tax-exempt interest rate index). The
Fund may purchase original issue inverse floating rate bonds in
both the primary and secondary markets and may also purchase in the
secondary market synthetically-created inverse floating rate bonds
evidenced by custodial or trust receipts. Generally, interest
rates on inverse floating rate bonds will decrease when short-term
rates increase, and will increase when short-term rates decrease.
Such securities have the effect of providing a degree of investment
leverage, since they may increase or decrease in value in response
to changes, as an illustration, in market interest rates at a rate
which is a multiple (typically two) of the rate at which fixed-rate
long-term tax exempt securities increase or decrease in response to
such changes. As a result, the market values of such securities
will generally be more volatile than the market values of fixed-
rate debt securities. To seek to limit the volatility of these
securities, the Fund may purchase inverse floating obligations with
shorter term maturities or which contain limitations on the extent
to which the interest rate may vary. The Manager believes that
indexed and inverse floating obligations represent a flexible
portfolio management instrument for the Fund which allows the
Manager to vary the degree of investment leverage relatively
efficiently under different market conditions.
Standby Commitment Agreements. The Fund may from time to
time enter into standby commitment agreements. Such agreements
commit the Fund, for a stated period of time, to purchase a stated
amount of a fixed income security which may be issued and sold to
the Fund at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. At the time of
entering into the agreement, the Fund is paid a commitment fee,
regardless of whether or not the security is ultimately issued,
which is typically approximately 0.5% of the aggregate purchase
price of the security which the Fund has committed to purchase.
The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and
price which is considered advantageous to the Fund. The Fund will
not enter into a standby commitment with a remaining term in excess
of 90 days and will limit its investment in such commitments so
that the aggregate purchase price of the securities subject to such
commitments, together with the value of portfolio securities
subject to legal restrictions on resale, will not exceed 10% of its
assets taken at the time of acquisition of such commitment or
security. The Fund will at all times maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government
securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies in an aggregate
amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a
standby commitment will be issued and the value of the security, if
issued, on the delivery date may be more or less than its purchase
price. Since the issuance of the security underlying the
commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment
agreement and the related commitment fee will be recorded on the
date on which the security can reasonably be expected to be issued,
and the value of the security will thereafter be reflected in the
calculation of the Fund's net asset value. The cost basis of the
security will be adjusted by the amount of the commitment fee. In
the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby
commitment.
Repurchase Agreements and Purchase and Sale Contracts. The
Fund may invest in securities pursuant to repurchase agreements or
purchase and sale contracts. Repurchase agreements may be entered
into only with a member bank of the Federal Reserve System or
15
<PAGE>
primary dealer in U.S. Government securities. Purchase and sale
contracts may be entered into only with financial institutions
which have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million.
Under such agreements, the other party agrees, upon entering into
the contract with the Fund, to repurchase the security at a
mutually agreed upon time and price in a specified currency,
thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market
fluctuations during such period although it may be affected by
currency fluctuations. In the case of repurchase agreements, the
prices at which the trades are conducted do not reflect accrued
interest on the underlying obligation; whereas, in the case of
purchase and sale contracts, the prices take into account accrued
interest. Such agreements usually cover short periods, such as
under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the
securities transferred to the purchaser. In the case of a
repurchase agreement, as a purchaser, the Fund will require the
seller to provide additional collateral if the market value of the
securities falls below the repurchase not have the right to seek
additional collateral in the case of purchase and agreement
construed to be a collateralized loan, the underlying securities
are obligation to pay the repurchase price. Therefore, the Fund
may suffer time collateral. A purchase and sale contract differs
from a repurchase agreement in Fund. In the event of a default
under such a repurchase agreement or under a return to the Fund
would be dependent upon intervening fluctuations of the such event,
the Fund would have rights against the seller for breach of the
failure of the seller to perform. The Fund may not invest more
than 10% of in more than seven days.
Lending of Portfolio Securities. The Fund may from time to
time lend securities from its portfolio with a value not exceeding
33-1/3 of its total assets, to banks, brokers and other financial
institutions and receive collateral in cash or securities issued or
guaranteed by the U.S. Government. Such collateral will be
maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. This limitation is
a fundamental policy, and it may not be changed without the
approval of the in the holders of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company
Act. During the period of such a loan, the Fund receives the
income on the loaned securities and either receives the income on
the collateral or other compensation, i.e., negotiated loan premium
or fee, for entering into the loan and thereby increases its yield.
In the event that the borrower defaults on its obligation to return
borrowed securities, because of insolvency or otherwise, the Fund
could experience delays and costs in gaining access to the
collateral and could suffer a loss to the extent that the value of
the collateral falls below the market value of the borrowed
securities.
Investment Restrictions. The Fund's investment activities
are subject to further restrictions that are described in the
Statement of Additional Information. Investment restrictions and
policies which are fundamental policies may not be changed without
the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment
Company Act means the lesser of (a) 67% of the shares represented
at a meeting at which more than 50% of the outstanding shares are
represented or (b) more than 50% of the outstanding shares). Among
its fundamental policies, the Fund may not invest more than 25% of
its total assets, taken at market value at the time of each
investment, in the securities of issuers of any particular industry
(excluding the U.S. Government and its agencies or
instrumentalities). Other fundamental policies include policies
which (i) limit investments in securities which cannot be readily
resold because of legal or contractual restrictions or which are
not otherwise readily marketable, including repurchase agreements
and purchase and sale contracts maturing in more than seven days,
if, regarding all such securities, more than 15% of its net assets,
taken at market value, would be invested in such securities,
(ii) limit investments in securities of other investment companies,
except in connection with certain specified transactions and with
respect to investments of up to 10% of the Fund's assets in
securities of closed-end investment companies and (iii) restrict
the issuance of senior securities and limit bank borrowings except
that the Fund may borrow amounts of up to 10% of its assets for
extraordinary purposes or to meet redemptions. The Fund will not
purchase securities while borrowings exceed 5% of its total assets.
The Fund has no present intention to borrow money in amounts
exceeding 5% of its total assets. Although not a fundamental
policy, the Fund will include OTC options and the securities
underlying such options in calculating the amount of its total
assets subject to the limitation set forth in clause (i) above.
However, as discussed above, the Fund may treat the securities it
uses as cover for written OTC options as liquid, and, therefore,
will be excluded from this restriction, provided it follows a
specified procedure. The Fund will not change or modify this
policy prior to the change or modification by the staff of the
Securities and Exchange Commission of its position regarding OTC
options, as discussed above.
16
<PAGE>
Portfolio Turnover. The Manager will effect portfolio
transactions without regard to holding period, if in its judgment,
such transactions are advisable in light of a change in
circumstances 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 portfolio turnover rate should
not exceed [200%] 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.
MANAGEMENT OF THE FUND
Board of Directors
The Board of Directors of the Fund consists of six
individuals, five of whom are not "interested persons" of the Fund
as defined in the Investment Company Act. The Board of Directors
of the Fund is responsible for the overall supervision of the
operations of the Fund and performs the various duties imposed on
the directors of investment companies by the Investment Company
Act.
The Directors of the Fund and their principal employment are
as follows:
ARTHUR ZEIKEL* - President and Chief Investment Officer of the
Manager and Fund Asset Management, Inc.; Executive Vice President
of Merrill Lynch & Co., Inc. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"); and Director of Merrill Lynch
Funds Distributor, Inc.
WALTER MINTZ - Special Limited Partner of Cumberland Partners
(investment partnership).
MELVIN R. SEIDEN - President of Silbanc Properties, Ltd. (real
estate, consulting and investments).
STEPHEN B. SWENSRUD - Principal of Fernwood Associates
(financial consultants).
JOE GRILLS - Member of the Committee on Investment of Employee
Benefits Assets of the Financial Executives Institute.
HARRY WOOLF - Professor and former Director of the Institute
for Advanced Study (private institution devoted to the
encouragement, support and patronage of learning).
- ----------------
* Interested person, as defined in the Investment Company Act, of
the Fund.
Management and Advisory Arrangements
The Manager, Merrill Lynch Asset Management, L.P., which does
business as Merrill Lynch Asset Management, is owned and controlled
by Merrill Lynch & Co., Inc., a financial services holding company
and the parent of Merrill Lynch. The Manager provides the Fund
with management and investment advisory services. The Manager or
an affiliate, Fund Asset Management, L.P. ("FAM"), acts as the
manager for more than 90 other registered investment companies.
The Manager also offers portfolio management and portfolio analysis
services to individuals and institutions. As of April 30, 1994,
the Manager and FAM had a total of approximately $ billion in
investment company and other portfolio assets under management,
including accounts of certain affiliates of the Manager.
17
<PAGE>
The management agreement with the Manager (the "Management
Agreement") provides that, subject to the direction of the Board of
Directors of the Fund, the Manager is responsible for the actual
management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the
Manager, subject to review by the Board of Directors.
The Manager provides the portfolio manager[s] for the Fund who
consider[s] analyses from various sources (including brokerage
firms with which the Fund does business), make[s] the necessary
decisions, and place[s] transactions accordingly. The Manager is
also obligated to perform certain administrative and management
services for the Fund and is obligated to provide all of the office
space, facilities, equipment and personnel necessary to perform its
duties under the Management Agreement.
The Management Agreement provides that the Fund will pay the
Manager a monthly fee at the annual rate of 0.75% of the average
daily net assets of the Fund. This fee is higher than that of most
mutual funds, but management of the Fund believes this fee, which
is typical for a global fund, is justified by the global nature of
the Fund.
The names of the persons associated with the Manager who are
primarily responsible for the day-to-day management of the Fund's
portfolio, the length of time that such persons have been so
responsible, and their business experience during the past five
years are as follows:
Joel Heymsfeld - Vice President of the Manager since 1978.
The Management Agreement obligates the Fund to pay certain
expenses incurred in its operations including, among other things,
the investment advisory fee, legal and audit fees, registration
fees, unaffiliated Directors' fees and expenses, custodian and
transfer agency fees, accounting costs, the costs of issuing and
redeeming shares and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional
information. Accounting services are provided to the Fund by the
Manager, and the Fund reimburses the Manager for its costs in
connection with such services on a semi-annual basis.
Transfer Agency Services
Financial Data Services, Inc. (the "Transfer Agent"), which is
a wholly owned subsidiary of Merrill Lynch & Co., Inc., acts as the
Fund's transfer agent pursuant to a Transfer Agency, Dividend
Disbursing Agency and Shareholder Servicing Agency Agreement ( the
"Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives an annual fee of [$7.00] per
Class A shareholder account and [$9.00] per Class B shareholder
account, nominal miscellaneous fees (e.g., account closing fees)
and is entitled to reimbursement for out-of-pocket expenses
incurred by it under the Transfer Agency Agreement.
PURCHASE OF SHARES
Subscription Offering
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), a
subsidiary of the Manager and an affiliate of Merrill Lynch, acts
as the distributor of Class A and Class B shares of the Fund.
The Distributor, Merrill Lynch and other securities dealers
which have entered into selected dealer agreements with the
Distributor will solicit subscriptions for shares of the Fund
during a period expected to end on ____________, 1994. The
subscription period may be extended for up to an additional 30 days
upon agreement between the Fund and the Distributor. On the fifth
business day after the conclusion of the subscription period, the
subscriptions will be payable, the Class A and Class B shares will
be issued and the Fund will commence operations. The subscription
18
<PAGE>
offering may be terminated by the Fund or the Distributor at any
time, in which event no Class A and Class B shares will be issued
(and, therefore, the Fund will not commence operations and no
amounts will be payable by subscribers, and no sales charges will
be assessed) or a limited number of shares will be issued.
The public offering price of the Class A shares during the
subscription offering is set forth in the table below:
<TABLE>
<CAPTION>
Subscription Period
Sales Securities Dealers'
Charge Concession
------ ----------
Percentage /*/ Percentage /*/
Public of Public of Public
Offering Dollar Offering Dollar Offering
Price Amount Price Amount Price
-------- ------ ------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less than $25,000 $10.417 $.417 4.00% $.417 4.00%
$25,000 but less
than 50,000 10.390 .390 3.75 .390 3.75
$50,000 but less than
$100,000 10.336 .336 3.25 .336 3.25
$100,000 but less than
$250,000 10.256 .256 2.50 .256 2.50
$250,000 but less than
$1,000,000 10.152 .152 1.50 .152 1.50
$1,000,000 and over 10.050 .050 0.50 .050 0.50
</TABLE>
- ----------------
/*/ Rounded to the nearest one-hundredth percent.
Initial sales charges will be waived for shareholders
purchasing $1 million or more in a single transaction (other than
a tax qualified retirement plan under Section 401 of the Code or a
deferred compensation plan under Section 403(b) and Section 457 of
the Code), or a purchase by TMA (Service Mark) Managed Trust, of
Class A shares of the Fund. Such purchases will be subject to a
contingent deferred sales charge if the shares are redeemed within
one year after purchase at the following rates:
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount of Purchase
Amount of Purchase ---------------------------------
- -------------------
$1 million up to $2.5 million . . 1.00%
Over $2.5 million up to $3.5
million . . . . . . . . . . . . 0.60
Over $3.5 million up to $5
million . . . . . . . . . . . . 0.40
Over $5 million . . . . . . . . . 0.25
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 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.
19
<PAGE>
The proceeds per share to the Fund from the sale of all Class
A shares sold during the subscription period will be $10.00.
The public offering price of the Class B shares during the
subscription offering will be $10.00 per share. However, the Class
B shares may be subject to a contingent deferred sales charge
described below under "Deferred Sales Charge Alternative - Class B
Shares - Contingent Deferred Sales Charge" if redeemed within four
years of purchase and are subject to ongoing account maintenance
and distribution fees as described below.
The minimum initial purchase for both Class A and Class B
shares during the subscription period is $1,000.
Continuous Offering
Commencing immediately after completion of the subscription
offering, Class A and Class B shares of the Fund will be offered
continuously for sale by the Distributor and other eligible
securities dealers (including Merrill Lynch). During the
continuous offering, shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the
Transfer Agent. The minimum initial purchase during the continuous
offering is $1,000. The minimum subsequent purchase is $50.
The Fund will offer its shares during the continuous offering
at a public offering price equal to the next determined net asset
value per share plus sales charges which, at the option of the
purchaser, may be imposed either at the time of purchase (the
"initial sales charge alternative") or on a deferred basis (the
"deferred sales charge alternative"), as described below. The
applicable offering price for purchase orders is based upon the net
asset value of the Fund next determined after receipt of the
purchase orders by the Distributor. As to purchase orders received
by securities dealers prior to 4:15 p.m., New York time, which
includes orders received after the determination of the net asset
value on the previous day, the applicable offering price will be
based on the net asset value determined as of 4:15 p.m., New York
time, on the day the orders are placed with the Distributor,
provided the orders are received by the Distributor prior to
4:30 p.m., New York time, on that day. If the purchase orders are
not received by the Distributor prior to 4:30 p.m., New York time,
such orders shall be deemed received on the next business day. Any
order may be rejected by the Distributor or the Fund. The Fund or
the Distributor may suspend the continuous offering of the Fund's
shares at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Distributor or the
Fund. Neither the Distributor nor the dealers are permitted to
withhold placing orders to benefit themselves by a price change.
Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a sale of shares to such customers. Purchases
directly through the Transfer Agent are not subject to the
processing fee.
________________________
The Fund issues two classes of shares: Class A shares are
sold to investors choosing the initial sales charge alternative,
and Class B shares are sold to investors choosing the deferred
sales charge alternative. The two classes of shares each represent
interests in the same portfolio of investments of the Fund, have
the same rights and are identical in all respects, except that
Class B shares bear the expenses of the deferred sales
arrangements, any expenses (including incremental transfer agency
costs) resulting from such sales arrangements and the expenses paid
by the account maintenance fee and have exclusive voting rights
with respect to the Rule 12b-1 distribution plan pursuant to which
the account maintenance and distribution fees are paid. The two
classes also have different exchange privileges. See "Shareholder
Services - Exchange Privilege." The net income attributable to
Class B shares and the dividends payable on Class B shares will be
reduced by the amount of the account maintenance and distribution
fees and incremental transfer agency costs relating to Class B
shares; likewise the net asset value of the Class B shares will be
reduced by such amount to the extent the Fund has undistributed net
income. Sales personnel may receive different compensation for
selling Class A or Class B shares. Investors are advised that only
Class A shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell
shares.
20
<PAGE>
Alternative Sales Arrangements
The alternative sales arrangements of the Fund permit
investors to choose the method of purchasing shares that is most
beneficial given the amount of their purchase, the length of time
the investor expects to hold the shares and other relevant
circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an
initial sales charge and not be subject to ongoing charges, as
discussed below, or to have the entire initial purchase price
invested in the Fund with the investment thereafter being subject
to ongoing account maintenance and distribution fees.
As an illustration, investors who qualify for significantly
reduced sales charges, as described below, might elect the initial
sales charge alternative because similar sales charge reductions
are not available for purchases under the deferred sales charge
alternative. Moreover, shares acquired under the initial sales
charge alternative would not be subject to an ongoing account
maintenance fee and a distribution fee, as described below.
However, because initial sales charges are deducted at the time of
purchase, such investors would not have all their funds invested
initially.
Investors not qualifying for reduced initial sales charges who
expect to maintain their investment for an extended period of time
might also elect the initial sales charge alternative because over
time the accumulated continuing account maintenance and
distribution fees related to Class B shares may exceed the initial
sales charge related to Class A shares. Again, however, such
investors must weigh this consideration against the fact that not
all their funds will be invested initially. Furthermore, the
ongoing account maintenance and distribution fees will be offset to
the extent any return is realized on the additional funds initially
invested under the deferred alternative. Another factor that may
be applicable under certain circumstances is that the payment of
the Class B distribution fee and contingent deferred sales charge
is subject to certain limits as set forth below under "Deferred
Sales Charge Alternative - Class B Shares."
Certain other investors might determine it to be more
advantageous to have all their funds invested initially, although
subject to continuing account maintenance and distribution fees
and, for a four-year period of time, a contingent deferred sales
charge as described below. For example, an investor subject to the
4.00% initial sales charge will have to hold his investment at
least 6-1/2 years for the ongoing 0.25% account maintenance fee and
0.50% distribution fee of Class B shares to exceed the initial
sales charge plus the accumulated account maintenance fee of Class
A shares. This example does not take into account the time value
of money which further reduces the impact of the ongoing 0.25%
account maintenance fee and 0.50% distribution fee of Class B
shares on the investment, fluctuations in net asset value, the
effect of the return on the investment over this period of time or
the effect of any limits that may be imposed upon the payment of
the distribution fee and the contingent deferred sales charge.
Initial Sales Charge Alternative - Class A Shares
The public offering price of Class A shares for purchasers
choosing the initial sales charge alternative is the next
determined net asset value plus varying sales charges (i.e., sales
loads) as set forth below.
21
<PAGE>
<TABLE>
<CAPTION>
Sales Charge Sales Charge Discount To
as Percentage as Percentage* Selected Dealers
of the of the Net as Percentage of
Amount of Purchase Offering Price Amount Invested the Offering Price
- ------------------ -------------- --------------- ------------------
<S> <C> <C> <C>
Less than $25,000. . . . . . . . 4.00% 4.17% 3.75%
$25,000 but less than $50,000. . 3.75 3.90 3.50
$50,000 but less than $100,000 . 3.25 3.36 3.00
$100,000 but less than $250,000. 2.50 2.56 2.25
$250,000 but less than $1,000,000 1.50 1.52 1.25
$1,000,000 and over . . . . . . .50 .50 .40
</TABLE>
__________________
/*/ Rounded to the nearest one-hundredth percent.
Initial sales charges may be waived for shareholders
purchasing $1 million or more in a single transaction (other than
a tax qualified retirement plan under Section 401 of the Code or a
deferred compensation plan under Section 403(b) and Section 457 of
the Code), or a purchase by TMA(Service Mark) Managed Trust, of
Class A shares of the Fund. In addition, purchases of Class A
shares of the Fund made in connection with a single investment of
$1 million or more under the Merrill Lynch Mutual Fund Adviser
Program will not be subject to an initial sales charge. Purchases
described in this paragraph will be subject to a contingent
deferred sales charge if the shares are redeemed within one year
after purchase at the following rates.
Contingent Deferred Sales
as a Percentage of
Dollar Amount Subject to Charge
Amount of Purchase ---------------------------------
- -------------------
$1 million up to $2.5 million . . 1.00%
Over $2.5 million up to $3.5
million . . . . . . . . . . . . 0.60
Over $3.5 million up to $5
million . . . . . . . . . . . . 0.40
Over $5 million . . . . . . . . . 0.25
The Distributor may reallow discounts to select dealers and
retain the balance over such discounts. At times the Distributor
may reallow the entire sales charge to such dealers. Since
securities dealers selling Class A shares of the Fund will receive
a concession equal to most of the sales charge, they may be deemed
to be underwriters under the Securities Act.
Reduced Initial Sales Charges
Sales charges are reduced under a Right of Accumulation and a
Letter of Intention. Class A shares of the Fund are offered at net
asset value to Directors of the Fund, to directors of Merrill Lynch
& Co., Inc., to participants in certain benefit plans, to directors
and trustees of certain other Merrill Lynch sponsored investment
companies, to an investor who has a business relationship with a
financial consultant who joined Merrill Lynch from another
22
<PAGE>
investment firm within six months prior to the date of purchase if
certain conditions set forth in the Statement of Additional
Information are met and to employees of Merrill Lynch & Co., Inc.
and its subsidiaries. Class A shares are offered at net asset
value to certain retirement plans, including eligible 401(k) plans,
provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by the Manager or
its affiliate, FAM. Also, Class A shares may be offered at net
asset value in connection with the acquisition of assets of other
investment companies. No initial sales charges are imposed upon
Class A shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A shares of the
Fund are also offered at net asset value, 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,
if the following conditions are satisfied: first, the investor must
purchase Class A shares of the Fund with proceeds from a redemption
of shares of such other mutual Fund and such Fund imposed a sales
charge either at the time of purchase or on a deferred basis;
second, such purchase of Class A shares must be made within 90 days
after such notice of termination. Class A shares of the Fund are
also offered at net asset value to shareholders of certain closed-
end funds advised by the Manager or FAM who wish to reinvest the
net proceeds from a sale of their closed-end fund shares of common
stock in shares of the Fund, provided certain conditions are met.
For example, Class A shares of the Fund and certain other mutual
funds advised by the Manager or FAM are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
(formerly known as Merrill Lynch Prime Fund, Inc.) ("Senior
Floating Rate Fund") who wish to reinvest the net proceeds from a
sale of certain of their shares of common stock of Senior Floating
Rate Fund in shares of such funds.
Additional information concerning these reduced initial sales
charges is set forth in the Statement of Additional Information.
Deferred Sales Charge Alternative - Class B Shares
Investors choosing the deferred sales charge alternative
purchase Class B shares at net asset value per share without the
imposition of a sales charge at the time of purchase. The Class B
shares are being sold without an initial sales charge so that the
Fund will receive the full amount of the investor's purchase
payment. Merrill Lynch compensates its financial consultants for
selling Class B shares at the time of purchase from its own funds.
The proceeds of the contingent deferred sales charge and the
ongoing distribution fee discussed below are used to defray Merrill
Lynch's expenses, including compensating its financial consultants.
The proceeds from the ongoing account maintenance fee are used to
compensate Merrill Lynch for providing continuing account
maintenance activities.
Proceeds from the contingent deferred sales charge are paid to
the Distributor and are used in whole or in part by the Distributor
to defray the expenses of dealers (including Merrill Lynch) related
to providing distribution-related services to the Fund in
connection with the sale of the Class B shares such as the payment
of compensation to financial consultants for selling Class B
shares. Payments by the Fund to the Distributor of the
distribution fee under the Distribution Plan relating to Class B
shares also may be used in whole or in part by the Distributor for
this purpose. The combination of the contingent deferred sales
charge and the ongoing distribution fee facilitates the ability of
the Fund to sell the Class B shares without a sales charge being
deducted at the time of purchase. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholders
Services - Exchange Privilege" will continue to be subject to the
Fund's contingent deferred sales charge schedule if such schedule
is higher than the deferred sales charge schedule relating to the
Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charge
Class B shares which are redeemed within four years of
purchase may be subject to a contingent deferred sales charge at
the rates set forth below charged as a percentage of the dollar
amount subject thereto. The charge will be assessed on an amount
equal to the lesser of the current market value or the cost of the
shares being redeemed. Accordingly, no sales charge will be
imposed on increases in net asset value above the initial purchase
price. In addition, no charge will be assessed on shares derived
from reinvestment of dividends or capital gains distributions.
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<PAGE>
The following table sets forth the rates of the contingent
deferred sales charge:
Contingent Deferred Sales
Year Since Purchase Charge as a Percentage of
Payment Made 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
In determining whether a contingent deferred sales charge is
applicable to a redemption, the calculation will be determined in
the manner that results in the lowest possible rate being charged.
Therefore, it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held
longest during the four-year period. The charge will not be
applied to dollar amounts representing an increase in the net asset
value since the time of purchase. A transfer of shares from a
shareholder's account to another account will be assumed to be made
in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares
at $10 per share (at a cost of $1,000) and in the third year after
purchase, the net asset value per share is $12, and during such
time, the investor has acquired 10 additional shares through
dividend reinvestment. If at such time the investor makes his
first redemption of 50 shares (proceeds of $600), 10 shares will
not be subject to the charge because of dividend reinvestment.
With respect to the remaining 40 shares, the charge is applied only
to the original cost of $10 per share and not to the increase in
net asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The contingent deferred sales charge is waived on redemptions
of shares in connection with certain post-retirement withdrawals
from Individual Retirement Accounts ("IRAs") or other retirement
plans or following the death or disability (as defined in the Code)
of a shareholder.
The contingent deferred sales charge also is waived on
redemptions of shares by certain eligible 401(a) and eligible
401(k) plans. The contingent deferred sales charge is also waived
for any Class B shares which are purchased by an eligible 401(k) or
eligible 401(a) plan and which are rolled over into a Merrill Lynch
or Merrill Lynch Trust Company custodied IRA and held in such
account at the time of redemption. Additional information
concerning the waiver of the contingent deferred sales charge is
set forth in the Statement of Additional Information.
Distribution Plan
Pursuant to a distribution plan adopted by the Fund pursuant
to Rule 12b-1 under the Investment Company Act (the "Distribution
Plan"), the Fund pays the Distributor an account maintenance fee
and a distribution fee relating to Class B shares, accrued daily
and paid monthly, at the annual rates of 0.25% and 0.50%,
respectively, of the average daily net assets of the Fund
attributable to Class B shares in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for
providing account maintenance and distribution services to the
Fund, with the ongoing account maintenance fee compensating the
Distributor and Merrill Lynch for providing account maintenance
services to Class B shareholders and with the ongoing distribution
fee compensating the Distributor and Merrill Lynch for providing
shareholder and distribution services, and bearing certain
24
<PAGE>
distribution-related expenses to the Fund, including payments to
financial consultants for selling Class B shares of the Fund. See
"Additional Information - Organization of the Fund." The
Distribution Plan is designed to permit an investor to purchase
Class B shares through dealers without the assessment of a front-
end sales charge and at the same time permit the dealer to
compensate its financial consultants in connection with the sale of
the Class B shares. In this regard, the purpose and function of
the ongoing account maintenance and distribution fees and the
contingent deferred sales charge are the same as those of the
initial sales charge with respect to the Class A shares of the Fund
in that the deferred sales charges provide for the financing of the
distribution of the Fund's Class B shares.
The payments under the Distribution Plan are based on a
percentage of average daily net assets attributable to Class B
shares regardless of the amount of expenses incurred, and
accordingly, distribution-related revenues may be more or less than
distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the
Directors for their consideration in connection with their
deliberations as to the continuance of the Distribution Plan. This
information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct
expenses and revenue/cash" basis. On the fully allocated accrual
basis, revenues consist of the account maintenance fees,
distribution fees, the contingent deferred sales charges and
certain other related revenues, and expenses consist of financial
consultant compensation, branch office and regional operation
center selling and transaction processing expenses, advertising,
sales promotion and marketing expenses, corporate overhead and
interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees
and contingent deferred sales charges, and the expenses consist of
financial consultant compensation.
The Fund has no obligation with respect to distribution and
account maintenance-related expenses incurred by the Distributor
and Merrill Lynch in connection with the Class B shares, and there
is no assurance that the Directors of the Fund will approve the
continuance of the Distribution Plan from year to year. However,
the Distributor intends to seek annual continuation of the
Distribution Plan. In their review of the Distribution Plan, the
Directors will not be asked to take into consideration expenses
incurred in connection with the distribution of Class A shares or
of shares of other funds for which the Distributor acts as
distributor. The account maintenance fee, the distribution fee and
the contingent deferred sales charges in the case of Class B shares
will not be used to subsidize the sale of Class A shares.
Similarly, the initial sales charges in the case of Class A shares
will not be used to subsidize the sale of Class B shares. Payment
of the distribution fee on Class B shares is subject to certain
limits as set forth under "Deferred Sales Charge Alternative -
Class B Shares."
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. ("NASD")
imposes a limitation on certain asset-based sales charges such as
the Fund's distribution fee and the contingent deferred sales
charge but not the account maintenance fee. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and contingent deferred sales charges
payable by the Fund to (1) 6.25% of eligible gross sales of Class
B shares (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges) plus (2) interest on the unpaid
balance at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of
the distribution fee and the contingent deferred sales charge).
The Distributor has voluntarily agreed to waive interest charges on
the unpaid balance in excess of 0.50% of eligible gross sales.
Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the
interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of
the distribution fee, and any contingent deferred sales charges
will be paid to the Fund rather than to the Distributor; however
the Fund will continue to make payments of the account maintenance
fee. 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.
25
<PAGE>
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and
fractional shares of the Fund upon receipt of a written request in
proper form. The redemption price is the net asset value per share
next determined after the initial receipt of proper notice of
redemption. Except for any contingent deferred sales charge which
may be applicable to Class B shares, there will be no charge for
redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will
receive upon redemption all dividends reinvested through the date
of redemption. The value of shares at the time of redemption may
be more or less than the shareholder's cost, depending on the
market value of the securities held by the Fund at such time.
Redemption
A shareholder wishing to redeem shares may do so without
charge by tendering the shares directly to the Transfer Agent,
Financial Data Services, Inc., Transfer Agency Mutual Fund
Operations, P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., Transfer Agency Mutual
Fund Operations, 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares
deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Proper notice of redemption in the
case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by
certificates for the shares to be redeemed. The notice in either
event requires the signatures of all persons in whose names the
shares are registered, signed exactly as their names appear on the
Transfer Agent's register or on the certificate, as the case may
be. The signature(s) on the notice must be guaranteed by an
"eligible guarantor institution" (including, for example, Merrill
Lynch branch offices and certain other financial institutions) as
such term is defined in Rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended, the existence and validity of which may be
verified by the Transfer Agent through the use of industry
publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents,
such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the
Transfer Agent, payment will be mailed within seven days of receipt
of a proper notice of redemption.
At various times the Fund may be requested to redeem shares
for which it has not yet received good payment. The Fund may delay
or cause to be delayed the mailing of a redemption check until such
time as good payment (e.g., cash or certified check drawn on a U.S.
bank) has been collected for the purchase of such shares.
Normally, this delay will not exceed 10 days.
Repurchase
The Fund also will repurchase shares through a shareholder's
listed securities dealer. The Fund normally will accept orders to
repurchase shares by wire or telephone from dealers for their
customers at the net asset value next computed after receipt of the
order by the dealer, provided that the request for repurchase is
received by the dealer prior to the close of business on the New
York Stock Exchange on the day received and that such request is
received by the Fund from such dealer not later than 4:30 p.m., New
York time, on the same day. Dealers have the responsibility of
submitting such repurchase requests to the Fund not later than
4:30 p.m., New York time, in order to obtain that day's closing
price.
The foregoing repurchase arrangements are for the convenience
of shareholders and do not involve a charge by the Fund (other than
any applicable contingent deferred sales charge in the case of
Class B shares). Securities firms which do not have selected
dealer agreements with the Distributor, however, may impose a
transaction charge on the shareholder for transmitting the notice
of repurchase to the Fund. Merrill Lynch may charge its customers
a processing fee (presently $4.85) to confirm a repurchase of
shares to such customers. Redemptions directly through the
Transfer Agent are not subject to the processing fee. The Fund
reserves the right to reject any order for repurchase, which right
of rejection might adversely affect shareholders seeking redemption
through the repurchase procedure. A shareholder whose order for
repurchase is rejected by the Fund, however, may redeem shares as
set forth above.
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<PAGE>
Reinstatement Privilege - Class A Shares
Shareholders who have redeemed their Class A shares have a
one-time privilege to reinstate their accounts by purchasing Class
A shares of the Fund at net asset value without a sales charge up
to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for
the amount to be reinstated to the Transfer Agent within 30 days
after the date the request for redemption was accepted by the
Transfer Agent or the Distributor. The reinstatement will be made
at the net asset value per share next determined after the notice
of reinstatement is received and cannot exceed the amount of the
redemption proceeds. The reinstatement privilege is a one-time
privilege and may be exercised by the Class A shareholder only the
first time such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and
investment plans described below which are designed to facilitate
investment in its shares. Certain of such services are not
available to investors who place purchase orders for the Fund's
shares through the Merrill Lynch Blueprint(SM) Program. Full details
as to each of such services, copies of the various plans described
below and instructions as to how to participate in the various
plans and services, or to change options with respect thereto, can
be obtained from the Fund by calling the telephone number on the
cover page hereof or from the Distributor or Merrill Lynch.
Certain of these services are available only to U.S. investors.
Investment Account. Each shareholder whose account is
maintained at the Transfer Agent has an Investment Account and will
receive semi-annual statements from the Transfer Agent showing any
reinvestments or dividends and capital gains distributions and any
other activity in the account since the preceding statement.
Shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends
and capital gains distributions. A shareholder may make additions
to his Investment Account at any time by mailing a check directly
to the Transfer Agent. Shareholders may also maintain their
accounts through Merrill Lynch. Upon the transfer of shares out of
a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering
transferring their Class A shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if
the firm to which the Class A shares are to be transferred will not
take delivery of shares of the Fund, a shareholder either must
redeem the Class A shares so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must
continue to maintain an Investment Account at the Transfer Agent
for those Class A shares. Shareholders interested in transferring
their Class B shares from Merrill Lynch and who do not wish to have
an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the
benefit of the shareholder. If the new brokerage firm is willing
to accommodate the shareholder in this manner, the shareholder must
request that he be issued certificates for his shares and then must
turn the certificates over to the new firm for re-registration as
described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an
individual retirement account from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if
the firm to which the retirement account is to be transferred will
not take delivery of shares of the Fund, a shareholder must either
redeem the shares (paying any applicable contingent deferred sales
charge) so that the cash proceeds can be transferred to the account
at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
Exchange Privilege. U.S. Class A and Class B shareholders of
the Fund each have an exchange privilege with certain other mutual
funds sponsored by Merrill Lynch. There is currently no limitation
on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Securities and Exchange
Commission. Class A shareholders of the Fund may exchange their
shares ("outstanding Class A shares") for Class A shares of another
fund ("new Class A shares") on the basis of relative net asset
value per Class A share, plus an amount equal to the difference, if
any, between the sales charge previously paid on the outstanding
Class A shares and the sales charge payable at the time of the
exchange on the new Class A shares. The Fund's exchange privilege
is modified with respect to purchases of Class A shares under the
Merrill Lynch Mutual Fund Adviser program. First, the initial
allocation of assets is made under the program. Then, any
subsequent exchange under the program of Class A shares of a fund
for Class A shares of the Fund will be made solely on the basis of
the relative net asset values of the shares being exchanged.
Therefore, there will not be a charge for any difference between
the sales charge previously paid on the shares of the other fund
and the sales charge payable on the shares of the Fund being
acquired in the exchange under this program.
Class B shareholders of the Fund may exchange their shares
("outstanding Class B shares") for Class B shares of another fund
("new Class B shares") on the basis of relative net asset value per
share without the payment of any contingent deferred sales charge
that might otherwise be due on redemption of the outstanding Class
B shares. Class B shareholders of the Fund exercising the exchange
privilege will continue to be subject to the Fund's contingent
deferred sales charge schedule if such schedule is higher than the
27
<PAGE>
deferred sales charge schedule relating to the new Class B shares.
In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's contingent
deferred sales charge schedule if such schedule is higher than the
deferred sales charge schedule relating to the Class B shares of
the fund from which the exchange has been made. For purposes of
computing the contingent deferred sales charge that may be payable
upon a disposition of the new Class B shares, the holding period
for the outstanding Class B shares is "tacked" to the holding
period of the new Class B shares. Class A and Class B shareholders
of the Fund may also exchange their shares for shares of certain
money market funds, but in the case of an exchange from Class B
shares, the period of time that shares are held in a money market
fund will not count toward satisfaction of the holding period
requirement for purposes of reducing the contingent deferred sales
charge. Exercise of the exchange privilege is treated as a sale
for Federal income tax purposes. For further information, see
"Shareholder Services - Exchange Privilege" in the Statement of
Additional Information.
Automatic Reinvestment of Dividends and Capital Gains
Distributions. All dividends and capital gains distributions are
reinvested automatically in full and fractional shares of the Fund
at the net asset value per share next determined on the ex-dividend
date of such dividend or distribution. A shareholder may at any
time, by written notification to Merrill Lynch if the shareholder's
account is maintained with Merrill Lynch or by written notification
or telephone call (1-800-MER-FUND) to the Transfer Agent if the
shareholder's account is maintained with the Transfer Agent, elect
to have subsequent dividends or capital gains distributions, or
both, paid in cash, rather than reinvested, in which event payment
will be mailed on or about the payment date. No contingent
deferred sales charge will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or
capital gains distributions.
Systematic Withdrawal and Automatic Investment Plans. A Class
A shareholder may elect to receive systematic withdrawal payments
from his Investment Account in the form of payments by check or
through automatic payment by direct deposit to his bank account on
either a monthly or quarterly basis. A Class A shareholder whose
shares are held within a CMA(R), CBA(R) or Retirement Account may elect
to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the Systematic Redemption
Program, subject to certain conditions. Regular additions of Class
A shares may be made to an investor's Investment Account by
prearranged charges of $50 or more to his regular bank account.
Investors who maintain CMA accounts may arrange to have periodic
investments made in the Fund in their CMA accounts or in certain
related accounts in amounts of $250 or more through the CMA
Automatic Investment Program. The Automatic Investment Program is
not available to shareholders whose shares are held in a brokerage
account with Merrill Lynch other than a CMA(R) account.
PERFORMANCE DATA
From time to time the Fund may include its average annual
total return for various specified time periods in advertisements
or information furnished to present or prospective shareholders.
Average annual total return is computed separately for Class A and
Class B shares in accordance with a formula specified by the
Securities and Exchange Commission.
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<PAGE>
Average annual total return quotations for the specified
periods will be computed by finding the average annual compounded
rates of return (based on net investment income and any capital
gains or losses on portfolio investments over such periods) that
would equate the initial amount invested to the redeemable value of
such investment at the end of each period. Average annual total
return will be computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and
nonrecurring expenses, including the maximum sales charge in the
case of Class A shares and the contingent deferred sales charge
that would be applicable to a complete redemption of the investment
at the end of the specified period in the case of Class B shares.
Dividends paid by the Fund with respect to Class A and Class B
shares, to the extent any dividends are paid, will be calculated in
the same manner at the same time on the same day and will be in the
same amount, except that account maintenance and distribution fees
and any incremental transfer agency costs relating to Class B
shares will be borne exclusively by that Class. The Fund will
include performance data for both Class A and Class B shares of the
Fund in any advertisement or information including performance data
of the Fund.
The Fund also may quote total return and aggregate total
return performance data for various specified time periods. Such
data will be calculated substantially as described above, except
that (1) the rates of return calculated will not be average annual
rates, but rather, actual annual, annualized or aggregate rates of
return, and (2) the maximum applicable sales charges will not be
included with respect to annualized rates of return calculations.
Aside from the impact on the performance data calculations of
including or excluding the maximum applicable sales charges, actual
annual or annualized total return data generally will be lower than
average annual total return data since the average annual rates of
return reflect compounding; aggregate total return data generally
will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods
of time. In advertisements directed to investors whose purchases
are subject to reduced sales charges in the case of Class A shares
or waiver of the contingent deferred sales charge in the case of
Class B shares (such as investors in certain retirement plans),
performance data may take into account the reduced, and not the
maximum, sales charge or may not take into account the contingent
deferred sales charge and therefore may reflect greater total
return since, due to the reduced sales charges or waiver of the
contingent deferred sales charge, a lower amount of expenses may be
deducted. See "Purchase of Shares." The Fund's total return may
be expressed either as a percentage or as a dollar amount in order
to illustrate the effect of such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified
period.
Total return figures are based on the Fund's historical
performance and are not intended to indicate future performance.
The Fund's total return will vary depending on market conditions,
the securities comprising the Fund's portfolio, the Fund's
operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an
investment in the Fund will fluctuate, and an investor's shares,
when redeemed, may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to the
Standard & Poor's 500 Composite Stock Price Index, the Dow Jones
Industrial Average, or performance data published by Lipper
Analytical Services, Inc., Morningstar Publications, Inc., Money
Magazine, U.S. News & World Report, Business Week, CDA Investment
Technology, Inc., Forbes Magazine, Fortune Magazine or other
industry publications. In addition, from time to time the Fund may
include the Fund's risk-adjusted performance ratings assigned by
Morningstar Publications, Inc. in advertising or supplemental sales
literature. As with other performance data, performance
comparisons should not be considered representative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
Dividends and Distributions
It is the Fund's intention to distribute all of its net
investment income, if any. Dividends from such net investment
income are paid at least [annually] [monthly]. All net realized
long- or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. The per share dividends and
distributions on Class B shares will be lower than the per share
dividends and distributions on Class A shares as a result of the
account maintenance, distribution and higher transfer agency fees
applicable to the Class B shares. See "Additional Information -
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<PAGE>
Determination of Net Asset Value." Dividends and distributions may
be reinvested automatically in shares of the Fund, at net asset
value without a sales charge. Shareholders may elect in writing to
receive any such dividends or distributions, or both, in cash.
Dividends and distributions are taxable to shareholders as
described below whether they are reinvested in shares of the Fund
or received in cash. From time to time, the Fund may declare a
special distribution at or about the end of the calendar year in
order to comply with a Federal income tax requirement that certain
percentages of its ordinary income and capital gains be distributed
during the calendar year.
Certain gains or losses attributable to foreign currency
related gains or losses from certain of the Fund's investments may
increase or decrease the amount of the Fund's income available for
distribution to shareholders. If such losses exceed other income
during a taxable year, (a) the Fund would not be able to make any
ordinary dividend distributions, and (b) distributions made before
the losses were realized would be recharacterized as returns of
capital to shareholders, rather than as ordinary dividends,
reducing each shareholder's tax basis in his Fund shares for
Federal income tax purposes. For a detailed discussion of the
Federal tax considerations relevant to foreign currency
transactions, see "Additional Information - Taxes." If in any
fiscal year the Fund has net income from certain foreign currency
transactions, such income will be distributed annually.
All net realized long- or short-term capital gains, if any,
are declared and distributed to the Fund's shareholders annually
after the close of the Fund's fiscal year. Capital gains
distributions will be automatically reinvested in shares unless the
shareholder elects to receive such distributions in cash.
See "Shareholder Services - Automatic Reinvestment of
Dividends and Capital Gains Distributions" for information as to
how to elect either dividend reinvestment or cash payments.
Dividends and distributions are taxable to shareholders as
described below whether they are reinvested in shares of any
portfolio or received in cash.
Determination of Net Asset Value
Net asset value per share is determined once daily as of
4:15 p.m., New York time, on each day during which the New York
Stock Exchange is open for trading. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as
quoted by one or more banks or dealers on the day of valuation.
The net asset value is computed by dividing the market value of the
securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received)
minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time. Expenses, including the
fees payable to the Manager and the account maintenance and
distribution fees payable to the Distributor, are accrued daily.
The per share net asset value of the Class B shares generally will
be lower than the per share net asset value of the Class A shares
reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with
respect to the Class B shares. It is expected, however, that the
per share net asset value of the two classes will tend to converge
immediately after the payment of dividends or distributions which
will differ by approximately the amount of the expense accrual
differential between the classes.
Portfolio securities which are traded on stock exchanges
are valued at the last sale price as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-
the-counter market are valued at the last available bid price
or yield equivalents obtained from one or more dealers in the
over-the-counter market prior to the time of valuation. Portfolio
securities which are traded both in the over-the-counter market
and on a stock exchange are valued according to the broadest and
most representative market. Other investments, including futures
contracts and related options, are stated at market value. Securities
and assets for which market quotations are not readily available are
valued at fair value as determined in good faith under the direction
of the Board of Directors of the Fund.
30
<PAGE>
Taxes
The Fund intends to continue to qualify for the special tax
treatment afforded regulated investment companies ("RICs") under
the Internal Revenue Code of 1986, as amended (the "Code"). If 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 and Class B shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and
distributions of the Fund's net realized short-term capital gains
(together referred to hereafter as "ordinary income dividends") are
taxable to shareholders as ordinary income. Distributions made
from the Fund's net realized long-term capital gains (including
long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term
capital gains, regardless of the length of time the shareholder has
owned Fund shares. Distributions in excess of the Fund's earnings
and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are
held as a capital asset).
Dividends are taxable to shareholders even though they are
reinvested in additional shares of the Fund. Not later than 60
days after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amounts of any
ordinary income dividends or capital gain dividends. A portion of
the Fund's ordinary income dividends may be eligible for the
dividends received deduction allowed to corporations under the
Code, if certain requirements are met. If the Fund pays a dividend
in January that was declared in the previous October, November or
December to shareholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who
are nonresident aliens or foreign entities will be subject to a 30%
U.S. withholding tax under existing provisions of the Code
applicable to foreign individuals and entities unless a reduced
rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the U.S. may reduce or
eliminate such taxes. Shareholders may be able to claim U.S.
foreign tax credits with respect to such taxes, subject to certain
conditions and limitations contained in the Code. For example,
certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. If more than
50% in value of the Fund's total assets at the close of its taxable
year consists of securities of foreign corporations, the Fund will
be eligible, and intends, to file an election with the Internal
Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding
taxes in their U.S. income tax returns as gross income, treat such
proportionate shares as taxes paid by them, and deduct such
proportionate shares in computing their taxable incomes or,
alternatively, use them as foreign tax credits against their U.S.
income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions.
A shareholder that is a nonresident alien individual or a foreign
corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but
may not be able to claim a credit or deduction against such U.S.
tax for the foreign taxes treated as having been paid by such
shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be
subject to a 31% withholding tax on certain ordinary income
dividends and capital gain dividends and on redemption payments
("backup withholding"). Generally, shareholders subject to backup
withholding will be those for whom no certified taxpayer
identification number is on file with the Fund or who, to the
Fund's knowledge, have furnished an incorrect number. When
establishing an account, an investor must certify under penalty of
perjury that such number is correct and that such investor is not
otherwise subject to backup withholding.
31
<PAGE>
Under Code Section 988, foreign currency gains or losses from
certain debt instruments, from certain forward contracts, from
futures contracts that are not "regulated futures contracts" and
from unlisted options will generally be treated as ordinary income
or loss. Such Code Section 988 gains or losses will generally
increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as
ordinary income. Additionally, if Code Section 988 losses exceed
other investment company taxable income during a taxable year, the
Fund would not be able to make any ordinary dividend distributions,
and any distributions made before the losses were realized but in
the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares.
If a Class A shareholder exercises the exchange privilege
within 90 days of acquiring the shares, then the loss the
shareholder can recognize on the exchange will be reduced (or the
gain increased) to the extent the sales charge paid to the Fund
reduces any sales charge the shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount
paid for the new Class A shares.
The foregoing is a general and abbreviated summary of the
applicable provisions of the Code and Treasury regulations
presently in effect. For the complete provisions, reference should
be made to the pertinent Code sections and the Treasury regulations
promulgated thereunder. The Code and the Treasury regulations are
subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income dividends and capital gain dividends may also
be subject to state and local taxes.
Certain states exempt from state income taxation dividends
paid by RICs which are derived from interest on U.S. Government
obligations. State law varies as to whether dividend income
attributable to U.S. Government obligations is exempt from state
income tax.
Shareholders are urged to consult their tax advisers regarding
specific questions as to Federal, foreign, state or local taxes.
Foreign investors should consider applicable foreign taxes in their
evaluation of an investment in the Fund.
Organization of the Fund
The Fund was incorporated under Maryland law on June 6, 1994.
It has an authorized capital of 200,000,000 shares of Common Stock,
par value $0.10 per share, divided into two classes, designated
Class A Common Stock and Class B Common Stock, each of which
consists of 100,000,000 shares. Both Class A Common Stock and
Class B Common Stock represent an interest in the same assets of
the Fund and are identical in all respects except that the Class B
shares bear certain expenses related to the account maintenance and
distribution of such shares and have exclusive voting rights with
respect to matters relating to such account maintenance and
distribution expenditures. See "Purchase of Shares." The Fund has
received an order from the Securities and Exchange Commission
permitting the issuance and sale of two classes of Common Stock.
The Board of Directors of the Fund may classify and reclassify the
shares of the Fund into additional classes of Common Stock at a
future date. The creation of additional classes would require an
additional order from the Securities and Exchange Commission.
There is no assurance that such an additional order would be
issued.
Shareholders are entitled to one vote for each share held and
fractional votes for fractional shares held and will vote on the
election of Directors and any other matters submitted to a
shareholder vote. The Fund does not intend to hold meetings of
shareholders in any year in which the Investment Company Act does
not require shareholders to act on 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 auditors. Also, the by-
laws of the Fund require that a special meeting of stockholders be
32
<PAGE>
held upon the written request of at least 10% of the outstanding
shares of the Fund entitled to vote at such meeting. Voting rights
for Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive or conversion rights. Each
share of Class A Common Stock and Class B Common Stock is entitled
to participate equally in dividends and distributions declared by
the Fund and in the net assets of the Fund on liquidation or
dissolution after satisfaction of outstanding liabilities, except
as noted above, the Class B shares bear certain expenses related to
the distribution of such shares.
Shareholder Reports
Only one copy of each shareholder report and certain
shareholder communications will be mailed to each identified
shareholder regardless of the number of accounts such shareholder
has. If a shareholder wishes to receive separate copies of each
report and communication for each of the shareholder's related
accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: Document Evaluation Unit
P.O. Box 45290
Jacksonville, FL 32232-5290
The written notification should include the shareholder's name,
address, tax identification number and Merrill Lynch, Pierce,
Fenner & Smith Incorporated and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill
Lynch financial consultant or Financial Data Services, Inc. at
1-800-637-3863.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the
address or telephone number set forth on the cover page of this
Prospectus.
33
<PAGE>
MERRILL LYNCH ASSET ALLOCATION INCOME PORTFOLIO, INC.-AUTHORIZATION FORM
Note: This form may not be used for purchases through the Merrill Lynch
Blueprint(SM) Program. You may request an application for purchases through
Merrill Lynch Blueprint(SM) Program by calling toll free (800) 637-2434.
1. Share Purchase Application
I, being of legal age, wish to purchase ......... Class A shares
or .................. Class B shares (choose one) of Merrill Lynch Asset
Allocation Income Portfolio, Inc. and establish an Investment Account
as described in the Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $...... payable to Financial Data
Services, Inc., as an initial investment (minimum $1,000) (subsequent
investments $50 or more). I understand that this purchase will be
executed at the applicable offering price next to be determined
after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual
funds that would qualify for the right of accumulation as
outlined in the Statement of Additional Information:
<TABLE>
<CAPTION>
1. . . . . . . . . . . . . . . . . . . . . . . . . 4. . . . . . . . . . . . . . . . .
2. . . . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . . . .
3. . . . . . . . . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . . .
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with
respect to dividends and distributions are elected:
<S> <C> <C> <C> <C>
Distribution Elect [ ] reinvest dividends Elect [ ] reinvest dividends
Options One [ ] pay dividends in cash One [ ] pay dividends in cash
If no election is made, dividends and capital gains will be reinvested automatically at net asset value without a sales charge.
--------------------------------------------
(PLEASE PRINT)
Name . . . . . . . . . . . . . . . . . . . . . . . . . . [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
First Name Initial Last Name Social Security No.
Name of Co-Owner (if any). . . . . . . . . . . . . . . . or Taxpayer Identification No.
First Name Initial Last Name
Address . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , 19 . . .
(Zip Code) Date
Occupation. . . . . . . . . . . . . . . . . . . . . . . Name and Address of Employer . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Under penalty of perjury, I certify (1) that the number set forth above is my correct Social Security
No. or Taxpayer Identification No. and (2) that I am not subject to backup withholding (as discussed in the
Prospectus under "Additional Information - Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the Internal Revenue Service ("IRS")
has notified me that I am no longer subject thereto.
Instruction: You must strike out the language in (2) above if you have been notified that you are subject to
backup withholding due to under reporting and if you have not received a notice from the IRS that backup
withholding has been terminated. The undersigned authorizes the furnishing of this certification to other
Merrill Lynch sponsored mutual funds.
Signature of Owner . . . . . . . . . . . . . . Signature of Co-Owner (if any) . . . . . . . . . . . . . . . .
In the case of co-owners, a joint tenancy with right of survivorship will be presumed unless otherwise specified.
- -----------------------------------------------------------------------------------------------------------------
2. Letter of Intention - Class A Shares Only (See terms and conditions in the Statement of Additional Information)
. . . . . . . . . . ., 19 . . . . .
Date of Initial Purchase
Gentlemen:
Although I am not obligated to do so, I intend to purchase shares of Merrill Lynch Asset Allocation
Income Portfolio, Inc. or any other investment company with an initial sales charge or deferred sales charge
for which Merrill Lynch Funds Distributor, Inc. acts as distributor over the next 13 month period which will
equal or exceed:
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000
Each purchase will be made at the then reduced offering price applicable to the amount checked above,
as described in the Merrill Lynch Asset Allocation Income Portfolio, Inc. prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby irrevocably constitute and
appoint Merrill Lynch Funds Distributor, Inc. my attorney, with full power of substitution, to surrender for
redemption any or all shares of Merrill Lynch Asset Allocation Income Portfolio, Inc. held as security.
By . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signature of Owner Signature of Co-Owner (If registered in joint names,
both must sign)
In making purchases under this letter, the following are the related accounts on which reduced offering
prices are to apply:
(1) Name. . . . . . . . . . . . . . . . . . . . . (2) Name. . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
MERRILL LYNCH ASSET ALLOCATION INCOME PORTFOLIO, INC.- AUTHORIZATION FORM
- ------------------------------------------------------------------------------------------------
3. Systematic Withdrawal Plan - Class A Shares Only (See terms and conditions in the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for quarterly, of shares in Merrill Lynch Asset Allocation
Income Portfolio, Inc., at cost or current offering price. Begin systematic withdrawal on ....., 19... Withdrawals to
be made either (check one) [ ] Monthly [ ] Quarterly* [Date]
*Quarterly withdrawals are made on the 24th day of March, June, September and December.
Specify withdrawal amount (check one): [ ] $.............. or [ ] .....% of the current value of Class A shares in the
account.
Specify withdrawal method: [ ] check or [ ] direct deposit to bank account (check one and complete part (a) or (b)
below:
<C> <C>
(a) I hereby authorize Payment by Check (b) I hereby authorize Payment by Direct Deposit to Bank Account and
(if necessary) debit entries and adjustments for any credit entries made
in error to my account.
Draw checks payable Specify type of account (check one): [ ] checking [ ] savings
(check one) I agree that this authorization will remain in effect until I provide
written notification to Financial Data Services, Inc. amending or
[ ] as indicated in Item 1. terminating this service.
[ ] to the order of . . . . . . . Name on your Account. . . . . . . . . . . . . . . . . . . . . . . . .
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mail to (check one) Bank No. . . . . . . . . . . . . . . .Account No. . . . . . . . . . .
[ ] the address indicated in Item 1. Bank Address . . . . . . . . . . . . . . . . . . . . . . . . . . . .
[ ] Name (Please Print) . . . . . . Signature of Depositor . . . . . . . . . . . . . . Date. . . . . . .
Signature of Depositor (if joint account) . . . . . . . . . . . . . .
Note: If Automatic Direct Deposit is elected, your blank, unsigned check
Address . . . . . . . . . . . . . . . . . . . marked "VOID" or a deposit slip from your savings account should
accompany this Application.
Signature of Owner. . . . . . . . . . . . . .
Signature of Co-Owner (if any). . . . . . . .
- -------------------------------------------------------------------------------------------------------------------------
4. Application for Automatic Investment Plan
I hereby request that Financial Data Services, Inc. draw a check or an automated clearing house ("ACH") debit on
my checking account as described below each month to purchase ......... Class A shares or ......... Class B shares (choose
one) of Merrill Lynch Asset Allocation Income Portfolio, Inc., subject to the terms set forth below.
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS OR ACH
You are hereby authorized to draw a check or DEBITS DRAWN BY FINANCIAL DATA SERVICES, INC.
an ACH debit each month on my bank account To . . . . . . . . . . . . . . . . . . . . . Bank
for investment in Merrill Lynch Asset (Investor's Bank)
Allocation Income Portfolio, Inc., as Bank Address . . . . . . . . . . . . . . . . . . . . . . .
indicated below: City . . . . . . . . . . . State . . . . Zip Code . . . .
Amount of each check or ACH debit $ . . . As a convenience to me, I hereby request and authorize you to pay and
Account No. . . . . . . . . . . . . . . . charge to my account checks or ACH debits drawn on my account by and
Please date and invest checks or draw ACH payable to Financial Data Services, Inc., Transfer Agency Mutual Fund
debits on the 20th of each month beginning Operations, Jacksonville, Florida 32232-5289. I agree that your rights in
. . . . . . . . . . . . . . . . . . . . . respect to each such check or debit shall be the same as if it were a check
(Month) drawn on you and signed personally by me. This authority is to remain in
or as soon thereafter as possible. effect until revoked personally by me in writing. Until you receive such
I agree that you are preparing these checks notice, you shall be fully protected in honoring any such check or debit.
or drawing these debits voluntarily at my I further agree that if any such check or debit be dishonored, whether with
request and that you shall not be liable for or without cause and whether intentionally or inadvertently, you
any loss arising from any delay in preparing shall be under no liability.
or failure to prepare any such check or debit.
If I change banks or desire to terminate or . . . . . . . . . . . . . . . . . . . . . . . . . .
suspend this program, I agree to notify you Date Signature of Depositor
promptly in writing. I further agree that
if a check or debit is not honored upon
presentation, Financial Data Services, Inc.
is authorized to discontinue immediately
the Automatic Investment Plan and to
liquidate sufficient shares held in my account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
to offset the purchase made with the returned Bank Account Number Signature of Depositor
check or dishonored debit. (If joint account, both must sign)
. . . . . . . . . . . . . . . . . . . . . .
Date Signature of Depositor
. . . . . . . . . . . . . Note: If Automatic Investment Plan is elected, your blank, unsigned check
Signature of Depositor marked "VOID" should accompany this Application.
(If joint account, both must sign)
- ---------------------------------------------------------------------------------------------------------------------------
<PAGE>
5. For Dealer Only We hereby authorize Merrill Lynch Funds Distributor, Inc. to
Branch Office, Address, Stamp act as our agent in connection with transactions under this
[ ] authorization form and agree to notify the Distributor of
any purchases made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the Shareholder's Signature.
[ ] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dealer Name and Address
This form when completed should be mailed to:
Merrill Lynch Asset Allocation Income
Portfolio, Inc.
c/o Financial Data Services, Inc. By . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Agency Mutual Fund Operations Authorized Signature of Dealer
P.O. Box 45289
Jacksonville, Florida 32232-5289 [ ] [ ] [ ] [ ] [ ] [ ] [ ] . . . . . . .
Branch Code F/C No. F/C Last Name
[ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Dealer's Customer A/C No.
</TABLE>
35
<PAGE>
Manager
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
Transfer Agent
Financial Data Services, Inc.
Administrative Offices:
<PAGE>
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Independent Auditors
Deloitte & Touche
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Rogers & Wells
200 Park Avenue
New York, New York 10166
<PAGE>
No person has been PROSPECTUS
authorized to give any
information or to make any
representations, other than
those contained in this
Prospectus, in connection with
the offer contained in this
Prospectus, and, if given or [LOGO]
made, such other information or
representations must not be
relied upon as having been
authorized by the Fund, the
Manager or the Distributor.
This Prospectus does not
constitute an offering in any
state in which such offering
may not lawfully be made.
_____
TABLE OF CONTENTS ----------------------------------
Page
MERRILL LYNCH
Fee Table. . . . . . . . . 3 ASSET ALLOCATION
Alternative Sales INCOME PORTFOLIO, INC.
Arrangements. . . . . . 4
Special Considerations . . 6
Investment Objective and
Policies . . . . . . . 8
Debt Securities . . . . 9
<PAGE>
Equity Securities . . . 10
Money Market Securities 11
Portfolio Strategies
Involving Options and
Futures. . . . . . . 11
Other Investment Policies
and Practices. . . . . 15
Management of the Fund . . 18
Board of Directors. . . 18
Management and Advisory
Arrangements . . . . 18
Transfer Agency Services 19
Purchase of Shares . . . . 19
Subscription Offering . 20
Continuous Offering . . 21
Alternative Sales
Arrangements . . . . . 22
Initial Sales Charge
Alternative - Class A
Shares . . . . . . . 22
Reduced Initial Sales
Charge . . . . . . . . 23
Deferred Sales Charge
Alternative - Class B
Shares . . . . . . . . 24
Contingent Deferred Sales
Charge . . . . . . . . 24
Distribution Plan . . . 25
Limitations on the
Payment of Deferred
Sales Charge . . . . 26
Redemption of Shares . . . 27
Redemption. . . . . . . 27
Repurchase. . . . . . . 27
Reinstatement Privilege-
Class A Shares . . . 28
Shareholder Services . . . 28
Performance Data . . . . . 29
Additional Information . . 30
Dividends and July ___, 1994
Distributions. . . . . 30
Determination of Net Distributor:
Asset Value . . . . . . 31 Merrill Lynch
Taxes . . . . . . . . . 32 Funds Distributor, Inc.
Organization of the Fund 33
Shareholder Reports . . 34 This prospectus should be
Shareholder Inquiries . 34 retained for future reference.
Authorization Form . . . . 35
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH ASSET ALLOCATION INCOME PORTFOLIO, INC.
Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609)
282-2800
<PAGE>
-------------------
Merrill Lynch Asset Allocation Income Portfolio, Inc. (the
"Fund") is a non-diversified mutual fund seeking [a high level
of current income] [high total investment return], consistent
with prudent risk, through a fully managed investment policy
utilizing United States and foreign debt, equity and money
market securities, the combination of which will be varied from
time to time both with respect to types of securities and
markets in response to changing market and economic trends.
Total investment return is the aggregate of capital value
changes and income. Under normal conditions, at least 65%, and
as much as all, of the Fund's total assets will be invested in
debt securities, and no more than 25% of the Fund's total
assets will be invested in foreign securities. There can be no
assurance that the Fund's investment objective will be
achieved. The Fund may employ a variety of instruments and
techniques to enhance income and to hedge against market and
currency risk.
The Fund offers two classes of shares which may be
purchased during the subscription offering at $10.00 per share
and during the continuous offering at a price equal to the next
determined net asset value per share, plus, in both cases, a
sales charge which, at the election of the purchaser, may be
imposed (i) at the time of purchase (the "Class A shares") or
(ii) on a deferred basis (the "Class B shares"). These
alternatives permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of
the purchase, the length of time the investor expects to hold
the shares and other circumstances. Investors should
understand that the purpose and function of the deferred sales
charges and ongoing account maintenance fee with respect to the
Class B shares are the same as those of the initial sales
charge and ongoing account maintenance fee with respect to the
Class A shares. Each Class A and Class B share represents
identical interests in the investment portfolio of the Fund and
has the same rights, except that Class B shares bear the
expenses of the account maintenance and distribution fees and
certain other costs resulting from the deferred sales charge
arrangement and have exclusive voting rights with respect to
the account maintenance and distribution fees. The two classes
also have different exchange privileges.
This Statement of Additional Information of the Fund is
not a prospectus and should be read in conjunction with the
prospectus of the Fund, dated July __, 1994 (the "Prospectus"),
which has been filed with the Securities and Exchange
Commission and can be obtained, without charge, by calling or
by writing the Fund at the above telephone number or address.
This Statement of Additional Information has been incorporated
by reference into the Prospectus.
---------------------
Merrill Lynch Asset Management-Manager
<PAGE>
Merrill Lynch Funds Distributor, Inc.-Distributor
---------------------
The date of this Statement of Additional Information is July
__, 1994.
Information contained herein is subject to completion or
amendment. A registration statement relating to these
securities has been filed with the Securities and Exchange
Commission. These securities may not be sold nor may offers to
buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any
such State.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high [level
of current income] [total investment return], consistent with
prudent risk, through a fully managed investment policy
utilizing United States and foreign debt, equity and money
market securities the combination of which will be varied from
time to time both with respect to types of securities and
markets in response to changing market and economic trends.
[Total investment return is the aggregate of capital value
changes and income.] 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. Under normal
conditions, at least 65%, and as much as all, of the Fund's
total assets will be invested in debt securities, and no more
than 25% of the Fund's total assets will be invested in foreign
securities. Reference is made to "Investment Objective and
Policies" in the Prospectus for a discussion of the investment
objective and policies of the Fund.
Although up to 100% of the Fund's total assets may be
invested in debt securities, the Manager anticipates that the
Fund's portfolio generally will include both equity and debt
securities.
The Fund will invest the portion of its assets allocated
to debt obligations in the securities of governmental issuers
and in corporate debt securities, including convertible debt
securities, rated A or better by Standard & Poor's Corporation
("S&P") or Moody's Investors Service, Inc. ("Moody's") or
which, in the Manager's judgment, possess similar credit
characteristics. See Appendix. The Manager considers the
ratings assigned by S&P and Moody's as one of several factors
in its independent credit analysis of issuers. [If a debt
<PAGE>
security in the Fund's portfolio is downgraded below investment
grade, the Manager will consider factors such as price, credit
risk, market conditions and interest rates and will sell
security only if, in the Manager's judgment, it is advantageous
to do so.]
While it is the policy of the Fund generally not to engage
in trading for short-term gains, Merrill Lynch Asset
Management, L.P., doing business as Merrill Lynch Asset
Management (the "Manager"), will effect portfolio transactions
without regard to holding period if, in its judgment, such
transactions are advisable in light of a change in
circumstances of a particular company or within a particular
industry or due to general market, economic or financial
conditions. Accordingly, while the Fund anticipates that its
annual turnover rate should not exceed 200% 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. The Fund is subject to the Federal income tax
requirement that less than 30% of the Fund's gross income must
be derived from gains from the sale or other disposition of
securities held for less than three months.
The U.S. Government has from time to time in the past
imposed restrictions, through taxation and otherwise, on
foreign investments by U.S. investors such as the Fund. If
such restrictions should be reinstituted, it might become
necessary for the Fund to invest all or substantially all of
its assets in U.S. securities. In such event, the Fund would
review its investment objective and investment policies to
determine whether changes are appropriate. Any changes in the
investment objective or fundamental policies set forth under
"Investment Restrictions" below would require the approval of
the holders of a majority of the Fund's outstanding voting securities.
The Fund's ability and decisions to purchase or sell
portfolio securities may be affected by laws or regulations
relating to the convertibility and repatriation of assets.
Because the shares of the Fund are redeemable on a daily basis
on each day the Fund determines its net asset value in U.S.
dollars, the Fund intends to manage its portfolio so as to give
reasonable assurance that it will be able to obtain U.S.
dollars to the extent necessary to meet anticipated
redemptions. See "Redemption of Shares." Under present
conditions, the Fund does not believe that these considerations
will have any significant effect on its portfolio strategy,
although there can be no assurance in this regard.
1
<PAGE>
Precious and Industrial Metal-Related Securities
<PAGE>
The Fund may invest in the equity securities of companies
that explore for,extract, process or deal in precious or
industrial metals, i.e., gold, silver, platinum, iron, copper
and aluminum, and in asset-based securities indexed to the
value of such metals. Such securities may be purchased when
they are believed to be attractively priced in relation to the
value of a company's precious or industrial metal-related
assets or when the value of precious or industrial metals are
expected to benefit from inflationary pressure or other
economic, political or financial uncertainty or instability.
The prices of precious and industrial metals and of the
securities of precious and industrial metal-related companies
historically have been subject to high volatility. In
addition, the earnings of precious and industrial metal-related
companies may be adversely affected by volatile metals prices
which may adversely affect the financial condition of such
companies.
The major producers of gold include the Republic of South
Africa, the former republics of the Soviet Union, Canada, the
United States, Brazil and Australia. Sales of gold by the
former republics of the Soviet Union are largely unpredictable
and often relate to political and economic considerations
rather than to market forces. Economic, social and political
developments within South Africa may significantly affect South
African gold production.
The Fund may invest in debt securities, preferred stock or
convertible securities, the principal amount, redemption terms
or conversion terms of which are related to the market price of
some metals such as gold bullion. These securities are
referred to as "asset-based securities." [The Fund will
purchase only asset-based securities which are rated, or are
issued by issuers that have outstanding debt obligations rated,
A or better by S&P or Moody's or commercial paper rated A-1 by
S&P or Prime-1 by Moody's or of issuers that the Manager has
determined to be of similar creditworthiness.] If the asset-
based security is backed by a bank letter of credit or other
similar facility, the Manager may take such backing into
account in determining the creditworthiness of the issuer.
While the market prices for an asset-based security and the
related natural resource asset generally are expected to move
in the same direction, there may not be perfect correlation in
the two price movements. Asset-based securities may not be
secured by a security interest in or claim on the underlying
natural resource asset. The asset-based securities in which
the Fund may invest may bear interest or pay preferred
dividends at below market (or even at relatively nominal)
rates. As an example, assume gold is selling at a market price
of $300 per ounce and an issuer sells a $1,000 face amount gold
related note with a seven year maturity, payable at maturity at
the greater of either $1,000 in cash or in the then market
price of three ounces of gold. If at maturity, the market
price of gold is $400 per ounce, the amount payable on the note
would be $1,200. Certain asset-based securities may be payable
at maturity in cash at the stated principal amount or, at the
<PAGE>
option of the holder, directly in a stated amount of the asset
to which it is related. In such instance, because the Fund
presently does not intend to invest directly in natural
resource assets, the Fund would sell the asset-based security
in the secondary market, to the extent one exists, prior to
maturity if the value of the stated amount of the asset exceeds
the stated principal amount and thereby realize the
appreciation in the underlying asset.
Real Estate-Related Securities
The real estate-related securities which will be
emphasized by the Fund are equity securities of real estate
investment trusts, which own income-producing properties, and
mortgage real estate investment trusts which make various types
of mortgage loans often combined with equity features. The
securities of such trusts generally pay above average dividends
and may offer the potential for capital appreciation. Such
securities will be subject to the risks customarily associated
with the real estate industry, including declines in the value
of the real estate investments of the trusts. Real estate
values are affected by numerous factors including (i)
governmental regulations (such as zoning and environmental
laws) and changes in tax laws, (ii) operating costs, (iii) the
location and the attractiveness of the properties, (iv) changes
in economic conditions (such as fluctuations in interest and
inflation rates and business conditions) and (v) supply and
demand for improved real estate. Such trusts also are
dependent on management skill and may not be diversified in
their investments.
2
<PAGE>
Portfolio Strategies Involving Options and Futures
Reference is made to the discussion under the caption
"Investment Objective and Policies - Portfolio Strategies
Involving Options and Futures" in the Prospectus for
information with respect to various portfolio strategies
involving options and futures. The Fund may seek to increase
its return through the use of options on portfolio securities
and to hedge its portfolio against movements in the equity,
debt and currency markets. The Fund has authority to write
(i.e., sell) covered put and call options on its portfolio
securities, purchase put and call options on securities and
engage in transactions in stock index options, stock index
futures and stock futures and financial futures, and related
options on such futures. The Fund may also deal in forward
foreign transactions and foreign currency options and futures,
and related options on such futures. Each of such portfolio
strategies is described in the Prospectus. Although certain
risks are involved in options and futures transactions (as
discussed in the Prospectus and below), the Manager believes
that, because the Fund will (i) write only covered call options
<PAGE>
on portfolio securities and (ii) engage in other options and
futures transactions only for hedging purposes, the options and
futures portfolio strategies of the Fund will not subject the
Fund to the risks frequently associated with the speculative
use of options and futures transactions. While the Fund's use
of hedging strategies is intended to reduce the volatility of
the net asset value of its shares, the net asset value of the
Fund's shares will fluctuate. There can be no assurance that
the Fund's hedging transactions will be effective. The
following is further information relating to portfolio
strategies involving options and futures that the Fund may
utilize.
Writing Covered Options. The Fund is authorized to write
(i.e., sell) covered call options on the securities in which it
may invest and to enter into closing purchase transactions with
respect to certain of such options. A covered call option is
an option where the Fund, in return for a premium, gives
another party a right to buy specified securities owned by the
Fund at a specified future date and price set at the time of
the contract. The principal reason for writing call options is
to attempt to realize, through the receipt of premiums, a
greater return than would be realized on the securities alone.
By writing covered call options, the Fund gives up the
opportunity, while the option is in effect, to profit from any
price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the
underlying security will be limited while the option is in
effect unless the Fund effects a closing purchase transaction.
A closing purchase transaction cancels out the Fund's position
as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it
has written. Covered call options serve as a particular hedge
against the price of the underlying security declining.
The writer of a covered call option has no control over
when he may be required to sell his securities since he may be
assigned an exercise notice at any time prior to the
termination of his obligation as a writer. If an option
expires unexercised, the writer would realize a gain in the
amount of the premium. Such a gain, of course, may be offset
by a decline in the market value of the underlying security
during the option period. If a call option is exercised, the
writer would realize a gain or loss from the sale of the
underlying security.
The Fund also may write put options which give the holder
of the option the right to sell the underlying security to the
Fund at the stated exercise price. The Fund will receive a
premium for writing a put option which increases the Fund's
return. The Fund writes only covered put options which means
that so long as the Fund is obligated as the writer of the
option, it will, through its custodian, have deposited and
maintained cash, cash equivalents, U.S. Government securities
or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies with a
securities depository with a value equal to or greater than the
<PAGE>
exercise price of the underlying securities. By writing a put,
the Fund will be obligated to purchase the underlying security
at a price that may be higher than the market value of that
security at the time of exercise for as long as the option is
outstanding. The Fund may engage in closing transactions in
order to terminate put options that it has written.
Options referred to herein and in the Fund's Prospectus
may be options issued by The Options Clearing Corporation (the
"Clearing Corporation") which are currently traded on the
Chicago Board Options Exchange, American Stock Exchange, New
York Stock Exchange, Philadelphia Stock Exchange and Pacific
Stock Exchange. Options referred to herein and in the Fund's
Prospectus may also be options traded on foreign securities
exchanges such as the London Stock Exchange and the Amsterdam
Stock Exchange. An option position may be closed out only on
an exchange which provides a secondary market
3
<PAGE>
for an option of the same series. If a secondary market does
not exist, it might not be possible to effect a closing
transaction in a particular option, with the result, in the
case of a covered call option, that the Fund will not be able
to sell the underlying security until the option expires or
until it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes
or series of options or underlying securities; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Clearing
Corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for
economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a
particular class or series of options), in which event the
secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options
on that exchange that had been issued by the Clearing
Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
The Fund may also enter into over-the-counter option
transactions ("OTC options"), which are two party contracts
with price and terms negotiated between the buyer and seller.
The staff of the Securities and Exchange Commission has taken
the position that OTC options and the assets used as cover for
written OTC options are illiquid securities.
Purchasing Options. The Fund may purchase put options to
hedge against a decline in the market value of its equity
holdings. By buying a put, the Fund has a right to sell the
<PAGE>
underlying security at the exercise price, thus limiting the
Fund's risk of loss through a decline in the market value of
the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be
offset partially by the amount of the premium paid for the put
option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale
transaction; profit or loss from the sale will depend on
whether the amount received is more or less than the premium
paid for the put option plus the related transaction cost. A
closing sale transaction cancels out the Fund's position as the
purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has
purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it
has written call options or on securities which it intends to
purchase. The Fund may purchase either exchange traded options
or OTC options. The Fund will not purchase options on
securities (including stock index options discussed below) if
as a result of such purchase the aggregate cost of all
outstanding options on securities held by the Fund would exceed
5% of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures.
As described in the Prospectus, the Fund is authorized to
engage in transactions in stock index options and futures and
financial futures, and related options on such futures. Set
forth below is further information concerning futures
transactions.
A futures contract is an agreement between two parties to
buy and sell a security or, in the case of an index-based
futures contract, to make and accept a cash settlement for a
set price on a future date. A majority of transactions in
futures contracts, however, do not result in the actual
delivery of the underlying instrument or cash settlement, but
are settled through liquidation, i.e., by entering into an
offsetting transaction.
The purchase or sale of a futures contract differs from
the purchase or sale of a security in that no price or premium
is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market,
which varies, but is generally about 5% of the contract amount,
must be deposited with the broker. This amount is known as
"initial margin" and represents a "good faith" deposit assuring
the performance of both the purchaser and seller under the
futures contract. Subsequent payments to and from the broker,
called "variation margin," are required to be made on a daily
basis as the price of the futures contract fluctuates, making
the long and short positions in the futures contract more or
less valuable, a process known as "mark to the market." At any
time prior to the settlement date of the futures contract, the
position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract.
A final determination of variation margin is then made,
additional cash is required to be paid to or released by the
<PAGE>
broker and the purchaser realizes a loss or gain. In addition,
a nominal commission is paid on each completed sale
transaction.
4
<PAGE>
An order has been obtained from the Securities and
Exchange Commission exempting the Fund from the provisions of
Section 17(f) and Section 18(f) of the Investment Company Act
of 1940, as amended (the "Investment Company Act"), in
connection with its strategy of investing in futures contracts.
Section 17(f) relates to the custody of securities and other
assets of an investment company and may be deemed to prohibit
certain arrangements between the Fund and commodities brokers
with respect to initial and variation margin. Section 18(f) of
the Investment Company Act prohibits an open-end investment
company such as the Fund from issuing a "senior security" other
than a borrowing from a bank. The staff of the Securities and
Exchange Commission has in the past indicated that a futures
contract may be a "senior security" under the Investment
Company Act.
Foreign Currency Hedging. Generally, the foreign exchange
transactions of the Fund will be conducted on a spot, i.e.,
cash basis at the spot rate of purchasing or selling currency
prevailing in the foreign exchange market. This rate under
normal market conditions differs from the prevailing exchange
rate in an amount generally less than one tenth of one percent
due to the costs of converting from one currency to another.
However, the Fund has authority to deal in forward foreign
exchange among currencies of the different countries in which
it will invest as a hedge against possible variations in the
foreign exchange rates among these currencies. This is
accomplished through contractual agreements to purchase or sell
a specified currency at a specified future date and price set
at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either
specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency
with respect to specific receivables or payables of the Fund
accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption of shares of the
Fund or the payment of dividends and distributions by the Fund.
Position hedging is the sale of forward foreign currency with
respect to portfolio security positions denominated or quoted
in such foreign currency. The Fund will not speculate in
forward foreign exchange. The Fund may not position hedge with
respect to the currency of a particular country to an extent
greater than the aggregate market value (at the time of making
such sale) of the securities held in its portfolio denominated
or quoted in that particular foreign currency. If the Fund
enters into a position hedging transaction, its custodian will
place cash or liquid equity or debt securities in a separate
account of the Fund in an amount equal to the value of the
Fund's total assets committed to the consummation of such
<PAGE>
forward contract. If the value of the securities placed in the
separate account declines, additional cash or securities will
be placed in the account so that the value of the account will
equal the amount of the Fund's commitment with respect to such
contracts. The Fund will enter into such transactions only to
the extent, if any, deemed appropriate by the Manager. The
Fund will not enter into a forward contract with a term of more
than one year.
The Fund is also authorized to purchase or sell listed or
over-the-counter foreign currency options, foreign currency
futures and related options on foreign currency futures as a
short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect
to hedges on non-U.S. dollar denominated securities owned by
the Fund, sold by the Fund but not yet delivered, or committed
or anticipated to be purchased by the Fund. As an
illustration, the Fund may use such techniques to hedge the
stated value in U.S. dollars of an investment in a yen
denominated security. In such circumstances, for example, the
Fund may purchase a foreign currency put option enabling it to
sell a specified amount of Japanese yen for dollars at a
specified price by a future date. To the extent the hedge is
successful, a loss in the value of the yen relative to the
dollar will tend to be offset by an increase in the value of
the put option. To offset, in whole or part, the cost of
acquiring such a put option, the Fund may also sell a call
option which, if exercised, requires it to sell a specified
amount of yen for dollars at a specified price by a future date
(a technique called a "straddle"). By selling such call option
in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of
the yen to the dollar. The Manager believes that "straddles"
of the type which may be utilized by the Fund constitute
hedging transactions and are consistent with the policies
described above.
Hedging against a decline in the value of a currency does
not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities
decline. Such transactions also preclude the opportunity for
gain if the value of the hedged currency should rise.
Moreover, it may not be possible
5
<PAGE>
for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to
sell the currency at a price above the devaluation level it
anticipates. The cost to the Fund of engaging in foreign
currency transactions varies with such factors as the
currencies involved, the length of the contract period and the
market conditions then prevailing. Since transactions in
foreign currency exchange usually are conducted on a principal
basis, no fees or commissions are involved.
<PAGE>
Risk Factors in Options and Futures Transactions.
Utilization of options and futures transactions involves the
risk of imperfect correlation in movements in the prices of
options and futures contracts and movements in the prices of
the securities and currencies which are the subject of the
hedge. If the price of the options and futures contract moves
more or less than the prices of the hedged securities or
currencies, the Fund will experience a gain or loss which will
not be completely offset by movements in the prices of the
securities and currencies which are the subject of the hedge.
The successful use of options and futures also depends on the
Manager's ability to correctly predict price movements in the
market involved in a particular options or futures transaction.
Prior to exercise or expiration, an exchange-traded option
or futures position can only be terminated by entering into a
closing purchase or sale transaction. This requires a
secondary market on an exchange for call or put options of the
same series. The Fund will enter into an option or futures
transaction on an exchange only if there appears to be a liquid
secondary market for such options or futures. However, there
can be no assurance that a liquid secondary market will exist
for any particular call or put option or futures contract at
any specific time. Thus, it may not be possible to close an
option or futures position. The Fund will acquire only over-
the-counter options for which management believes the Fund can
receive on each business day at least two independent bids or
offers (one of which will be from an entity other than a party
to the option), unless there is only one dealer, in which case
that dealer's price is used. In the case of a futures position
or an option on a futures position written by the Fund in the
event of adverse price movements, the Fund would continue to be
required to make daily cash payments of variation margin. In
such situations, if the Fund has insufficient cash, it may have
to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so.
In addition, the Fund may be required to take or make delivery
of the security or currency underlying futures contracts it
holds. The inability to close options and futures positions
also could have an adverse impact on the Fund's ability to
hedge effectively its portfolio. There is also the risk of
loss by the Fund of margin deposits in the event of bankruptcy
of a broker with whom the Fund has an open position in a
futures contract or related option. The risk of loss from
investing in futures transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options
transactions have generally established limitations governing
the maximum number of call or put options on the same
underlying security or currency (whether or not covered) which
may be written by a single investor, whether acting alone or in
concert with others (regardless of whether such options are
written on the same or different exchanges or are held or
written on one or more accounts or through one or more
brokers). "Trading limits" are imposed on the maximum number
of contracts which any person may trade on a particular trading
day. An exchange may order the liquidation of positions found
<PAGE>
to be in violation of these limits, and it may impose other
sanctions or restrictions. The Manager does not believe that
these trading and position limits will have any adverse impact
on the portfolio strategies for hedging the Fund's portfolio.
Other Investment Policies and Practices
Non-Diversified Status. The Fund is classified as non-
diversified within the meaning of the Investment Company Act,
which means that the Fund is not limited by such Act in the
proportion of its assets that it may invest in securities of a
single issuer. However, the Fund's investments will be limited
so as to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code of 1986, as amended. See
"Dividends, Distributions and Taxes - Taxes." To qualify,
among other requirements, the Fund will limit its investments
so that, at the close of each quarter of the taxable year, (i)
not more than 25% of the market value of the Fund's total
assets will be invested in the securities of a single issuer,
and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total
assets will be invested in the securities of a single issuer,
and the Fund will not own more than 10% of the outstanding
voting securities of a single issuer. A fund which elects to
be classified as "diversified" under the Investment Company Act
must satisfy the foregoing 5% and 10% requirements with respect
to 75% of its total assets. To the extent that the Fund
assumes large positions in the securities of a small number of
issuers, the Fund's net asset value may fluctuate to a greater
extent than that of a diversified company as a result of
changes in the financial condition or in the market's
assessment of the issuers.
6
<PAGE>
When-Issued Securities and Delayed Delivery Transactions.
The Fund may purchase securities on a when-issued basis, and
it may purchase or sell securities for delayed delivery. These
transactions occur when securities are purchased or sold by the
Fund with payment and delivery taking place in the future to
secure what is considered an advantageous yield and price to
the Fund at the time of entering into the transaction.
Although the Fund has not established any limit on the
percentage of its assets that may be committed in connection
with such transactions, the Fund will maintain a segregated
account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity
securities denominated in U.S. dollars or non-U.S. currencies
in an aggregate amount equal to the amount of its commitment in
connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to
time enter into standby commitment agreements. Such agreements
commit the Fund, for a stated period of time, to purchase a
stated amount of a fixed income security which may be issued
<PAGE>
and sold to the Fund at the option of the issuer. The price
and coupon of the security is fixed at the time of the
commitment. At the time of entering into the agreement, the
Fund is paid a commitment fee, regardless of whether or not the
security is ultimately issued, which is typically approximately
0.5% of the aggregate purchase price of the security which the
Fund has committed to purchase. The Fund will enter into such
agreement only for the purpose of investing in the security
underlying the commitment at a yield and price which is
considered advantageous to the Fund. The Fund will not enter
into a standby commitment with a remaining term in excess of 90
days and will limit its investment in such commitments so that
the aggregate purchase price of the securities subject to such
commitments, together with the value of portfolio securities
subject to legal restrictions on resale, will not exceed 10% of
its assets taken at the time of acquisition of such commitment
or security. The Fund will at all times maintain a segregated
account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity
securities denominated in U.S. dollars or non-U.S. currencies
in an aggregate amount equal to the purchase price of the
securities underlying the commitment.
There can be no assurance that the securities subject to
a standby commitment will be issued, and the value of the
security, if issued, on the delivery date may be more or less
than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the
Fund may bear the risk of a decline in the value of such
security and may not benefit from an appreciation in the value
of the security during the commitment period.
The purchase of a security subject to a standby commitment
agreement and the related commitment fee will be recorded on
the date on which the security can reasonably be expected to be
issued, and the value of the security will thereafter be
reflected in the calculation of the Fund's net asset value.
The cost basis of the security will be adjusted by the amount
of the commitment fee. In the event the security is not
issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
Repurchase Agreements; Purchase and Sale Contracts. The
Fund may invest in securities pursuant to repurchase agreements
or purchase and sale contracts. Repurchase agreements may be
entered into only with a member bank of the Federal Reserve
System or primary dealer in U.S. Government securities.
Purchase and sale contracts may be entered into only with
financial institutions which have capital of at least $50
million or whose obligations are guaranteed by an entity having
capital of at least $50 million. Under such agreements, the
other party agrees, upon entering into the contract with the
Fund, to repurchase the security at a mutually agreed upon time
and price in a specified currency, thereby determining the
yield during the term of the agreement. This results in a
fixed rate of return insulated from market fluctuations during
such period although it may be affected by currency
<PAGE>
fluctuations. In the case of repurchase agreements, the
7
<PAGE>
prices at which the trades are conducted do not reflect the
accrued interest on the underlying obligations; whereas, in the
case of purchase and sale contracts, the prices take into
account accrued interest. Such agreements usually cover short
periods, often under one week. Repurchase agreements may be
construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, as a purchaser, the Fund
will require the seller to provide additional collateral if the
market value of the securities falls below the repurchase price
at any time during the term of the repurchase agreement; the
Fund does not have the right to seek additional collateral in
the case of purchase and sale contracts. In the event of
default by the seller under a repurchase agreement construed to
be a collateralized loan, the underlying securities are not
owned by the Fund but constitute only collateral for the
seller's obligation to pay the repurchase price. Therefore,
the Fund may suffer time delays and incur costs of possible
losses in connection with the disposition of the collateral.
A purchase and sale contract differs from a repurchase
agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default
under such a repurchase agreement or under a purchase and sale
contract, instead of the contractual fixed rate of return, the
rate of return to the Fund would depend on intervening
fluctuations of the market values of such securities and the
accrued interest on the securities. In such event, the Fund
would have rights against the seller for breach of contract
with respect to any losses arising from market fluctuations
following the failure of the seller to perform. The Fund may
not invest more than 10% of its net assets in repurchase
agreements or purchase and sale contracts maturing in more than
seven days. While the substance of purchase and sale contracts
is similar to repurchase agreements, because of the different
treatment with respect to accrued interest and additional
collateral, management believes that purchase and sale
contracts are not repurchase agreements as such term is
understood in the banking and brokerage community.
Lending of Portfolio Securities. Subject to investment
restriction (8) below, the Fund may lend securities from its
portfolio to approved borrowers and receive therefor collateral
in cash or securities issued or guaranteed by the U.S.
Government which are maintained at all times in an amount equal
to at least 100% of the current market value of the loaned
securities. The purpose of such loans is to permit the
borrower to use such securities for delivery to purchasers when
such borrower has sold short. If cash collateral is received
by the Fund, it is invested in short-term money market
securities, and a portion of the yield received in respect of
such investment is retained by the Fund. Alternatively, if
securities are delivered to the Fund as collateral, the Fund
<PAGE>
and the borrower negotiate a rate for the loan premium to be
received by the Fund for lending its portfolio securities. In
either event, the total yield on the Fund's portfolio is
increased by loans of its portfolio securities. The Fund will
have the right to regain record ownership of loaned securities
to exercise beneficial rights such as voting rights,
subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time. The
Fund may pay reasonable finder's, administrative and custodial
fees in connection with such loans. With respect to the
lending of portfolio securities, there is the risk of failure
by the borrower to return the securities involved in such
transactions.
Investment Restrictions
The Fund has adopted the following restrictions and
policies relating to the investment of its assets and its
activities, which are fundamental policies and may not be
changed without the approval of the holders of a majority of
the Fund's outstanding voting securities (which for this
purpose and under the Investment Company Act means the lesser
of (i) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (ii) more
than 50% of the outstanding shares). The Fund may not:
1. Invest more than 25% of its assets, taken at market
value at the time of each investment, in the securities of
issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
2. Purchase or sell real estate or real estate
mortgage loans, except that the Fund may invest in securities
directly or indirectly secured by real estate or interests
therein or issued by companies which invest in real estate or
interests therein.
3. Make loans to other persons, except that the
acquisition of bonds, debentures or other corporate debt
securities and investment in government obligations, short-term
commercial paper, certificates of deposit, bankers' acceptances
and repurchase agreements and similar instruments will not be
deemed to be the making of a loan, and except further that the
Fund may lend its portfolio securities provided that such loans
may be made only in accordance with applicable law and the
guidelines set forth in the Prospectus and this Statement of
Additional Information, as they may be amended from time to
time.
4. Issue senior securities to the extent such issuance
would violate applicable law.
8
<PAGE>
<PAGE>
5. Borrow money or pledge its assets, except that the
Fund (a) may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions in
amounts not exceeding 10% (taken at market value) of its total
assets and pledge its assets to secure such borrowings, (b) may
obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and
(c) may purchase securities on margin to the extent permitted
by applicable law. (However, at the present time, applicable
law prohibits the Fund from purchasing securities on margin.)
(The deposit or payment by the Fund of initial or variation
margin in connection with futures contracts or options
transactions is not considered the purchase of a security on
margin.)
6. Underwrite securities of other issuers, except
insofar as the Fund technically may be deemed an underwriter
under the Securities Act in purchasing and selling portfolio
securities and except insofar as such underwriting would comply
with the limits set forth in the Investment Company Act.
7. Purchase or sell commodities or contracts on
commodities, except to the extent the Fund may do so in
accordance with applicable law and as set forth in the
Prospectus and this Statement of Additional Information, and
without registering as a commodity pool operator under the
Commodities Exchange Act.
Additional investment restrictions adopted by the Fund,
which may be changed by the Directors, provide that the Fund
may not:
(i) Purchase securities of other investment companies
except to the extent that such purchases are permitted by
applicable law. Applicable law currently prohibits the Fund
from purchasing the securities of other investment companies,
except in connection with a plan of merger, consolidation,
reorganization, or acquisition, or by purchase in the open
market of securities of closed-end investment companies where
no underwriter or dealer's commission or profit, other than the
customary broker's commission, is involved and only if
immediately thereafter not more than (i) 3% of the total
outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value,
would be invested in any one such company, (iii) 10% of the
Fund's total assets, taken at market value, would be invested
in such securities, and (iv) the Fund, together with other
investment companies having the same investment adviser and
companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment
company. Investments by the Fund in wholly-owned investment
entities created under the laws of certain countries will not
be deemed an investment in other investment companies.
(ii) Make short sales of securities or maintain a
short position except to the extent permitted by applicable
law. The Fund does not, however, currently intend to engage in
<PAGE>
short sales.
(iii) Invest in securities which cannot be readily
resold because of legal or contractual restrictions, or which
cannot otherwise be marketed, redeemed, put to the issuer or to
a third party, or which do not mature within seven days, or
which the Board of Directors of the Fund have not determined to
be liquid pursuant to applicable law, if at the time of
acquisition more than 15% of its net assets would be invested
in such securities.
(iv) Make investments for the purpose of exercising
control or management.
(v) Invest in warrants if at the time of acquisition
its investment in warrants, valued at the lower of cost or
market value, would exceed 5% of the Fund's net assets;
included within such limitation, but not to exceed 2% of the
Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major
foreign exchange. For purposes of this restriction, warrants
acquired by the Fund in units or attached to securities may be
deemed to be without value.
(vi) Invest in securities of companies having a
record, together with predecessors, of less than three years of
continuous operation, if more than 5% of its total assets would
be invested in such securities. This restriction will not
apply to mortgage-backed securities, asset-backed securities or
obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
9
<PAGE>
(vii) Purchase or retain the securities of any issuer,
if those individual officers and Directors of the Fund, the
Manager or any subsidiary thereof each owning beneficially more
than one-half of one percent of the securities of such issuer
own in the aggregate more than 5% of the securities of such
issuer.
(viii) Invest in real estate limited partnership
interests or interests in oil, gas or other mineral leases, or
exploration or development programs, except that the Fund may
invest in securities issued by companies that engage in oil,
gas or other mineral exploration or development activities.
(ix) Write, purchase or sell puts, calls, straddles,
spreads or combinations thereof, except to the extent permitted
in the Prospectus and this Statement of Additional Information,
as it may be amended from time to time.
(x) Purchase securities while borrowings exceed 5%
<PAGE>
(taken at market value) of its total assets.
The staff of the Securities and Exchange Commission (the
"Commission") has taken the position that purchased OTC options
and the assets used as cover for written OTC options are
illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or
sell OTC options if, as a result of such transaction, the sum
of the market value of OTC options currently outstanding which
are held by the Fund, the market value of the underlying
securities covered by OTC call options currently outstanding
which were sold by the Fund and margin deposits on the Fund's
existing OTC options on futures contracts exceeds 10% of the
total assets of the Fund, taken at market value, together with
all other assets of the Fund which are illiquid or are not
otherwise readily marketable. However, if the OTC option is
sold by the Fund to a primary U.S. Government securities dealer
recognized by the Federal Reserve Bank of New York and if the
Fund has the unconditional contractual right to repurchase such
OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying
securities as is equal to the repurchase price less the amount
by which the option is "in-the-money" (i.e., current market
value of the underlying securities minus the option's strike
price). The repurchase price with the primary dealers is
typically a formula price which is generally based on a
multiple of the premium received for the option, plus the
amount by which the option is "in-the-money." This policy as
to OTC options is not a fundamental policy of the Fund and may
be amended by the Directors of the Fund without the approval of
the Fund's shareholders. However, the Fund will not change or
modify this policy prior to the change or modification by the
Commission staff of its position.
Portfolio securities of the Fund generally may not be
purchased from, sold or loaned to the Manager or its affiliates
or any of their directors, general partners, officers or
employees, acting as principal, unless pursuant to a rule or
exemptive order under the Investment Company Act.
Because of the affiliation of the Manager with the Fund,
the Fund is prohibited from engaging in certain transactions
involving the Manager's affiliate, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), or its
affiliates except for brokerage transactions permitted under
the Investment Company Act involving only usual and customary
commissions or transactions pursuant to an exemptive order
under the Investment Company Act. See "Portfolio Transactions
and Brokerage." Without such an exemptive order, the Fund
would be prohibited from engaging in portfolio transactions
with Merrill Lynch or its affiliates acting as principal and
from purchasing securities in public offerings which are not
registered under the Securities Act of 1933, as amended, in
which such firm or any of its affiliates participate as an
underwriter or dealer.
<PAGE>
10
<PAGE>
MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund and their
principal occupations for at least the last five years are set
forth below. Unless otherwise noted, the address of each
executive officer and Director is Box 9011, Princeton, New
Jersey 08543-9011.
ARTHUR ZEIKEL - President and Director(1)(2) - President
of the Manager since 1977 and Chief Investment Officer and
Director of the Manager since 1976; President, Director and
Chief Investment Officer of Fund Asset Management, L.P. ("FAM")
since 1977; Director of Merrill Lynch Funds Distributor, Inc.;
Executive Vice President of Merrill Lynch & Co., Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated since 1990.
WALTER MINTZ - Director(2) - 1114 Avenue of the Americas,
New York, New York 10036. Special Limited Partner of
Cumberland Partners (investment partnership) since 1982.
MELVIN R. SEIDEN - Director(2) - 780 Third Avenue, New
York, New York 10017. President of Silbanc Properties, Ltd.
(real estate, consulting and investments) since 1987; Chairman
and President of Seiden & de Cuevas, Inc. (private investment
firm) from 1964 to 1987.
STEPHEN B. SWENSRUD - Director(2) - 24 Federal Street,
Boston, Massachusetts 02110. Principal of Fernwood Associates
(financial consultants); Director, Hitchiner Manufacturing
Company.
JOE GRILLS - Director(2) - 183 Soundview Lane, New Canaan,
Connecticut 06840. Member of the Committee on Investment of
Employee Benefits Assets of the Financial Executives Institute
("CIEBA") since 1986, member of CIEBA's Executive Committee
since 1988 and its Chairman from 1991 to 1992; Assistant
Treasurer of International Business Machines Corporation
("IBM") and Chief Investment Officer of the IBM Retirement
Funds from 1986 until 1992.
HARRY WOOLF - Director(2) - The Institute for Advanced
Study, Olden Lane, Princeton, New Jersey 08540. Professor and
former Director of The Institute for Advanced Study (private
institution devoted to the encouragement, support and patronage
of learning) since 1976; Director, Alex. Brown Cash Reserve
Fund, Flag Investors Fund and Westmark International (medical
equipment manufacturing and marketing).
TERRY K. GLENN - Executive Vice President(1)(2) -
Executive Vice President of the Manager and FAM since 1983 and
Director since 1991; President and Director of Merrill Lynch
<PAGE>
Funds Distributor, Inc. (the "Distributor") since 1986;
President of Princeton Administrators, Inc. since 1988; and
Director of Financial Data Services, Inc. since 1985.
BERNARD J. DURNIN - Senior Vice President(1)(2) - Senior
Vice President of the Manager since 1981 and Vice President
from 1977 to 1981.
DONALD C. BURKE - Vice President(1)(2) - Vice President of
the Manager since 1990; accountant, Deloitte & Touche from 1982
to 1990.
JOEL HEYMSFELD - Vice President(1)(2) - Vice President of
the Manager since 1978.
GERALD M. RICHARD - Treasurer(1)(2) - Senior Vice
President and Treasurer of the Manager and FAM since 1984;
Treasurer of the Distributor since 1984 and Vice President
since 1981; and Senior Vice President and Treasurer of
Princeton Administrators, Inc. since 1988.
MARK B. GOLDFUS - Secretary(1)(2) - Vice President of the
Manager since 1985.
11
<PAGE>
(1) Interested person, as defined in the Investment Company Act
of 1940, of the Company.
(2) Mr. Zeikel is a director or trustee and officer, Messrs.
Mintz, Seiden, Swensrud and Woolf are directors, trustees or
members of the advisory board, and Messrs. Glenn, Durnin,
Richard and Goldfus are officers, of certain other investment
companies for which the Manager or FAM acts as investment
adviser.
At _______________, 1994, the officers and Directors of
the Fund as a group (six persons) owned an aggregate of less
than 1% of the outstanding shares of the Fund. At such date,
Mr. Zeikel, a Director of the Fund, and the other officers of
the Fund, owned less than 1% of the outstanding shares of
common stock of Merrill Lynch & Co., Inc.
The Fund pays each Director not affiliated with the
Manager a fee of $ per year plus $ per
Board meeting attended, together with such Director's actual
out-of-pocket expenses relating to attendance at meetings. The
Fund also compensates members of its Audit Committee, which
consists of all of the non-affiliated Directors, at a rate of
$ per meeting attended. The Chairman of the Audit
Committee receives an additional fee of $ per
meeting attended.
<PAGE>
Management and Advisory Arrangements
Reference is made to "Management of the Fund-Management
and Advisory Arrangements" in the Prospectus for certain
information concerning the management and advisory arrangements
of the Fund.
Securities held by the Fund may also be held by, or be
appropriate investments for, other funds or investment advisory
clients for which the Manager or its affiliates act as an
adviser. Because of different objectives or other factors, a
particular security may be bought for one or more clients when
one or more clients are selling the same security. If
purchases or sales of securities by the Manager for the Fund or
other funds for which it acts as investment adviser or for its
other advisory clients arise for consideration at or about the
same time, transactions in such securities will be made,
insofar as feasible, for the respective funds and clients in a
manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Manager
or its affiliates during the same period may increase the
demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
The Fund has entered into a management agreement with the
Manager (the "Management Agreement"). As discussed in the
Prospectus, the Management Agreement provides that the Fund
will pay the Manager a monthly fee at the annual rate of 0.75%
of the average daily net assets of the Fund. This fee is
higher than that of most mutual funds, but management of the
Fund believes this fee, which is typical for a global fund, is
justified by the global nature of the Fund.
California imposes limitations on the expenses of the
Fund. These expense limitations require that the Manager
reimburse the Fund in an amount necessary to prevent the
ordinary operating expenses of the Fund (excluding interest,
taxes, distribution fees, brokerage fees and commissions and
extraordinary charges such as litigation costs) from exceeding
2.5% of the Fund's first $30 million of average daily net
assets, 2.0% of the next $70 million of average daily net
assets and 1.5% of the remaining average daily net assets. The
Manager's obligation to reimburse the Fund is limited to the
amount of the management fee. No fee payment will be made to
the Manager during any fiscal year which will cause such
expenses to exceed the most restrictive expense limitation
applicable at the time of such payment.
The Fund has received an order from the State of
California partially waiving the expense limitations described
above. Pursuant to the terms of such order, the expense
limitations that would otherwise apply are waived to the extent
the Fund's expense for custodial services, management and
auditing fees exceeds the average of such fees of a group of
funds managed by the Manager or its subsidiary which primarily
invest domestically. Since the commencement of operations of
the Fund, no reimbursement of expenses has been required
<PAGE>
pursuant to the applicable expense limitation provisions
discussed above.
12
<PAGE>
The Management Agreement obligates the Manager to provide
investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund
connected with investment and economic research, trading and
investment management of the Fund, as well as the fees of all
Directors of the Fund who are affiliated persons of the Manager
or any of their affiliates. The Fund pays all other expenses
incurred in its operation, including, among other things,
taxes; expenses for legal and auditing services; costs of
printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except
to the extent paid by the Distributor); charges of the
custodian, any sub-custodian and transfer agent; expenses of
redemption of shares; Commission fees; expenses of registering
the shares under Federal, state or foreign laws; fees and
expenses of unaffiliated Directors; accounting and pricing
costs (including the daily calculation of net asset value);
insurance; interest; brokerage costs; litigation and other
extraordinary or non-recurring expenses; and other expenses
properly payable by the Fund. Accounting services are provided
to the Fund by the Manager, and the Fund reimburses the Manager
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 its
shares. Certain expenses in connection with the distribution
of Class B shares will be financed by the Fund pursuant to a
distribution plan in compliance with Rule 12b-1 under the
Investment Company Act. See "Purchase of Shares - Alternative
Sales Arrangements - Distribution Plans."
The Manager is a limited partnership, the partners of
which are Merrill Lynch & Co., Inc., Merrill Lynch Investment
Management, Inc. and Princeton Services, Inc.
Duration and Termination. Unless earlier terminated as
described below, the Management Agreement will remain in effect
from year to year if approved annually (a) by the Board of
Directors or by a majority of the outstanding shares of the
Fund and (b) by a majority of the Directors who are not parties
to such contracts or interested persons (as defined in the
Investment Company Act) of any such party. Such contracts are
not assignable and may be terminated without penalty on 60
days' written notice at the option of either party thereto or
by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the
Prospectus for certain information as to the purchase of Fund
<PAGE>
shares.
Alternative Sales Arrangements
The Fund issues two classes of shares: Class A shares are
sold to investors choosing the initial sales charge
alternative, and Class B shares are sold to investors choosing
the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of
investments of the Fund, have the same rights and are identical
in all respects, except that Class B shares bear the expenses
of the deferred sales arrangements, any expenses (including
incremental transfer agency costs) resulting from such sales
arrangements and the expenses of the account maintenance fee
and have exclusive voting rights with respect to the Rule 12b-1
distribution plan pursuant to which the account maintenance and
distribution fees are paid. The two classes also have
different exchange privileges. See "Shareholder Services -
Exchange Privilege."
The Fund has entered into separate distribution agreements
with Merrill Lynch Funds Distribution, Inc. (the "Distributor")
in connection with the continuous offering of Class A and Class
B shares of the Fund (the "Distribution Agreements"). The
Distribution Agreements obligate the Distributor to pay certain
expenses in connection with the offering of the Class A and
Class B shares of the Fund. After the prospectuses, statements
of additional information and periodic reports have been
prepared, set in type and mailed to shareholders, the
Distributor pays for the printing and distribution of copies
thereof used in connection with the offering to dealers and
investors. The Distributor also pays for other supplementary
sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and
termination provision as the Management Agreement described
under "Management of the Fund - Management and Advisory
Arrangements."
13
<PAGE>
Initial Sales Charge Alternative - 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 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
(including a pension, profit-sharing or other employee benefit
trust created pursuant to a plan qualified under Section 401 of
the Code) although more than one beneficiary is involved. The
<PAGE>
term "purchase" also includes purchases by any "company," as
that term is defined in the Investment Company Act, but does
not include purchases by any such company which has not been in
existence for at least six months or which has no purpose other
than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided,
however, that it does not include purchases by any group of
individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a
bank or broker-dealer or clients of an investment adviser. The
term "purchase" also includes purchases by employee benefit
plans not qualified under Section 401 of the Code, including
purchases by employees or by employers on behalf of employees,
by means of a payroll deduction plan or otherwise, of shares of
the Fund. Purchases by such a company or non-qualified
employee benefit plan will qualify for the quantity discounts
discussed above only if the Fund and the Distributor are able
to realize economies of scale in sales effort and sales related
expense by means of the company, employer or plan making the
Fund's Prospectus available to individual investors or
employees and forwarding investments by such persons to the
Fund and by any such employer or plan bearing the expense of
any payroll deduction plan.
Reduced Initial Sales Charges - Class A Shares
Right of Accumulation. Reduced sales charges are
applicable through a right of accumulation under which eligible
investors are permitted to purchase Class A shares of the Fund
at the offering price applicable to the total of (a) the dollar
amount then being purchased plus (b) an amount equal to the
then current net asset value or cost, whichever is higher, of
the purchaser's combined holdings of the Class A shares and
Class B shares of the Fund and of any other investment company
with a sales charge for which the Distributor acts as the
distributor. For any such right of accumulation to be made
available, the Distributor must be provided at the time of
purchase, by the purchaser or the purchaser's securities
dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to
such confirmation. The right of accumulation may be amended or
terminated at any time.
Letter of Intention. Reduced sales charges are
applicable to purchases aggregating $10,000 or more of Class A
shares of the Fund or any other investment company with an
initial sales charge or a deferred sales charge for which the
Distributor acts as the distributor made within a thirteen-
month period starting with the first purchase pursuant to a
Letter of Intention in the form provided in the Prospectus.
The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The
Letter of Intention is not available to employee benefit plans
for which Merrill Lynch provides plan-participant recordkeeping
services. The Letter of Intention is not a binding obligation
to purchase any amount of Class A shares; however, its
<PAGE>
execution will result in the purchaser paying a lower sales
charge at the appropriate quantity purchase level. A purchase
not originally made pursuant to a Letter of Intention may be
included under a subsequent Letter of Intention executed within
90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of
Class A shares of the Fund and of other investment companies
with a sales charge for which the Distributor acts as the
distributor presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under
the Letter of Intention, may be included as a credit toward
completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied
only to new purchases. If the total amount of shares purchased
does not equal the amount stated in the Letter of Intention
(minimum of $10,000), the investor will be notified and must
pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the Class A shares
purchased at the reduced rate and the sales charge applicable
to the shares actually purchased through the Letter. Class A
shares equal to five percent of the intended amount will be
held in escrow during the thirteen-month period (while
remaining registered in the name of the purchaser) for this
purpose. The first purchase under the Letter of Intention must
be at least five percent of the dollar amount of such Letter.
If a purchase during the term of such
14
<PAGE>
Letter would otherwise be subject to a further reduced sales
charge based on the right of accumulation, the purchaser will
be entitled on that purchase and subsequent purchases to the
reduced percentage sales charge which would be applicable to a
single purchase equal to the total dollar value of the Class A
shares then being purchased under such Letter, but there will
be no retroactive reduction of the sales charges on any
previous purchase. The value of any shares redeemed or
otherwise disposed of by the purchaser prior to termination or
completion of the Letter of Intention will be deducted from the
total purchases made under such Letter. An exchange from
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Ready
Assets Trust, Merrill Lynch Retirement Reserves Money Fund or
Merrill Lynch U.S.A. Government Reserves into the Fund that
creates a sales charge will count toward completing a new or
existing Letter of Intention from the Fund.
Merrill Lynch Blueprint(SM) Program. Class A shares of the
Fund are offered to participants in the Merrill Lynch
Blueprint(SM) Program ("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
shares of the Fund through Blueprint will acquire the Class A
shares at net asset value plus a sales charge calculated in
accordance with the Blueprint sales charge schedule (i.e., up
<PAGE>
to $300 at 5.50%, $300.01 to $5,000 at 4.50% plus $3.00 and
$5,000.01 or more at the standard sales charge rates disclosed
in the Prospectus). Class A shares of the Fund are offered at
net asset value plus a sales charge of 1/2 of 1% for corporate or
group IRA programs placing orders to purchase their Class A
shares through Blueprint. Services, including the exchange
privilege, available to Class A investors through Blueprint,
however, may differ from those available to other investors in
Class A shares.
Class A shares are offered at net asset value, with a
waiver of the front-end sales charge, to Blueprint participants
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
Eligible Retirement Plans (as defined below) whose Trustee
and/or Plan Sponsor offers the Merrill Lynch Directed IRA
Rollover Program. Eligible Retirement Plans include (a) plans
qualified under Section 401(k) of the Internal Revenue Code of
1986, as amended (the "Code"), with a salary reduction feature
offering a menu of investments to plan participants, provided
such plan initially has 1,000 or more employees eligible to
participate in the plan (employees eligible to participate in
retirement plans of the same sponsoring employer or its
affiliates may be aggregated); or (b) tax qualified retirement
plans within the meaning of Section 401(a) of the Code or
deferred compensation plans within the meaning of Section
403(b) of the Code, provided the plan (i) initially invested $5
million or more in existing plan assets in portfolios, mutual
funds or trusts advised by the Manager or its subsidiaries or
(ii) has accumulated $5 million or more in existing plan assets
invested in mutual funds advised by the Manager or its
subsidiaries, which charge a front-end sales charge or
contingent deferred sales charge (assets of retirement plans
with the same sponsor or an affiliated sponsor may be
aggregated).
Orders for purchases and redemptions of Class A shares of
the Fund may be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two
business days following the day such orders are placed. The
minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants
who are part of an automatic investment plan. Additional
information concerning purchases 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.
Employer Sponsored Retirement and Savings Plans. Class A
shares are offered at net asset value to employer sponsored
retirement or savings plans, such as tax qualified retirement
plans within the meaning of Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), deferred
<PAGE>
compensation plans within the meaning of Sections 403(b) and
457 of the Code, other deferred compensation arrangements, VEBA
plans, and non-qualified After Tax Savings and Investment
programs, maintained on the Merrill Lynch Group Employee
Services system, herein referred to as
15
<PAGE>
"Employer Sponsored Retirement or Savings Plans," provided the
plan has $5 million or more in existing plan assets initially
invested in portfolios, mutual funds or trusts advised by the
Manager either directly or through an affiliate. Class A
shares may also be offered at net asset value to Employer
Sponsored Retirement or Savings Plans, provided the plan has
accumulated $5 million or more in existing plan assets invested
in mutual funds advised by the Manager charging a front-end
sales charge or contingent deferred sales charge. Assets of
Employer Sponsored Retirement or Savings Plans sponsored by the
same sponsor or an affiliated sponsor may be aggregated. The
Class A share reduced load breakpoints also apply to these
aggregated assets. Class A shares may be offered at net asset
value to multiple plans sponsored by the same sponsor or an
affiliated sponsor provided that the addition of one or more of
the multiple plans results in aggregate assets of $5 million or
more invested in portfolios, mutual funds or trusts advised by
the Manager either directly or through an affiliate. Employer
Sponsored Retirement or Savings Plans are also offered Class A
shares at net asset value, provided such plan initially has
1,000 or more employees eligible to participate in the plan.
Employees eligible to participate in Employer Sponsored
Retirement or Savings Plan of the same sponsoring employer or
its affiliates may be aggregated. Tax qualified retirement
plans within the meaning of Section 401(a) of the Code meeting
any of the foregoing requirements and which are provided
specialized services (e.g., plans whose participants may direct
on a daily basis their plan allocations among a wide range of
investments including individual corporate equities and other
securities in addition to mutual fund shares) by the Merrill
Lynch Blueprint(SM) Program, are offered Class A shares at a
price equal to net asset value per share plus a reduced sales
charge of 0.50%. Any Employer Sponsored Retirement or Savings
Plan which does not meet the above described qualifications to
purchase Class A shares at net asset value has the option of
purchasing Class A shares at the sales charge schedule
disclosed in the Prospectus, or if the Employer Sponsored
Retirement or Savings Plan is a qualified retirement plan and
meets the specified requirements, then it may purchase Class B
shares with a waiver of the contingent deferred sales charge
upon redemption. The minimum initial and subsequent purchase
requirements are waived in connection with all the above
referenced Employer Sponsored Retirement or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the
Fund, directors and trustees of certain other Merrill Lynch
sponsored investment companies, directors of Merrill Lynch &
<PAGE>
Co., Inc., employees of Merrill Lynch & Co., Inc. and its
subsidiaries and any trust, pension, profit-sharing or other
benefit plan for such persons may purchase Class A shares of
the Fund at net asset value. Class A shares of the Fund will
be 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 purchase Class A shares of the Fund with proceeds
from a redemption of shares of a mutual fund that was sponsored
by the financial consultant's previous firm and imposed a sales
charge either at the time of purchase or on a deferred basis.
Second, such redemption must have been made within 60 days
prior to the investment in the Fund, and the proceeds from the
redemption must have been maintained in the interim in cash or
a money market fund.
Class A shares of the Fund are offered at net asset value
to shareholders of Senior Floating Rate Fund (formerly known as
Merrill Lynch Prime Fund, Inc.) who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock
of Senior Floating Rate Fund in shares of the Fund. In order
to exercise this investment option, Senior Floating Rate Fund
shareholders must sell their Senior Floating Rate Fund shares
to the Senior Floating Rate Fund in connection with a tender
offer conducted by the Senior Floating Rate Fund and reinvest
the proceeds immediately in the Fund. This investment option
is available only with respect to the proceeds of Senior
Floating Rate Fund shares as to which no Early Withdrawal
Charge (as defined in the Senior Floating Rate Fund prospectus)
is applicable. Purchase orders from Senior Floating Rate Fund
shareholders wishing to exercise this investment option will be
accepted only on the day that the related Senior Floating Rate
Fund tender offer terminates and will be effected at the net
asset value of the Fund at such day.
Class A shares of the Fund are offered at net asset value
to shareholders of certain closed-end funds advised by the
Manager or
16
<PAGE>
FAM who wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in shares of the Fund.
In order to exercise this investment option, closed-end fund
shareholders must (i) sell their closed-end fund shares through
Merrill Lynch and reinvest the proceeds immediately in the
Fund, (ii) have acquired the shares in the closed-end fund's
initial public offering or through reinvestment of dividends
earned on shares purchased in such offering, (iii) have
maintained their closed-end fund shares continuously in a
Merrill Lynch account, and (iv) purchase a minimum of $250
worth of Fund shares.
<PAGE>
Class A shares of the Fund are also offered at net asset
value, without sales charge, to an investor who has a business
relationship with a Merrill Lynch financial consultant and who
has invested in a mutual fund sponsored by a non-Merrill Lynch
company for which Merrill Lynch has served as a selected dealer
and where Merrill Lynch has either received or given notice
that such arrangement will be terminated, if the following
conditions are satisfied: first, the investor must purchase
Class A shares of the Fund with proceeds from a redemption of
shares of such other mutual fund and such fund imposed a sales
charge either at the time of purchase or on a deferred basis;
second, such purchase of Class A shares must be made within 90
days after such notice of termination.
Acquisition of Certain Investment Companies. The public
offering price of Class A shares may be reduced to the net
asset value per Class A share in connection with the
acquisition of the assets of or merger or consolidation with a
public or private investment company. The value of the assets
or company acquired in a tax-free transaction may be adjusted
in appropriate cases to reduce possible adverse tax
consequences to the Fund which might result from an acquisition
of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the
realized or unrealized appreciation of the Fund.
Reductions in or exemptions from the imposition of a sales
load are due to the nature of the investors and/or the reduced
sales efforts that will be needed in obtaining such
investments.
Deferred Sales Charge Alternative - Class B Shares
Distribution Plans. Reference is made to "Purchase of
Shares - Alternative Sales Arrangements - Distribution Plans"
in the Prospectus for certain information with respect to the
distribution plans of the Fund (each, a "Distribution Plan").
The payment of the account maintenance fee and
distribution fee with respect to Class B shares is subject to
the provisions of Rule 12b-1 under the Investment Company Act.
See "General Information - Description of Shares." Among other
things, the Distribution Plan provides that the Distributor
will provide and the Directors will review quarterly reports of
the disbursement of the account maintenance and distribution
fees paid to the Distributor. In their consideration of the
Distribution Plan, the Directors must consider all factors they
deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and to its Class B shareholders.
The Distribution Plan further provides that, so long as such
Distribution Plan remains in effect, the selection and
nomination of Directors who are not "interested persons" of the
Fund, as defined in the Investment Company Act (the
"Independent Directors"), will be committed to the discretion
of the Independent Directors then in office. In approving the
Distribution Plan in accordance with Rule 12b-1, the
<PAGE>
Independent Directors concluded that there is a reasonable
likelihood that such Distribution Plan will benefit the Fund
and its Class B shareholders. The Distribution Plan can be
terminated at any time, without penalty, by the vote of a
majority of the Independent Directors or by the vote of the
holders of a majority of the outstanding Class B voting
securities of the Fund. The Distribution Plan can be amended
to increase materially the amount to be spent by the Fund
without Class B shareholder approval, and all material
amendments are required to be approved by the vote of
Directors, including a majority of the Independent Directors
who have no direct or indirect financial interest in such
Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Fund preserve
copies of the Distribution Plan and any reports made pursuant
to such plan for a period of not less than six years from the
date of the Distribution Plan or such reports, the first two
years in an easily accessible place.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the
Prospectus for certain information as to the redemption and
repurchase of Fund shares. The right to redeem shares or to
receive payment with respect to any such redemption may be
suspended only for any period during which trading on the New
York Stock Exchange is restricted as determined by the
Commission or such Exchange is closed (other than customary
weekend and holiday closings), for any period during which an
emergency exists as defined by the 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.
17
<PAGE>
Contingent Deferred Sales Charge - Class B Shares
As discussed in the Prospectus under "Purchase of Shares
- - Deferred Sales Charge Alternative - Class B Shares," while
Class B shares redeemed within four years of purchase are
subject to a contingent deferred sales charge under most
circumstances, the charge is waived on redemptions of Class B
shares in connection with certain post-retirement withdrawals
from an Individual Retirement Account ("IRA") or other
retirement plan or following the death or disability of a Class
B shareholder. Redemptions for which the waiver applies are:
(a) any partial or complete redemption in connection with a
tax-free distribution following retirement under a tax-deferred
retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan, or any redemption resulting from the
tax-free return of an excess contribution to an IRA or (b) any
<PAGE>
partial or complete redemption following the death or
disability (as defined in the Code) of a Class B shareholder
(including one who owns the Class B shares as joint tenant with
his or her spouse), provided the redemption is requested within
one year of the death or initial determination of disability.
Merrill Lynch Blueprint(SM) Program. Class B shares are
offered to certain participants in the Merrill Lynch Blueprint(SM)
Program ("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 contingent deferred
sales charge 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 investors in
Class B shares. 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 the 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.
Retirement Plans. Any Retirement Plan which does not meet
the qualifications to purchase Class A shares at net asset
value has the option of purchasing Class A shares at the sales
charge schedule disclosed in the Prospectus, or if the
Retirement Plan meets the following requirements, then it may
purchase Class B shares with a waiver of the contingent
deferred sales charge upon redemption. The contingent deferred
sales charge is waived for any Eligible 401(k) Plan redeeming
Class B shares. The contingent deferred sales charge is also
waived for redemptions from a 401(a) plan qualified under the
Code, provided, however, that each such plan has the same or an
affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of a mutual fund advised by the
Manager or FAM ("Eligible 401(a) Plan"). The contingent
deferred sales charge is waived for any Class B shares which
are purchased by an Eligible 401(k) Plan or Eligible 401(a)
Plan and are rolled over into a Merrill Lynch or Merrill Lynch
Trust Company custodied IRA and held in such account at the
time of redemption. The minimum initial and subsequent
purchase requirements are waived in connection with all the
above referenced Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies -
<PAGE>
Other Investment Policies and Practices Portfolio Transactions"
in the Prospectus.
Subject to policies established by the Board of Directors
of the Fund, the Manager is primarily responsible for the
execution of the Fund's portfolio transactions. In executing
such transactions, the Manager seeks to obtain the best net
results for the Fund, taking into account such factors as price
(including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational
facilities of the firm involved and the firm's risk in
positioning a block of securities. Subject to
18
<PAGE>
obtaining the best price and execution, brokers who provide
supplemental investment research to the Manager may receive
orders for transactions by the Fund. Information so received
will be in addition to and not in lieu of the services required
to be performed by the Manager under the Management Agreement,
and the expenses of the Manager will not necessarily be reduced
as a result of the receipt of such supplemental information.
In addition, consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. and policies
established by the Directors of the Fund, the Manager may
consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio
transactions for the Fund. It is possible that certain of the
supplementary investment research so received will primarily
benefit one or more other investment companies or other
accounts for which investment discretion is exercised.
Conversely, the Fund may be the primary beneficiary of the
research or services received as a result of portfolio
transactions effected for such other accounts or investment
companies.
The Fund anticipates that its brokerage transactions
involving securities of companies domiciled in countries other
than the United States will be conducted primarily on the
principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock
exchange transactions are generally higher than in the United
States, although the Fund will endeavor to achieve the best net
results in effecting its portfolio transactions. There is
generally less governmental supervision and regulation of
foreign stock exchanges and brokers than in the United States.
The Fund invests in certain securities traded in the over-
the-counter market and, where possible, deals directly with the
dealers who make a market in the securities involved except in
those circumstances in which better prices and execution are
available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund and persons who are affiliated with
such affiliated persons are prohibited from dealing with the
<PAGE>
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 over-the-counter
market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the
Fund, including Merrill Lynch and any of its affiliates, will
not serve as the Fund's dealer in such transactions. However,
affiliated persons of the Fund may serve as its broker in
listed or over-the-counter transactions conducted on an agency
basis provided that, among other things, the fee or commission
received by such affiliated broker is reasonable and fair
compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions.
The Fund's ability and decisions to purchase or sell
portfolio securities may be affected by laws or regulations
relating to the convertibility and repatriation of assets.
Because the shares of the Fund are redeemable on a daily basis
in U.S. dollars, the Fund intends to manage its portfolio so as
to give reasonable assurance that it will be able to obtain
U.S. dollars to the extent necessary to meet anticipated
redemptions. Under present conditions, it is not believed that
these considerations will have any significant effect on its
portfolio strategy.
Section 11(a) of the Securities Exchange Act of 1934, as
amended, generally prohibits members of the U.S. national
securities exchanges from executing exchange transactions for
their affiliates and institutional accounts which 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 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 Directors have considered the possibilities of seeking
to recapture for the benefit of the Fund brokerage commissions
and other expenses of possible portfolio transactions by
conducting portfolio transactions through affiliated entities.
For example, brokerage commissions received by affiliated
brokers could be
19
<PAGE>
offset against the advisory fee paid by the Fund. After
considering all factors deemed relevant, the Directors made a
determination not to seek such recapture. The Directors will
<PAGE>
reconsider this matter from time to time.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information -
Determination of Net Asset Value" in the Prospectus concerning
the determination of net asset value. The net asset value of
the shares of the Fund is determined once daily Monday through
Friday as of 4:15 p.m., New York time, on each day the New York
Stock Exchange is open for trading. The New York Stock
Exchange is not open on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated
into U.S. dollars at the prevailing market rates as quoted by
one or more banks or dealers on the day of valuation. Net
asset value is computed by dividing the value of the securities
held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of
shares outstanding at such time. Expenses, including the fees
payable to the Manager and the Distributor, are accrued daily.
The per share net asset value of the Class B shares generally
will be lower than the per share net asset value of the Class
A shares reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees
applicable with respect to the Class B shares. It is expected,
however, that the per share net asset value of the two classes
will tend to converge immediately after the payment of
dividends or distributions, which will differ by approximately
the amount of the expense accrual differential between the
classes.
Securities traded in the over-the-counter market are
valued at the last available bid price or yield equivalents
obtained from one or more dealers in the over-the-counter
market prior to the time of valuation. When the Fund writes a
call option, the amount of the premium received is recorded on
the books of the Fund as an asset and an equivalent liability.
The amount of the liability is subsequently valued to reflect
the current market value of the option written, based upon the
last asked price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the
average of the last asked price as obtained from one or more
dealers. Options purchased by the Fund are valued at their
last bid price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the
average of the last bid price as obtained from two or more
dealers unless there is only one dealer, in which case that
dealer's price is used. Portfolio securities which are traded
on stock exchanges are valued at the last sale price on
the principal market on which such securities are traded, as of
the close of business on the day the securities are being
valued, or lacking any sales, at the last available bid price.
Portfolio securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to
<PAGE>
the broadest and most representative market. Other
investments, including futures contracts and related options,
are stated at market value. Securities and assets for which
market quotations are not readily available are valued at fair
value as determined in good faith under the direction of the
Board of Directors of the Fund. Such valuations and procedures
will be reviewed periodically by the Board of Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described
below which are designed to facilitate investment in its
shares. Full details as to each of such services and copies of
the various plans described below can be obtained from the
Fund, the Distributor or Merrill Lynch. Certain of these
services are available only to U.S. investors.
Investment Account
Each shareholder whose account is maintained at the
transfer agent has an Investment Account and will receive semi-
annual statements from the transfer agent showing any
reinvestments of dividends and capital gains distributions and
any other activity in
20
<PAGE>
the account since the preceding statement. Shareholders also
will receive separate confirmations for each purchase or sale
transaction other than reinvestment of dividends and capital
gains distributions. A shareholder may make additions to his
Investment Account at any time by mailing a check directly to
the transfer agent.
Share certificates are issued only for full shares and
only upon the specific request of the shareholder. Issuance of
certificates representing all or only part of the full shares
in an Investment Account may be requested by a shareholder
directly from the transfer agent.
Automatic Investment Plan
A shareholder may make additions to an Investment Account
at any time by purchasing Class A or Class B shares at the
applicable public offering price either through the
shareholder's securities dealer or by mail directly to the
transfer agent, acting as agent for such securities dealer.
Voluntary accumulation can also be made through a service known
as the Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks of $50 or more to charge the
regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such
shareholder. An investor whose shares of the Fund are held
<PAGE>
within a CMA(R) account may arrange to have periodic investments
made in the Fund in amounts of $250 or more through the CMA
Automatic Investment Program. The Automatic Investment Program
is not available to shareholders whose shares are held in a
brokerage account with Merrill Lynch other than a CMA(R) account.
Automatic Reinvestment of Dividends and Capital Gains
Distributions
Unless specific instructions to the contrary are given as
to the method of payment of dividends and capital gains
distributions, dividends and distributions will be reinvested
automatically in additional shares of the Fund. Such
reinvestment will be at the net asset value of shares of the
Fund, without sales charge, as of the close of business on the
ex-dividend date of the dividend or distribution. Shareholders
may elect in writing to receive either their dividends or
capital gains distributions, or both, in cash, in which event
payment will be mailed on or about the payment date.
Shareholders may, at any time, notify the transfer agent
in writing or by telephone (1-800-MER-FUND) that they no longer
wish to have their dividends and/or distributions reinvested in
shares of the Fund or vice versa, and commencing ten days after
receipt by the transfer agent of such notice, those
instructions will be effected.
Systematic Withdrawal Plans - Class A Shares
A Class A shareholder may elect to make withdrawals from
an Investment Account on either a monthly or quarterly basis as
provided below. Quarterly withdrawals are available for
shareholders who have acquired Class A shares of the Fund
having a value, based on cost or the current offering price, of
$5,000 or more and monthly withdrawals for shareholders with
Class A shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class
A shares are redeemed from those on deposit in the
shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his
Class A shares. Redemptions will be made at net asset value as
determined at the close of business of the New York Stock
Exchange on the 24th day of each month or the 24th day of the
last month of each quarter, whichever is applicable. If the
Exchange is not open for business on such date, the Class A
shares will be redeemed at the close of business on the
following business day. The check for the withdrawal payment
will be mailed, or the direct deposit of the withdrawal payment
will be made, on the next business day following redemption.
When a shareholder is making systematic withdrawals, dividends
and distributions on all Class A shares in the Investment
Account are reinvested automatically in Fund Class A shares.
A shareholder's Systematic Withdrawal Plan may be terminated at
any time, without charge or penalty, by the shareholder, the
Fund, the transfer agent or the Distributor.
<PAGE>
Withdrawal payments should not be considered as dividends,
yield or income. Each withdrawal is a taxable event. If
periodic withdrawals continuously exceed reinvested dividends,
the
21
<PAGE>
shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A shares
concurrent with withdrawals are ordinarily disadvantageous to
the shareholder because of sales charges and tax liabilities.
The Fund will not knowingly accept purchase orders for Class A
shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one
year's scheduled withdrawals or $1,200, whichever is greater.
Periodic investments may not be made into an Investment Account
in which the shareholder has elected to make systematic
withdrawals.
A Class A shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on
a monthly, bimonthly, quarterly, semiannual or annual basis
through the Systematic Redemption Program. The minimum fixed
dollar amount redeemable is $25. The proceeds of systematic
redemptions will be posted to the shareholder's account five
business days after the date the shares are redeemed. Monthly
systematic redemptions will be made at net asset value on the
first Monday of each month, bimonthly systematic redemptions
will be made at net asset value on the first Monday of every
other month, and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months
selected at the shareholder's option. If the first Monday of
the month is a holiday, the redemption will be processed at net
asset value on the next business day. The Systematic
Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic
Investment Program. For more information on the Systematic
Redemption Program, eligible shareholders should contact their
Financial Consultant.
Exchange Privilege
U.S. Class A or Class B shareholders of the Fund may
exchange their Class A or Class B shares of the Fund for shares
of the same class of Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill
Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill
Lynch Arizona Municipal Bond Fund, Merrill Lynch Balanced Fund
for Investment and Retirement, Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch California Insured Municipal Bond Fund,
Merrill Lynch California Limited Maturity Municipal Bond Fund,
Merrill Lynch California Municipal Bond Fund, Merrill Lynch
Capital Fund, Inc., Merrill Lynch Colorado Municipal Bond Fund,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
<PAGE>
Developing Capital Markets Fund, Inc. (shares of which are
deemed Class A shares for purposes of the exchange privilege),
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund,
Merrill Lynch Federal Securities Trust, Merrill Lynch Florida
Limited Maturity Municipal Bond Fund, Merrill Lynch Florida
Municipal Bond Fund, Merrill Lynch Fund For Tomorrow, Inc.,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch
Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund
for Investment and Retirement, Merrill Lynch Global Convertible
Fund, Inc., Merrill Lynch Global Growth Portfolio, Inc.,
Merrill Lynch Global Holdings (residents of Arizona must meet
investor suitability standards), Merrill Lynch Global Resources
Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Growth Fund for Investment and Retirement, Merrill Lynch
Healthcare Fund, Inc. (residents of Wisconsin must meet
investor suitability standards), Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Maryland Municipal Bond Fund, Merrill Lynch Massachusetts
Limited Maturity Municipal Bond Fund, Merrill Lynch
Massachusetts Municipal Bond Fund, Merrill Lynch Michigan
Limited Maturity Municipal Bond Fund, Merrill Lynch Michigan
Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond
Fund, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Municipal Intermediate Term Fund, Merrill Lynch New Jersey
Limited Maturity Municipal Bond Fund Merrill Lynch New Jersey
Municipal Bond Fund, Merrill Lynch New York Limited Maturity
Municipal Bond Fund, Merrill Lynch New York Municipal Bond
Fund, Merrill Lynch North Carolina Municipal Bond Fund, Merrill
Lynch Ohio Municipal Bond Fund, Merrill Lynch Oregon Municipal
Bond Fund, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Pennsylvania Limited Maturity Municipal Bond Fund, Merrill
Lynch Pennsylvania Municipal Bond Fund, Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch SmallCap Global Fund, Inc., Merrill Lynch Special
Value Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch Texas
Municipal Bond Fund, Merrill Lynch Utility Income Fund, Inc.
and Merrill Lynch World Income Fund, Inc. on the basis
described below. In addition, Class A shareholders of the Fund
may exchange their Class A shares for shares of Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch Ready Assets Trust
and Merrill Lynch U.S. Treasury Money Fund (or Merrill Lynch
Retirement Reserves Money Fund if the exchange occurs within
certain retirement plans) (together, the "Class A money market
funds"), and Class B shareholders of the Fund may exchange
their Class B shares for shares of Merrill Lynch Government
Fund, Merrill Lynch Institutional Fund, Merrill Lynch
Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund
(together, the "Class B money market
22
<PAGE>
funds") on the basis described below. Shares with a net asset
value of at least $250 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have
<PAGE>
been held by the shareholder for at least 15 days. Certain
funds into which exchanges may be made may impose a redemption
fee (not in excess of 2.00% of the amount redeemed) on shares
purchased through the exchange privilege when such shares are
subsequently redeemed, including redemption through subsequent
exchanges. Such redemption fee would be in addition to any
contingent deferred sales charge otherwise applicable to a
redemption of Class B shares. It is contemplated that the
exchange privilege may be applicable to other new mutual funds
whose shares may be distributed by the Distributor. The
exchange privilege available to participants in the Merrill
Lynch Blueprint(SM) Program may be different than that available
to other investors.
Under the exchange privilege, each of the funds with Class
A shares outstanding offers to exchange its Class A shares
("new Class A shares") for Class A shares ("outstanding Class
A shares") of any of the other funds, on the basis of relative
net asset value per Class A share, plus an amount equal to the
difference, if any, between the sales charge previously paid on
the outstanding Class A shares and the sales charge payable at
the time of the exchange on the new Class A shares. With
respect to outstanding Class A shares as to which previous
exchanges have taken place, the "sales charge previously paid"
shall include the aggregate of the sales charges paid with
respect to such Class A shares in the initial purchase and any
subsequent exchange. Class A shares issued pursuant to
dividend reinvestment are sold on a no-load basis in each of
the funds offering Class A shares. For purposes of the
exchange privilege, Class A 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 shares on which the dividend was paid. Based on this
formula, Class A shares of the Fund generally may be exchanged
into the Class A shares of the other funds or into shares of
the Class A money market funds with a reduced or without a
sales charge.
In addition, each of the funds with Class B shares
outstanding offers to exchange its Class B shares ("new Class
B shares") for Class B shares ("outstanding Class B shares") of
any of the other funds on the basis of relative net asset value
per Class B share, without the payment of any contingent
deferred sales charge that might otherwise be due on redemption
of the outstanding shares. Class B shareholders of the Fund
exercising the exchange privilege will continue to be subject
to the Fund's contingent deferred sales charge schedule if such
schedule is higher than the deferred sales charge schedule
relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund
acquired through use of the exchange privilege will be subject
to the Fund's contingent deferred sales charge schedule if such
schedule is higher than the deferred sales charge schedule
relating to the Class B shares of the fund from which the
exchange has been made. For purposes of computing the sales
charge that may be payable on a disposition of the new Class B
shares, the holding period for the outstanding Class B shares
<PAGE>
is "tacked" to the holding period of the new Class B shares.
For example, an investor may exchange Class B shares of the
Fund for those of Merrill Lynch Global Resources Trust
(formerly Merrill Lynch Natural Resources Trust) after having
held the Fund's Class B shares for two and a half years. The
2% sales charge 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 Merrill
Lynch Global Resources Trust and receive cash. There will be
no contingent deferred sales charge due on this redemption,
since by "tacking" the two and a half year holding period of
the Fund's Class B shares to the three year holding period for
the Merrill Lynch Global Resources Trust Class B shares, the
investor will be deemed to have held the new Class B shares for
more than five years.
Shareholders also may exchange Class A shares and Class B
shares from any of the funds into shares of the Class A money
market funds and Class B money market funds, respectively, but
the period of time that Class B shares are held in a Class B
money market fund will not count towards satisfaction of the
holding period requirement for purposes of reducing the
contingent deferred sales charge. However, shares of a Class
B money market fund which were acquired as a result of an
exchange for Class B shares of a fund may, in turn, be
exchanged back into Class B shares of any fund offering such
shares, in which event the holding period for Class B shares of
the fund will be aggregated with previous holding periods for
purposes of reducing the contingent deferred sales charge.
Thus, for example, an investor may exchange Class B shares of
the Fund for shares of Merrill Lynch Institutional Fund after
having held the Class B shares for two and a half years and
three years later decide to redeem the shares of Merrill Lynch
Institutional Fund for cash. At the time of this redemption,
the 2% contingent deferred sales charge that would have been
due had
23
<PAGE>
the Class B shares of the Fund been redeemed for cash rather
than exchanged for shares of Merrill Lynch Institutional Fund
will be payable. If, instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund
which the shareholder continues to hold for an additional two
and a half years, any subsequent redemption will not incur a
contingent deferred sales charge.
Below is a description of the investment objectives of the
other funds into which exchanges can be made:
<TABLE>
<CAPTION>
<S> <C>
Merrill Lynch Adjustable Rate
Securities Fund, Inc
High current income consistent with a policy of
<PAGE>
limiting the degree of fluctuation in net asset
value by investing primarily in a portfolio of
adjustable rate securities, consisting principally
of mortgage-backed and asset-backed securities.
Merrill Lynch Americas Income
Fund, Inc.
A high level of current income, consistent with
prudent investment risk, by investing primarily in
debt securities denominated in a currency of a
country located in the Western Hemisphere (i.e.,
North and South America and the surrounding waters).
Merrill Lynch Arizona Limited
Maturity Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Arizona income taxes
as is consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade Arizona Municipal
Bonds.
Merrill Lynch Arizona Municipal
Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide investors with as high a level of income
exempt from Federal and Arizona income taxes as is
consistent with prudent investment management.
Merrill Lynch Balanced Fund for
Investment and Retirement
As high a level of total investment return as is
consistent with reasonable risk by investing in
common stocks and other types of securities,
including fixed income securities and convertible
securities.
Merrill Lynch Basic Value Fund,
Inc. Capital appreciation and, secondarily, income
through investment in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
Merrill Lynch California Insured
Municipal Bond Fund
A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund, whose objective is to
provide shareholders with as high a level of income
exempt from Federal and California income taxes as
is consistent with prudent investment management
through investment in a portfolio consisting
primarily of insured California Municipal Bonds.
<PAGE>
24
<PAGE>
Merrill Lynch California Limited
Maturity Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide shareholders with as
high a level of income exempt from Federal and
California income taxes as is consistent with
prudent investment management through investment in
a portfolio primarily of intermediate-term
investment grade California Municipal Bonds.
Merrill Lynch California
Municipal Bond Fund
A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund, who objective is to
provide investors with as high a level of income
exempt from Federal and California income taxes as
is consistent with prudent investment management.
Merrill Lynch Capital Fund, Inc.
The highest total investment return consistent with
prudent risk through a fully managed investment
policy utilizing equity, debt and convertible
securities.
Merrill Lynch Colorado
Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Colorado income taxes as is consistent with prudent
investment management.
Merrill Lynch Connecticut
Municipal Bond Fund, Inc.
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Connecticut income taxes as is consistent with
prudent investment management.
Merrill Lynch Corporate Bond
Fund, Inc.
Current income from three separate diversified
portfolios of fixed income securities.
Merrill Lynch Developing Capital
Markets Fund, Inc.
Long-term appreciation through investment in
securities, principally equities, of issuers in
countries having smaller capital markets.
Merrill Lynch Dragon Fund, Inc.
Capital appreciation primarily through investment in
equity and debt securities of issuers domiciled in
<PAGE>
developing countries located in Asia and the Pacific
Basin, other than Japan, Australia and New Zealand.
Merrill Lynch Eurofund
Capital appreciation primarily through investment in
equity securities of corporations domiciled in
Europe.
25
<PAGE>
Merrill Lynch Federal Securities
Trust High current return through investments in U.S.
Government and Government agency securities,
including GNMA mortgage-backed certificates and
other mortgage-backed Government securities.
Merrill Lynch Florida Limited
Maturity Municipal
Bond Fund
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income exempt
from Federal income taxes as is consistent with
prudent investment management while serving to offer
shareholders the opportunity to own securities
exempt from Florida intangible personal property
taxes through investment in a portfolio primarily of
intermediate-term investment grade Florida Municipal
Bonds.
Merrill Lynch Florida Municipal
Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal income
taxes as is consistent with prudent investment
management, while seeking to offer shareholders the
opportunity to own securities exempt from Florida
intangible personal property taxes.
Merrill Lynch Fund For
Tomorrow, Inc.
Long-term growth through investment in a portfolio
of good quality securities, primarily common stock,
potentially positioned to benefit from demographic
and cultural changes as they affect consumer
markets.
Merrill Lynch Fundamental
Growth Fund, Inc.
Long-term growth through investment in a diversified
portfolio of equity securities placing particular
emphasis on companies that have exhibited above-
average growth rate in earnings.
<PAGE>
Merrill Lynch Global Allocation
Fund, Inc.
High total investment return, consistent with
prudent risk, through a fully managed investment
policy utilizing United States and foreign equity,
debt, and money market securities, the combination
of which will be varied from time to time both with
respect to types of securities and markets in
response to changing market and economic trends.
Merrill Lynch Global Bond Fund
for Investment and Retirement
High total investment return from investment in a
global portfolio of debt instruments denominated in
various currencies and multinational currency units.
Merrill Lynch Global Convertible
Fund, Inc.
High total return from investment primarily in an
internationally diversified portfolio of convertible
debt securities, convertible preferred stock and
"synthetic" convertible securities consisting of a
combination of debt securities or preferred stock
and warrants or options.
26
<PAGE>
Merrill Lynch Global Growth
Portfolio, Inc.
High total investment return, consistent with
prudent risk, from investment in United States and
foreign equity, debt and money market securities the
combination of which will be varied both with
respect to types of securities and markets in
response to changing market and economic trends.
27
<PAGE>
Merrill Lynch Global Holdings
(residents of Arizona must
meet investor suitability
standards)
The highest total investment return consistent with
prudent risk through worldwide investment in an
internationally diversified portfolio of securities.
Merrill Lynch Global Resources
Trust Long-term growth and protection of capital from
investment in securities of domestic and foreign
companies that possess substantial natural resource
assets.
<PAGE>
Merrill Lynch Global Utility
Fund, Inc.
Capital appreciation and current income through
investment of at least 65% of its total assets in
equity and debt securities issued by domestic and
foreign companies which are primarily engaged in the
ownership or operation of facilities used to
generate, transmit or distribute electricity,
telecommunications, gas or water.
Merrill Lynch Government Fund
A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and
security of principal from investment in securities
issued or guaranteed by the U.S. Government, its
agencies and instrumentalities and in repurchase
agreements secured by such obligations.
Merrill Lynch Growth Fund for
Investment and Retirement
Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing principal emphasis on those
securities which management of the fund believes to
be undervalued.
Merrill Lynch Healthcare
Fund, Inc. (residents of
Wisconsin must meet investor
suitability standards)
Capital appreciation through worldwide investment in
equity securities of companies that derive or are
expected to derive a substantial portion of their
sales from products and services in healthcare.
Merrill Lynch Institutional Fund
A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
maximum current income consistent with liquidity and
the maintenance of a high quality portfolio of money
market securities.
Merrill Lynch Institutional
Tax-Exempt Fund
A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income exempt from Federal income taxes,
preservation of capital and liquidity available from
investing in a diversified portfolio of short-term,
high quality municipal bonds.
28
<PAGE>
<PAGE>
Merrill Lynch International
Equity Fund
Capital appreciation and, secondarily, income by
investing in a diversified portfolio of equity
securities of issuers located in countries other
than the United States.
Merrill Lynch Latin America
Fund, Inc.
Capital appreciation by investing primarily in Latin
American equity and debt securities.
Merrill Lynch Maryland
Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Maryland income taxes as is consistent with prudent
investment management.
Merrill Lynch Massachusetts
Limited Maturity Municipal
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income exempt
from Federal and Massachusetts income taxes as is
consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade Massachusetts
Municipal Bonds.
Merrill Lynch Massachusetts
Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Massachusetts income taxes as is consistent with
prudent investment management.
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income exempt
from Federal and Michigan income taxes as is
consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade Michigan
Municipal Bonds.
Merrill Lynch Michigan Municipal
Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Michigan income taxes as is consistent with prudent
<PAGE>
investment management.
Merrill Lynch Minnesota
Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Minnesota income taxes as is consistent with prudent
investment management.
29
<PAGE>
Merrill Lynch Municipal Bond
Fund, Inc.
Tax-exempt income from three separate diversified
portfolios of municipal bonds.
Merrill Lynch Municipal
Intermediate Term Fund
Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as possible
of income exempt from Federal income taxes by
investing in investment grade obligations with a
dollar weighted average maturity of five to twelve
years.
Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income exempt
from Federal and New Jersey income taxes as is
consistent with prudent investment management
through a portfolio primarily of intermediate-term
investment grade New Jersey Municipal Bonds.
Merrill Lynch New Jersey
Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and New
Jersey income taxes as is consistent with prudent
investment management.
Merrill Lynch New Mexico
Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and New
Mexico income taxes as is consistent with prudent
investment management.
Merrill Lynch New York Limited
<PAGE>
Maturity Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income exempt
from Federal, New York State and New York City
income taxes as is consistent with prudent
investment management through investment in a
portfolio primarily of intermediate-term investment
grade New York Municipal Bonds.
Merrill Lynch New York
Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal, New York
State and New York City income taxes as is
consistent with prudent investment management.
Merrill Lynch North Carolina
Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and North
Carolina income taxes as is consistent with prudent
investment management.
30
<PAGE>
Merrill Lynch Ohio Municipal
Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and Ohio
income taxes as is consistent with prudent
investment management.
Merrill Lynch Oregon Municipal
Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Oregon income taxes as is consistent with prudent
investment management.
Merrill Lynch Pacific Fund, Inc.
Capital appreciation by investing in equity
securities of corporations domiciled in Far Eastern
and Western Pacific countries, including Japan,
Australia, Hong Kong, Singapore and the Philippines.
Merrill Lynch Pennsylvania
Maturity Municipal
Fund A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
<PAGE>
whose objective is to provide as high a level of
income exempt from Federal and Pennsylvania income
taxes as is consistent with prudent investment
management through investment in a portfolio of
intermediate-term investment grade Pennsylvania
Municipal Bonds.
Merrill Lynch Pennsylvania
Municipal Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal and
Pennsylvania income taxes as is consistent with
prudent investment management.
Merrill Lynch Phoenix Fund, Inc.
Long-term growth of capital by investing in equity
and fixed income securities, including tax-exempt
securities, of issuers in weak financial condition
or experiencing poor operating results believed to
be undervalued relative to the current or
prospective condition of such issuer.
Merrill Lynch Ready Assets Trust
Preservation of capital, liquidity and the highest
possible current income consistent with the
foregoing objectives from the short-term money
market securities in which the Trust invests.
31
<PAGE>
Merrill Lynch Retirement
Reserves Money Fund
(available only if the
exchange occurs within
certain retirement plans)
Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund, whose
objectives are current income, preservation of
capital and liquidity available from investing in a
diversified portfolio of short-term money market
securities.
Merrill Lynch Short-Term Global
Income Fund, Inc.
As high a level of current income as is consistent
with prudent investment management from a global
portfolio of high quality debt securities
denominated in various currencies and multinational
currency units and having remaining maturities not
exceeding three years.
Merrill Lynch Smallcap Global
Fund, Inc.
<PAGE>
Long-term growth of capital from investments in
securities, primarily common stocks, of companies
with relatively small market capitalizations located
in various foreign countries and in the United
States.
Merrill Lynch Special Value Fund,
Inc. Long-term growth of capital from investments in
securities, primarily common stocks, of relatively
small companies believed to have special investment
value and emerging growth companies regardless of
size.
Merrill Lynch Strategic Dividend
Fund Long-term total return from investment in dividend
paying common stocks which yield more than Standard
& Poor's 500 Composite Stock Price Index.
Merrill Lynch Technology Fund, Inc.
Capital appreciation through worldwide investment in
equity securities of companies that derive or are
expected to derive a substantial portion of their
sales from products and services in technology.
Merrill Lynch Texas Municipal
Bond Fund
A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
high a level of income exempt from Federal income
taxes as is consistent with prudent investment
management by investing primarily in a portfolio of
long-term, investment grade obligations issued by
the State of Texas, its political subdivisions,
agencies and instrumentalities.
Merrill Lynch Treasury Fund
A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and
security of principal from investment in direct
obligations of the U.S. Treasury and up to 10% of
its total assets in repurchase agreements secured by
such obligations.
32
<PAGE>
Merrill Lynch U.S.A. Government
Reserves
Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and repurchase
agreements relating to such securities.
Merrill Lynch U.S. Treasury
Money Fund
Preservation of capital, liquidity and current
income through investment exclusively in a
diversified portfolio of short-term marketable
securities which are direct obligations of the U.S.
Treasury.
Merrill Lynch Utility Income
Fund, Inc.
High current income through investment in equity and
debt securities issued by companies which are
primarily engaged in the ownership or operation of
facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
Merrill Lynch World Income Fund,
Inc. High current income by investing in a global
portfolio of fixed income securities denominated in
various currencies, including multinational
currencies.
</TABLE>
Before effecting an exchange, shareholders of the Fund
should obtain a currently effective prospectus of the fund into
which the exchange is to be made. Exercise of the exchange
privilege is treated as a sale for Federal income tax purposes
and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. In addition, a
shareholder exchanging shares of any of the funds may be
subject to a backup withholding tax unless such shareholder
certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct and
that such shareholder is not otherwise subject to backup
withholding. See "Dividends, Distributions and Taxes - Taxes"
below.
To exercise the exchange privilege, shareholders should
contact their Merrill Lynch financial consultant, who will
advise the Fund of the exchange, or if the exchange does not
involve a money market fund, shareholders may write to the
transfer agent requesting that the exchange be effected. Such
letter must be signed exactly as the account is registered with
signatures guaranteed by an "eligible guarantor institution"
(including, for example, Merrill Lynch branch offices and
certain other financial institutions) as such is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, the existence and validity of which may be verified by
the transfer agent through the use of industry publications.
Shareholders of the Fund, and shareholders of the other funds
described above with shares for which certificates have not
been issued, may exercise the exchange privilege by wire
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
<PAGE>
exchange privilege. Certain funds may suspend the continuous
offering of their shares to the general public at any time and
may thereafter resume such offering from time to time. The
exchange privilege is available only to U.S. shareholders in
states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
It is the Fund's intention to distribute all of its net
investment income, if any. Dividends from such net investment
33
<PAGE>
income are paid at least annually. All net realized long- or
short-term capital gains, if any, are distributed to the Fund's
shareholders at least annually. From time to time, the Fund
may declare a special distribution at or about the end of the
calendar year in order to comply with a Federal income tax
requirement that certain percentages of its ordinary income and
capital gains be distributed during the taxable year. Premiums
from expired call options written by the Fund and net gains
from closing purchase transactions are treated as short-term
capital gains for Federal income tax purposes. See
"Shareholder Services - Automatic Reinvestment of Dividends and
Capital Gains Distributions" for information concerning the
manner in which dividends and distributions may be reinvested
automatically in shares of the Fund. Shareholders may elect in
writing to receive any such dividends or distributions, or
both, in cash. Dividends and distributions are taxable to
shareholders as described below whether they are invested in
shares of the Fund or received in cash. The per share
dividends and distributions on Class B shares will be lower
than the per share dividends and distributions on Class A
shares as a result of the distribution and higher transfer
agency fees applicable with respect to the Class B shares. See
"Determination of Net Asset Value."
Taxes
The Fund intends to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the
Internal Revenue Code of 1986, as amended (the "Code"). If it
so qualifies, 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 and Class B shareholders (together, the
"shareholders"). The Fund intends to distribute substantially
all of such income.
Dividends paid by the Fund from its ordinary income and
distributions of the Fund's net realized short-term capital
gains (together referred to hereafter as "ordinary income
<PAGE>
dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term
capital gains (including long-term gains from certain
transactions in futures and options) ("capital gain dividends")
are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund
shares. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero,
will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Any loss upon the sale or
exchange of Fund shares held for six months or less, however,
will be treated as long-term capital loss to the extent of any
capital gain dividends received by the shareholder.
Dividends are taxable to shareholders even though they are
reinvested in additional shares of the Fund. Not later than 60
days after the close of its taxable year, the Fund will provide
its shareholders with a written notice designating the amounts
of any ordinary income dividends or capital gain dividends. A
portion of the Fund's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporations
under the Code, if certain requirements are met. For this
purpose, the Fund will allocate dividends eligible for the
dividends received deduction between the Class A and Class B
shareholders according to a method (which it believes is
consistent with the Securities and Exchange Commission
exemptive order permitting the issuance and sale of two classes
of stock) that is based on the gross income allocable to Class
A and Class B shareholders during the taxable year, or such
other method as the Internal Revenue Service may prescribe. If
the Fund pays a dividend in January that was declared in the
previous October, November or December to shareholders of
record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the
Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders
who are nonresident aliens or foreign entities will be subject
to a 30% U.S. withholding tax under existing provisions of the
Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders
are urged to consult their own tax advisers concerning the
applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders
may be subject to a 31% withholding tax on certain ordinary
income
34
<PAGE>
dividends and capital gain dividends and on redemption payments
("backup withholding"). Generally, shareholders subject to
<PAGE>
backup withholding will be those for whom no certified taxpayer
identification number is on file with the Fund or who, to the
Fund's knowledge, have furnished an incorrect number. When
establishing an account, an investor must certify under penalty
of perjury that such number is correct and that such investor
is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise
to withholding and other taxes imposed by foreign countries.
Tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes. Shareholders may be able to
claim U.S. foreign tax credits with respect to such taxes,
subject to certain conditions and limitations contained in the
Code. For example, certain retirement accounts cannot claim
foreign tax credits on investments in foreign securities held
in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible, and
intends, to file an election with the Internal Revenue Service
pursuant to which shareholders of the Fund will be required to
include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such
proportionate shares as taxes paid by them, and deduct such
proportionate shares in computing their taxable incomes or,
alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, however,
may be claimed by noncorporate shareholders who do not itemize
deductions. A shareholder that is a nonresident alien
individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to
claim a credit or deduction against such U.S. tax for the
foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount
per share of such withholding taxes. For this purpose, the
Fund will allocate foreign taxes and foreign source income
between the Class A and Class B shareholders according to a
method similar to that described above for the allocation of
dividends eligible for the dividends received deduction.
If a Class A shareholder exercises the exchange privilege
within 90 days of acquiring the shares, then the loss the
shareholder can recognize on the exchange will be reduced (or
the gain increased) to the extent the sales charge paid to the
Fund reduces any sales charge the shareholder would have owed
upon purchase of the new Class A shares in the absence of the
exchange privilege. Instead, such sales charge will be treated
as an amount paid for the new Class A 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 year basis, and 98% of its capital gains, determined,
in general, on an October 31 year end, plus certain
undistributed amounts from previous years. While the Fund
intends to distribute its income and capital gains in the
manner necessary to avoid imposition of the 4% excise tax,
<PAGE>
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, Futures and Forward Foreign
Exchange Transactions. The Fund may write, purchase or sell
options, futures or forward foreign exchange contracts.
Options and futures contracts that are "Section 1256 contracts"
will be "marked to market" for Federal income tax purposes at
the end of each taxable year, i.e., each such option or futures
contract will be treated as sold for its fair market value on
the last day of the taxable year. Unless such contract is a
non-equity option or a regulated futures contract for a non-
U.S. currency and the Fund elects to have gain or loss in
connection with the contract treated as ordinary gain or loss
under Code Section 988 (as described below), gain or loss from
Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. The mark-to-market rules outlined above,
however, will not apply to certain transactions entered into by
the Fund solely to reduce the risk of changes in price or
interest or currency exchange rates with respect to its
investments.
A forward foreign exchange contract that is a Section 1256
contract will be marked to market, as described above.
However, the character of gain or loss from such a contract
will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain
forward foreign exchange contracts as capital. In this case,
gain or loss realized in connection with a forward foreign
exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain
or loss.
35
<PAGE>
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
contracts.
One of the requirements for qualification as a RIC is that
less than 30% of the Fund's gross income may be derived from
gains from the sale or other disposition of securities held for
less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three
months after entering into an options or futures contract.
Special Rules for Certain Foreign Currency Transactions.
In general, gains from "foreign currencies" and from foreign
<PAGE>
currency options, foreign currency futures and forward foreign
exchange contracts relating to investments in stock, securities
or foreign currencies will be qualifying income for purposes of
determining whether the Fund qualifies as a RIC. It is
currently unclear, however, who will be treated as the issuer
of a foreign currency instrument or how foreign currency
options, foreign currency futures and forward foreign exchange
contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund. The Fund
may request a private letter ruling from the Internal Revenue
Service on some or all of these issues.
Under Code Section 988, special rules are provided for
certain transactions in a 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
forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will be
treated as ordinary income or loss under Code Section 988. In
certain circumstances, the Fund may elect capital gain or loss
treatment for such transactions. Regulated futures contracts,
as described above, will be taxed under Code Section 1256
unless application of Section 988 is elected by the Fund. In
general, however, Code Section 988 gains or losses will
increase or decrease the amount of the Fund's investment
company taxable income available to be distributed to
shareholders as ordinary income. Additionally, if Code Section
988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any
ordinary dividend distributions, and any distributions made
before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to
shareholders, thereby reducing the basis of each shareholder's
Fund shares. These rules and the mark-to-market rules
described above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk
of currency fluctuations with respect to its investments.
---------------------
The foregoing is a general and abbreviated summary of the
applicable provisions of the Code and Treasury regulations
presently in effect. For the complete provisions, reference
should be made to the pertinent Code sections and the Treasury
regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or
administrative action either prospectively or retroactively.
Ordinary income dividends and capital gain dividends may
also be subject to state and local taxes.
Certain states exempt from state income taxation dividends
paid by RICs which are derived from interest on U.S. Government
obligations. State law varies as to whether dividend income
attributable to U.S. Government obligations is exempt from
state income tax.
<PAGE>
Shareholders are urged to consult their own tax advisers
regarding specific questions as to Federal, foreign, state or
local taxes. Foreign investors should consider applicable
foreign taxes in their evaluation of an investment in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual
total return and other total return data in advertisements or
36
<PAGE>
information furnished to present or prospective shareholders.
Total return figures are based on the Fund's historical
performance and are not intended to indicate future
performance. Average annual total return is determined
separately for Class A and Class B 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 shares and the contingent deferred sales
charge that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of
Class B shares.
The Fund also may quote annual, average annual and
annualized total return and aggregate total return performance
data, both as a percentage and as a dollar amount based on a
hypothetical $1,000 investment, for various periods other than
those noted below. Such data will be computed as described
above, except that (i) as required by the periods of the
quotations, actual annual, annualized or aggregate data, rather
than average annual data, may be quoted, and (ii) the maximum
applicable sales charges will not be included. Actual annual
or annualized total return data generally will be lower than
average annual total return data since the average rates of
return reflect compounding of return; aggregate total return
data generally will be higher than average annual total return
data since the aggregate rates of return reflect compounding
over longer periods of time.
In order to reflect the reduced sales charges, in the case
of Class A shares, or the waiver of the contingent deferred
sales charge, in the case of Class B shares, applicable to
<PAGE>
certain investors, as described under "Purchase of Shares" and
"Redemption of Shares," respectively, the total return data
quoted by the Fund in advertisements directed to such investors
may take into account the reduced, and not the maximum, sales
charge or may not take into account the contingent deferred
sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales
charges, a lower amount of expenses may be deducted.
GENERAL INFORMATION
Description of Shares
The Fund was incorporated under Maryland law on June 6,
1994. It has an authorized capital of 200,000,000 shares of
Common Stock, par value $0.10 per share, divided into two
classes, designated Class A Common Stock and Class B Common
Stock, each of which consists of 100,000,000 shares. Both Class
A Common Stock and Class B Common Stock represent an interest
in the same assets of the Fund and are identical in all
respects except that the Class B shares bear certain expenses
related to the account maintenance and distribution of such
shares and have exclusive voting rights with respect to matters
relating to such account maintenance and distribution
expenditures. The Fund has received an order from the
Commission permitting the issuance and sale of two classes of
Common Stock. The Board of Directors of the Fund may classify
and reclassify the shares of the Fund into additional classes
of Common Stock at a future date. The creation of additional
classes would require an additional order from the Commission.
There is no assurance that such an additional order would be
issued.
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
37
<PAGE>
non-assessable and have no preemptive or conversion rights.
Redemption rights are discussed elsewhere herein and in the
Prospectus. Each share is entitled to participate equally in
<PAGE>
dividends and distributions declared by the Fund and in the net
assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities. Stock certificates
are issued by the transfer agent only on specific request.
Certificates for fractional shares are not issued in any case.
The Manager provided the initial capital for the Fund by
purchasing 5,000 shares of each class of stock for an aggregate
of $100,000. Such shares were acquired for investment and can
only be disposed of by redemption. The organizational expenses
of the Fund will be paid by the Fund and amortized over a
period not exceeding five years. The proceeds realized by the
Manager upon redemption of any of such shares will be reduced
by the proportionate amount of the unamortized organizational
expenses which the number of shares redeemed bears to the
number of shares initially purchased.
Computation of Offering Price Per Share
An illustration of the computation of the offering price for
Class A and Class B shares of the Fund based on the projected
value of the Fund's estimated net assets on ___________, 1994,
and its shares outstanding on that date is as follows:
Class A Class B
------- -------
Net Assets. . . . . . . . . . . . . . . . . $ $
======= =======
Number of Shares Outstanding. . . . . . . . ======= =======
Net Asset Value Per Share (net assets
divided by number of shares outstanding). $ $
Sales Charge (for Class A shares:
4.00% of offering price ( %
of net amount invested))* . . . . . . . . $ $
-------- -------
Offering Price . . . . . . . . . . . . . . $ $
======== =======
_____________________________
* Rounded to the nearest one-hundredth percent; assumes
maximum sales charges applicable.
** Class B shares are not subject to an initial sales charge
but may be subject to a contingent deferred sales charge on
redemption of shares within four years of purchase. See
"Purchase of Shares - Deferred Sales Charge Alternative - Class
B Shares" in the Prospectus and "Redemption of Shares -
Contingent Deferred Sales Charge - Class B Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey
08540, has been selected as the independent auditors of the
Fund. The selection of independent auditors is subject to
ratification by the shareholders of the Fund. The independent
auditors are responsible for auditing the annual financial
statements of the Fund.
<PAGE>
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109 (the "Custodian"), acts as the custodian of
the Fund's assets. Under its contract with the Fund, the
Custodian is authorized to establish separate accounts in
foreign currencies and to cause foreign securities owned by the
Fund to be held in its offices outside the U.S. and with
certain foreign banks and securities depositories. The
Custodian is responsible for safeguarding and controlling the
Fund's cash and securities, handling the receipt and delivery
of securities and collecting interest and dividends on the
Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., Transfer Agency Mutual
Fund Operations, 4800 Deer Lake Drive East, Jacksonville,
Florida
38
<PAGE>
32246-6484 (the "Transfer Agent"), acts as the Fund's transfer
agent. The Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening, maintenance
and servicing of shareholder accounts. See "Management of the
Fund - Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Rogers & Wells, 200 Park Avenue, New York, New York
10166, is counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each
year. The Fund sends to its shareholders at least semi-
annually reports showing the Fund's portfolio and other
information. An annual report, containing financial statements
audited by independent auditors, is sent to shareholders each
year. After the end of each year, shareholders will receive
Federal income tax information regarding dividends and capital
gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional
Information do not contain all the information set forth in the
Registration Statement and the exhibits relating thereto, which
the Fund has filed with the Securities and Exchange Commission,
<PAGE>
Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act, to which reference is hereby made.
Under a separate agreement, Merrill Lynch has granted the
Fund the right to use the "Merrill Lynch" name and has reserved
the right to withdraw its consent to the use of such name by
the Fund at any time or to grant the use of such name to any
other company, and the Fund has granted Merrill Lynch, under
certain conditions, the use of any other name it might assume
in the future, with respect to any corporation organized by
Merrill Lynch.
39
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
Description of Moody's Investors Service, Inc.'s
("Moody's") Corporate Ratings
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure.
While the various protective elements are likely to
change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in
Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
<PAGE>
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well
assured. Often the protection of interest and principal
payments may be very moderate and thereby not well
safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in
this class.
B Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements
of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its
corporate bond rating system. The modifier 1 indicates that
the security ranks in the higher 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.
40
<PAGE>
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
<PAGE>
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:
Prime-1. Issuers rated Prime-1 (or supporting
institutions) have a superior ability for repayment of senior
short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure 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.
Prime-2. Issuers rated Prime-2 (or supporting
institutions) have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may
be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting
institutions) have an acceptable ability for repayment of
senior short term obligations. The effect of industry
characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes
in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate
liquidity is maintained.
Not Prime. 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 the 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 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
<PAGE>
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
41
<PAGE>
used in the quality ranking of preferred stock. The symbols,
presented below, are designed to avoid comparison with bond
quality in absolute terms. It should always be borne in mind
that preferred stock occupies a junior position to bonds within
a particular capital structure and that these securities are
rated within the universe of preferred stocks.
Preferred stock rating symbols and their definitions are
as follows:
"aaa"
An issue which is rated "aaa" is considered to be a top-
quality preferred stock. This rating indicates good asset
protection and the least risk of dividend impairment
within the universe of preferred stocks.
"aa" An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a
reasonable assurance the earnings and asset protection
will remain relatively well maintained in the foreseeable
future.
"a" An issue which is rated "a" is considered to be an upper-
medium grade preferred stock. While risks are judged to
be somewhat greater than in the "aaa" and "aa"
classifications, earnings and asset protections are,
nevertheless, expected to be maintained at adequate
levels.
"baa"
An issue which is rated "baa" is considered to be a
medium-grade preferred stock, neither highly protected nor
poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great
length of time.
"ba" An issue which is rated "ba" is considered to have
speculative elements and its future cannot be considered
well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in
this class.
<PAGE>
"b" An issue which is rated "b" generally lacks the
characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
"caa"
An issue which is rated "caa" is likely to be in arrears
on dividend payments. This rating designation does not
purport to indicate the future status of payments.
"ca" An issue which is rated "ca" is speculative in a high
degree and is likely to be in arrears on dividends with
little likelihood of eventual payments.
"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 applies numerical modifiers 1, 2 and 3 in
each rating classification: the modifier 1 indicates that the
security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
Description of Standard & Poor's Corporation's
("Standard & Poor's") Corporate Debt Ratings
A Standard & Poor's corporate or municipal debt rating is
a current assessment of the creditworthiness of an obligor with
respect to a specific obligation. This assessment may take
into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell
or hold a security, inasmuch as it does not comment as to
market price or suitability for a particular investor.
The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources
it
42
<PAGE>
considers reliable. Standard & Poor's does not perform any
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
circumstances.
The ratings are based, in varying degrees, on the
following considerations: (1) likelihood of default-capacity
<PAGE>
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 in higher rated
categories.
Speculative
Grade
Debt rated BB, B, CCC, CC and C is 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. While such debt will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties or major exposures to adverse
conditions.
BB Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or
economic conditions will 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.
<PAGE>
CCC Debt rated CCC has a currently identifiable vulnerability
to default, and is dependent upon favorable business,
financial, and economic conditions to meet timely payment
of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay
principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to
senior debt that 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.
43
<PAGE>
CI The rating CI is reserved for income bonds on which no
interest is being paid.
D Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are
not made on the date due even if the applicable grace
period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period.
The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are
jeopardized.
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 categories.
N.R. 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
<PAGE>
addition, the Legal Investment Laws of various states may
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-1" for the highest
quality obligations to "D" for the lowest. The four categories
are as follows:
A Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this
category are delineated with the numbers 1, 2, and 3 to
indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very
strong. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this
designation is strong. However, the relative degree of
safety is not as high as for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat
more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only an 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 Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments are not made on the date due even if the
applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during
such grace period.
44
<PAGE>
A commercial paper rating is not a recommendation to
purchase or sell a security. The ratings are based on current
<PAGE>
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 arrangement under the
laws of bankruptcy and other laws 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.
<PAGE>
BBB
B
CCC
Preferred stock rated "BB," "B," and "CCC" are regarded, on
balance, as predominately 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 protective 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.
45
<PAGE>
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.
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.
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
<PAGE>
The Board of Directors and Shareholders of
Merrill Lynch Asset Allocation Income Portfolio, Inc.:
We have audited the accompanying statement of assets and
liabilities, of Merrill Lynch Asset Allocation Income
Portfolio, Inc. as of July __, 1994. This financial statement
is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial
statement based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statement is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statement presents fairly, in
all material respects, the financial position of Merrill Lynch
Asset Allocation Income Portfolio, Inc. as of July __, 1994, in
conformity with generally accepted accounting principles.
Deloitte & Touche
Princeton, New Jersey
July , 1994.
47
<PAGE>
<TABLE>
<CAPTION>
MERRILL LYNCH ASSET ALLOCATION INCOME PORTFOLIO, INC.
STATEMENT OF ASSETS AND LIABILITIES
_________, 1994
<S> <C>
Assets:
Cash in Bank. . . . . . . . . . . . . . . . . . . . $100,000
Prepaid registration fees (Note 3) . . . . . . . .
Deferred organization expenses (Note 4) . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ________
<PAGE>
Liabilities - accrued expenses . . . . . . . . . . . . . . . . . . . . . . ________
Net Assets (equivalent to $10.00 per share on 5,000 Class A shares of
common stock (par value $0.10) and 5,000 Class B shares of common stock (par
value $0.10) outstanding with 200,000,000 shares authorized) (Note 1). . . $100,000
________________
(1) Merrill Lynch Asset Allocation Income Portfolio, Inc. (the
"Fund") was incorporated in the State of Maryland on
________, 1994. The Fund is registered under the
Investment Company Act of 1940 as an open-end investment
company.
(2) The Fund intends to enter into an Investment Management
Agreement (the "Management Agreement") with Merrill Lynch
Asset Management, L.P. (the "Manager"), and a distribution
agreement (the "Distribution Agreement") with Merrill
Lynch Funds Distributor, Inc. (the "Distributor"). (See
"Management and Advisory Arrangements" in the Statement of
Additional Information.) Certain officers and/or
directors of the Fund are officers and/or directors of the
Manager and the Distributor.
(3) Prepaid registration fees are charged to income as the
related shares are issued.
(4) Deferred organization expenses will be amortized over a
period from the date the Fund commences operations not
exceeding five years. In the event that the Manager (or
any subsequent holder) redeems any of its original shares
prior to the end of the five-year period, the proceeds of
the redemption payable in respect of such shares will be
reduced by the pro rata share (based on the proportionate
share of the original shares redeemed to the total number
of original shares outstanding at the time of redemption)
of the unamortized deferred organization expenses as of
the date of such redemption. In the event that the Fund
is liquidated prior to the end of the five-year period,
the Manager (or any subsequent holder) will bear the
unamortized deferred organization expenses.
</TABLE>
48
<PAGE>
TABLE OF CONTENTS STATEMENT OF
ADDITIONAL
Page INFORMATION
Investment Objective and Policies . . . . . 1
Precious Metal-Related Securities. . . . 2
Real Estate-Related Securities . . . . . 2
Portfolio Strategies Involving Options
and Futures . . . . . . . . . . . . . 3
Other Investment Policies and Practices. 6
Investment Restrictions . . . . . . . . 8
Management of the Fund . . . . . . . . . . 11
Directors and Officers . . . . . . . . . 11
Management and Advisory Arrangements . . 12
Purchase of Shares . . . . . . . . . . . . 13
Alternative Sales Arrangements . . . . . 13
<PAGE>
Initial Sales Charge Alternative-Class
A Shares . . . . . . . . . . . . . . . 14
Reduced Initial Sales Charges-Class A [LOGO]
Shares . . . . . . . . . . . . . . . . 14
Deferred Sales Charge Alternative-Class
B Shares . . . . . . . . . . . . . . . 17
Redemption of Shares. . . . . . . . . . . . 17
Contingent Deferred Sales Charge-Class B
Shares . . . . . . . . . . . . . . . 18
Portfolio Transactions and Brokerage. . . . 18
Determination of Net Asset Value. . . . . . 20 -----------------------
Shareholder Services . . . . . . . . . . . 20 MERRILL LYNCH
Investment Account . . . . . . . . . . . 20 ASSET ALLOCATION
Automatic Investment Plan. . . . . . . . 21 INCOME PORTFOLIO, INC.
Automatic Reinvestment of Dividends
and Capital Gains Distributions. . . . . 21
Systematic Withdrawal Plans-Class
A Shares . . . . . . . . . . . . . . . 21
Exchange Privilege . . . . . . . . . . . 22
Dividends, Distributions and Taxes. . . . . 33
Dividends and Distributions. . . . . . . 33
Taxes . . . . . . . . . . . . . . . . . 33
Performance Data. . . . . . . . . . . . . . 36
General Information . . . . . . . . . . . . 37
Description of Shares. . . . . . . . . . 37
Computation of Offering Price Per Share. 38
Independent Auditors . . . . . . . . . . . 38
Custodian . . . . . . . . . . . . . . . . . 38
Transfer Agent. . . . . . . . . . . . . . . 38
Legal Counsel . . . . . . . . . . . . . . . 38
Reports to Shareholders . . . . . . . . . . 39
Additional Information . . . . . . . . . . 39
Appendix . . . . . . . . . . . . . . . . . 40
Independent Auditors' Report. . . . . . . . 47 July __, 1994
Statement of Assets and Liabilities . . . . 47
Distributor: Merrill Lynch
Funds Distributor, Inc.
<PAGE>
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
Contained in Part A: None.
Contained in Part B:
Statement of Assets and Liabilities, July __, 1994.
(b) Exhibits:
Exhibit
Number
1 - Articles of Incorporation of the Registrant.
2 - By-Laws of the Registrant.
3 - None.
<PAGE>
4 - Copies of instruments defining the rights of
shareholders, including the relevant portions of
the Articles of Incorporation, as amended, and By-
Laws of Registrant.
5 - Form of Management Agreement between Registrant and
Merrill Lynch Asset Management, L.P.
6(a) - Form of Class B Shares Distribution Agreement
between Registrant and Merrill Lynch Funds
Distributor, Inc.
(b) - Letter Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc. with respect to the
Merrill Lynch Mutual Fund Advisor Program.
7 - None.
8 - Form of Custodian Agreement between Registrant and
Brown Brothers Harriman & Co.
9(a) - Form of Transfer Agency, Dividend Disbursing Agency
and Shareholder Servicing Agency Agreement between
Registrant and Financial Data Services, Inc.
(b) - Form of Agreement between Merrill Lynch & Co., Inc.
and the Registrant relating to use by Registrant of
Merrill Lynch name.
10 - None.
11 - Consent of Deloitte & Touche, independent auditors
for the Registrant.
12 - None.
13 - Certificate of Merrill Lynch Asset Management,
L.P.
14 - None.
15 - Class B Distribution Plan of the Registrant and
Distribution Plan Sub-Agreement.
16(a) - Schedule of computation of each performance
quotation relating to Class A shares provided in
the Registration Statement in response to Item 22.
(b) - Schedule of computation of each performance
quotation relating to Class B shares provided in
the Registration Statement in response to Item 22.
______________
* To be filed by amendment
Item 25. Persons Controlled by or Under Common Control with
Registrant.
The Registrant is not controlled by or under common
control with any other person.
Item 26. Number of Holders of Securities.
C-1
<PAGE>
Number of Record
Holders at Effective
Date of the
Title of Class Registration Statement
-------------- ----------------------
Shares of Class A Common Stock, par value $0.10 per share One
Shares of Class B Common Stock, par value $0.10 per share One
<PAGE>
Item 27. Indemnification.
Reference is made to Article VI of Registrant's Articles
of Incorporation, Article VI of Registrant's By-Laws, Section
2-418 of the Maryland General Corporation Law and Section [9]
of the Class A and Class B Distribution Agreements.
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.
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.
Insofar as the conditional advancing of indemnification
moneys for actions based upon the Investment Company Act of
1940 may be concerned, such payments will be made only on the
following conditions: (i) the advances must be limited to
amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs
connected with the preparation of a settlement; (ii) advances
may be made only upon receipt of a written promise by, or on
behalf of, the recipient to repay that amount of the advance
which exceeds the amount to which it is ultimately determined
that he is entitled to receive from the Registrant by reason of
indemnification; and (iii) (a) such promise must be secured by
a surety bond, other suitable insurance or an equivalent form
of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the
<PAGE>
recipient of the advance, or (b) a majority of a quorum of the
Registrant's disinterested, non-party Directors, or an
independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that
the recipient of the advance ultimately will be found entitled
to indemnification.
In Section 9 of the Class A and Class B Distribution
Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person,
if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the "Act"), against certain types of
civil liabilities arising in connection with the Registration
Statement or Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under
the Act may be permitted to Directors, officers and controlling
persons of the Registrant and the principal underwriter
pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the
C-2
<PAGE>
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
Director, officer, or controlling person of the Registrant and
the principal underwriter in connection with the successful
defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal
underwriter in connection with the shares being registered, the
Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Adviser.
(a) Merrill Lynch Asset Management, L.P., doing
business as Merrill Lynch Asset Management (the "Manager"),
acts as investment adviser for the following registered
investment companies: Convertible Holdings, Inc., Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Allocation Income
Portfolio, Inc., Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental
<PAGE>
Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Growth Portfolio, Inc., Merrill Lynch Global Convertible
Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch Global
Resources Trust, Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Growth Fund for Investment and Retirement,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Institutional
Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal
Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term
Global Income Fund, Inc., Merrill Lynch SmallCap Global Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc. and Senior Floating Rate Fund. Fund Asset
Management, L.P. ("FAM"), an affiliate of the Manager, acts as
the investment adviser for the following investment companies:
Apex Municipal Fund, Inc., CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Financial
Institutions Series Trust, Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Basic
Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Municipal Series Trust,
Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc., MuniAssets Fund, Inc.,
MuniBond Income Fund, Inc., The Municipal Fund Accumulation
Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
California Insured Fund, Inc., MuniVest Florida Fund, MuniVest
Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc.,
MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona
Fund II, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured
Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund,
Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New
Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield New York Insured Fund III,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income
Portfolio, Inc., Senior High Income Portfolio II, Inc., Taurus
MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings,
Inc. and Worldwide DollarVest Fund, Inc. The address of each of
<PAGE>
these investment companies is Box 9011, Princeton, New Jersey
08543-9011, except that the address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Institutional
Intermediate Fund is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of the Manager and FAM
is also Box 9011, Princeton, New Jersey 08543-9011. The
address of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML&Co.") is
World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281.
C-3
<PAGE>
Set forth below is a list of each executive officer and
partner of the Manager indicating each business, profession,
vocation or employment of a substantial nature in which each
such person or entity has been engaged since November 1, 1991,
for his or its own account or in the capacity of director,
officer, partner or trustee. [In addition, Mr. Zeikel is
President, Mr. Richard is Treasurer and Mr. Glenn is Executive
Vice President of substantially all of the investment companies
described in the preceding paragraph, and Messrs. Durnin,
Giordano, Harvey, Kirstein and Monagle are directors, trustees
or officers of one or more of such companies.]
<TABLE>
<CAPTION>
Position with Other Substantial Business, Profession,
Name The Manager Vocation or Employment
<S> <C> <C>
ML & Co. Limited Partner Financial Services Holding Company
Merrill Lynch
Management, Inc Limited Partner Investment Advisory Services;
Limited Partner of FAM
Princeton Services, Inc.
("Princeton Services") General Partner General Partner of FAM
Arthur Zeikel President President of FAM; President and Director
of Princeton Services; Director of
Merrill Lynch Funds Distributor, Inc.
("MLFD"); Executive Vice President of
ML & Co.; Executive Vice President of
Merrill Lynch
Terry K. Glenn Executive Vice President Executive Vice President of the Manager
and FAM; Executive Vice President and
Director of Princeton Services; President
and Director of MLFD; Director of Financial
Data Services, Inc. ("FDS"); President of
Princeton Administrators
Bernard J. Durnin Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
<PAGE>
Vincent R. Giordano Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Elizabeth Griffin Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Norman R. Harvey Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
N. John Hewitt Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Philip L. Kirstein Senior Vice President,
General Counsel and
Secretary Senior Vice President, General Counsel
and Secretary of FAM; Senior Vice President,
General Counsel, Director and Secretary of
Princeton Services, Director of MLF
Ronald M. Kloss Senior Vice President
and Controller Senior Vice President and Controller of
FAM; Senior Vice President and Controller
of Princeton Services
Stephen M.M. Miller Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
C-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Gerard M. Richard Senior Vice President
and Treasurer Senior Vice President and Treasurer of the
Manager and FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Richard L. Rufener Senior Vice President Vice President of FAM; Senior Vice President
of Princeton Services
Ronald L. Welburn Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Anthony Wiseman Senior Vice President Senior Vice President of Princeton Services
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-adviser for the following
registered investment companies: Merrill Lynch EuroFund, Merrill Lynch Global Growth Portfolio, Inc., Merrill
<PAGE>
Lynch International Equity Fund and Merrill Lynch Short-Term Global Income Fund, Inc. The address of each of
these investment companies is Box 9011, Princeton, New Jersey 08543-9011. The address of MLAM U.K. is Ropemaker
Place, 25 Ropemaker Street, 1st Floor, London EC24 9LY, 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 November 1, 1991, for his own account or in the capacity of director, officer, partner or
trustee. [In addition, Messrs. Zeikel, Albert, Glenn, Harvey, Richard and Yardley are officers of one
or more of the registered investment companies listed in the preceding paragraph:]
</TABLE>
<TABLE>
<CAPTION>
Position with Other Substantial Business, Profession,
Name The Manager Vocation or Employment
<S> <C> <C>
Arthur Zeikel Chairman President of the Manager and FAM; President
and Director of Princeton Services; Director
of MLFD; Executive Vice President of ML&Co.;
Executive Vice President of Merrill Lynch
Alan J. Albert Managing Director Vice President of the Manager
Terry K. Glenn Managing Director Executive Vice President of the Manager and
FAM; Executive Vice President and Director of
Princeton Services; President and Director of
MLFD; Director of FDS; President of Princeton
Administrators
Paul J. Sarosy Managing Director None
Norman R. Harvey Senior Vice President Services Senior Vice President of the Manager and FAM;
Senior Vice President of Princeton Services
Gerard M. Richard Senior Vice President Senior Vice President and Treasurer of the
Manager and FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Jeffrey Lawrence Vice President None
Adrian Holmes Vice President None
Steven J. Yardley Vice President None
Carol Ann Langham Company Secretary None
Debra Anne Searle Assistant Company Secretary None
C-5
</TABLE>
<PAGE>
<PAGE>
Item 29. Principal Underwriters.
(a) MLFD acts as the principal underwriter for the Registrant and
for each of the investment companies referred to in the first paragraph of
Item 28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust,
CMA Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings, Inc., The
Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond
Income Fund, Inc., The Municipal Fund Accumulation Program, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc.,
MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey
Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania
Fund, MuniYield Arizona Fund, MuniYield Arizona Fund II, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New
Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc.,
MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Taurus
MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc. and
Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and
officer of MLFD. The principal business address of each such person is Box
9011, Princeton, New Jersey 08543-9011, except that the address of Messrs.
Crook, Aldrich, Breen, Graczyk, Fatseas, and Wasel is One Financial Center,
Boston, Massachusetts 02111-2646.
Position(s) and Office(s) Position(s) and Office(s)
Name with MLFD with Registrant
Terry K. Glenn President and Director Executive Vice President
Arthur Zeikel Director President and Director
Philip L. Kirstein Director None
William E. Aldrich Senior Vice President None
Robert W. Crook Senior Vice President None
Michael J. Brady Vice President None
William M. Breen Vice President None
Sharon Creveling Vice President and
Assistant Treasurer None
Mark A. DeSario Vice President None
James T. Fatseas Vice President None
Stanley Graczyk Vice President None
Michelle T. Lau Vice President None
Debra W. Landsman-Yaros Vice President None
Gerald M. Richard Vice President
and Treasurer Treasurer
Richard L. Rufener Vice President None
Salvatore Venezia Vice President None
William WaselAssistant Vice President None
Robert Harris Secretary None
<PAGE>
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the
rules thereunder are maintained at the offices of the Registrant,
800 Scudders Mill Road, Plainsboro, New Jersey 08536, and Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
C-6
<PAGE>
Item 31. Management Services.
Other than as set forth under the caption "Management of the Fund -
Management and Advisory Arrangements" in the Prospectus constituting Part
A of the Registration Statement and under "Management of the Fund -
Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, Registrant
is not a party to any management related service contract.
Item 32. Undertakings.
The Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of the Registrant's annual report to shareholders, upon
request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Plainsboro,
State of New Jersey on the 6th day of June, 1994.
MERRILL LYNCH ASSET ALLOCATION
INCOME PORTFOLIO, INC.
By/s/ Philip L. Kirstein
----------------------------------------
<PAGE>
(Philip L. Kirstein, President)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Philip L. Kirstein, Mark B. Goldfus
and Robert Harris, and each of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and
all Amendments (including pre-effective and post-effective amendments) to
this Registration Statement, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents,
or either of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Philip L. Kirstein
- --------------------------------
Philip L. Kirstein Director and President
(Principal Executive
Officer) June , 1994
/s/ Mark B. Goldfus
- -------------------------------
Mark B. Goldfus Director and Treasurer
(Principal Financial
and Accounting Officer)
June , 1994
/s/ Robert Harris
- -------------------------------
Robert Harris Director June , 1994
C-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Sequential
Number Numbered
Page
<S> <C> <C>
1- Articles of Incorporation of the Registrant.
2- By-Laws of the Registrant.
<PAGE>
3- None.
4- Copies of instruments defining the rights of shareholders, including
the Relevant portions of the Articles of Incorporation, as amended,
and By-Laws of Registrant.*
5- Form of Management Agreement between Registrant and Merrill Lynch
Asset Management, L.P.*
6(a)-
Form of Class B Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.*
(b)- Letter Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. with respect to the Merrill Lynch Mutual Fund
Advisor Program.*
7- None.
8- Form of Custodian Agreement between Registrant and Brown Brothers
Harriman & Co.*
9(a)-
Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc.*
(b)- Form of Agreement between Merrill Lynch & Co., Inc. and the
Registrant relating to use by Registrant of Merrill Lynch name.*
10- None.
11- Consent of Deloitte & Touche, independent auditors for the
Registrant.*
12- None.
13- Certificate of Merrill Lynch Asset Management, L.P.*
14- None.
15- Class B Distribution Plan of the Registrant and Distribution Plan Sub-
Agreement.*
16(a)-
Schedule of computation of each performance quotation relating to
Class A shares provided in the Registration Statement in response to
Item 22.*
(b)- Schedule of computation of each performance quotation relating to
Class B shares provided in the Registration Statement in response to
Item 22.*
___________________________
* To be filed by amendment
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Asset Allocation Income Portfolio, Inc.:
<PAGE>
We consent to the use in Registration Statement No. 33-_________of our
report dated July __, 1994 appearing in the Statement of Additional
Information, which is a part of such Registration Statement.
DELOITTE & TOUCHE
Princeton, New Jersey
July __, 1994
C-10
<PAGE>
</TABLE>
ARTICLES OF INCORPORATION
MERRILL LYNCH ASSET ALLOCATION INCOME PORTFOLIO, INC.
THE UNDERSIGNED, JOHN D. LAMB, whose post office address is
200 Park Avenue, New York, New York 10166-0153, being at least
eighteen years of age, does hereby act as an incorporator, under
and by virtue of the General Laws of the State of Maryland
authorizing the formation of corporations and with the intention
of forming a corporation.
ARTICLE I
NAME
----
The name of the corporation is MERRILL LYNCH ASSET
ALLOCATION INCOME PORTFOLIO, INC. (the "Corporation").
ARTICLE II
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed,
the powers, rights and privileges that the Corporation shall be
authorized to exercise and enjoy, and the business or objects to
be transacted, carried on and promoted by it are as follows:
(1) To conduct and carry on the business of an investment
company of the management type.
(2) To hold, invest and reinvest its assets in securities,
and in connection therewith to hold part or all of its assets in
cash.
<PAGE>
(3) To issue and sell shares of its own capital stock in
such amounts and on such terms and conditions for such purposes
and for such amount or kind of consideration now or hereafter
permitted by the General Laws of the State of Maryland and by
these Articles of Incorporation, as its Board of Directors may
determine; provided, however, that the value of the consideration
per share to be received by the Corporation upon the sale or
other disposition of any shares of its capital stock shall not be
less than the net asset value per share of such capital stock
outstanding at the time of such event.
(4) To exchange, classify, reclassify, change the
designation of, convert, rename, redeem, purchase or otherwise
acquire, hold, dispose of, resell, transfer, reissue or cancel
(all without the vote or consent of the stockholders of the
Corporation) shares of its issued or unissued capital stock of
any class or series, as its Board of Directors may determine, in
any manner and to the extent now or hereafter permitted by the
General Laws of the State of Maryland and by these Articles of
Incorporation.
(5) To do any and all such further acts or things and to
exercise any and all such further powers or rights as may be
necessary, incidental, relative, conducive, appropriate or
desirable for the accomplishment, carrying out or attainment of
all or any of the foregoing purposes or objects.
The Corporation shall be authorized to exercise and enjoy
all of the powers, rights and privileges granted to, or conferred
upon, corporations by the General Laws of the State of Maryland
2
<PAGE>
now or hereafter in force, and the enumeration of the foregoing
purposes, powers, rights and privileges shall not be deemed to
exclude any powers, rights or privileges so granted or conferred.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post office address of the principal office of the
Corporation in the State of Maryland is c/o The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202. The
name of the resident agent of the Corporation in this State is
the Corporation Trust Incorporated, a corporation of this State,
and the post office address of the resident agent is 32 South
Street, Baltimore, Maryland 21202.
ARTICLE IV
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock which the
Corporation shall have authority to issue is Two Hundred Million
(200,000,000) shares, of the par value of Ten Cents ($.10) per
share, and of the aggregate par value of Twenty Million Dollars
($20,000,000). The capital stock initially is classified into
two classes, consisting of One Hundred Million (100,000,000)
shares of Class A Common Stock and One Hundred Million
(100,000,000) shares of Class B Common Stock.
(2) The Board of Directors may classify and reclassify any
unissued shares of capital stock of any class or series into one
3
<PAGE>
or more additional or other classes or series as may be
established from time to time by setting or changing in any one
or more respects the designations, preferences, conversion or
other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of
such shares of stock and pursuant to such classification or
reclassification to increase or decrease the number of authorized
shares of any existing class or series.
(3) The Board of Directors may classify and reclassify any
issued shares of capital stock into one or more additional or
other classes or series as may be established from time to time
by setting or changing in any one or more respects the
designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such shares of stock and
pursuant to such classification or reclassification to increase
or decrease the number of authorized shares of any existing class
or series, provided, however, that any such classification or
reclassification shall not substantially adversely affect the
rights of holders of such issued shares.
(4) Unless otherwise expressly provided in the charter of
the Corporation, including any Articles Supplementary creating
any class or series of capital stock, the holders of each class
or series of capital stock shall be entitled to dividends and
distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and
distributions paid with respect to the various classes or series
4
<PAGE>
of capital stock may vary among such classes and series.
Dividends on a class or series may be declared or paid only out
of the net assets of that class or series. Expenses related to
the distribution of, and other identified expenses that should
properly be allocated to, the shares of a particular class or
series of capital stock may be charged to and borne solely by
such class or series and the bearing of expenses solely by a
class or series of capital stock may be appropriately reflected
(in a manner determined by the Board of Directors) and cause
differences in the net asset value attributable to, and the
dividend, redemption and liquidation rights of, the shares of
each class or series of capital stock.
(5) Unless otherwise expressly provided in the charter of
the Corporation, including those matters set forth in Article II,
Section (4) hereof and including any Articles Supplementary
creating any class or series of capital stock, on each matter
submitted to a vote of stockholders, each holder of a share of
capital stock of the Corporation shall be entitled to one vote
for each share standing in such holder's name on the books of the
Corporation, irrespective of the class or series thereof, and all
shares of all classes and series shall vote together as a single
class; provided, however, that (a) as to any matter with respect
to which a separate vote of any class or series is required by
the Investment Company Act of 1940, as amended, and in effect
from time to time, or any rules, regulations or orders issued
thereunder, or by the Maryland General Corporation Law, such
requirement as to a separate vote by that class or series shall
5
<PAGE>
apply in lieu of a general vote of all classes and series as
described above, (b) in the event that the separate vote
requirements referred to in (a) above apply with respect to one
or more classes or series, then, subject to paragraph (c) below,
the shares of all other classes and series not entitled to a
separate class vote shall vote as a single class, and (c) as to
any matter which does not affect the interest of a particular
class or series, such class or series shall not be entitled to
any vote and only the holders of shares of the affected classes
and series, if any, shall be entitled to vote.
(6) Notwithstanding any provision of the Maryland General
Corporation Law requiring a greater proportion than a majority of
the votes of all classes or series of capital stock of the
Corporation (or of any class or series entitled to vote thereon
as a separate class or series) to take or authorize any action,
the Corporation is hereby authorized (subject to the requirements
of the Investment Company Act of 1940, as amended, and in effect
from time to time, and any rules, regulations and orders issued
thereunder) to take such action upon the concurrence of a
majority of the votes entitled to be cast by holders of capital
stock of the Corporation (or a majority of the votes entitled to
be cast by holders of a class or series entitled to vote thereon
as a separate class or series).
(7) Unless otherwise expressly provided in the charter of
the Corporation, including any Articles Supplementary creating
any class or series of capital stock, in the event of any
liquidation, dissolution or winding up of the Corporation,
6
<PAGE>
whether voluntary or involuntary, the holders of each class or
series of capital stock of the Corporation shall be entitled,
after payment or provision for payment of the debts and other
liabilities of the Corporation, to share ratably in the remaining
net assets of the Corporation applicable to that class or series.
(8) Any fractional shares shall carry proportionately all
the rights of a whole share, excepting any right to receive a
certificate evidencing such fractional share, but including,
without limitation, the right to vote and the right to receive
dividends.
(9) The presence in person or by proxy of the holders of
shares entitled to cast one-third of the votes entitled to be
cast shall constitute a quorum at any meeting of stockholders,
except with respect to any matter which requires approval by a
separate vote of one or more classes of stock, in which case the
presence in person or by proxy of the holders of shares entitled
to cast one-third of the votes entitled to be cast by each class
entitled to vote as a separate class shall constitute a quorum.
(10) All persons who shall acquire stock in the Corporation
shall acquire the same subject to the provisions of the charter
and By-Laws of the Corporation. As used in the charter of the
Corporation, the terms "charter" and "Articles of Incorporation"
shall mean and include the Articles of Incorporation of the
Corporation as amended, supplemented and restated from time to
time by Articles of Amendment, Articles Supplementary, Articles
of Restatement or otherwise.
7
<PAGE>
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE CORPORATION
AND OF THE DIRECTORS AND STOCKHOLDERS
-------------------------------------
(1) The number of directors of the Corporation shall be
three, which number may be increased pursuant to the By-Laws of
the Corporation but shall never be less than three. The names of
the directors who shall act until their successors are duly
elected and qualify are:
Philip L. Kirstein
Mark B. Goldfus
Robert Harris
(2) The Board of Directors of the Corporation is hereby
empowered to authorize the issuance from time to time of shares
of capital stock of any class or series, whether now or hereafter
authorized, for such consideration as the Board of Directors may
deem advisable, subject to such limitations as may be set forth
in these Articles of Incorporation or in the By-Laws of the
Corporation or in the General Laws of the State of Maryland.
(3) No holder of stock of the Corporation shall, as such
holder, have any rights to purchase or subscribe for any shares
of the capital stock of the Corporation or any other security of
the Corporation which it may issue or sell (whether out of the
number of shares authorized by these Articles of Incorporation,
or out of any shares of the capital stock of the Corporation, of
any class or series, acquired by it after the issue thereof, or
8
<PAGE>
otherwise) other than such right, if any, as the Board of
Directors, in its discretion, may determine.
(4) Each director and each officer of the Corporation shall
be indemnified by the Corporation to the full extent permitted by
the General Laws of the State of Maryland, subject to the
requirements of the Investment Company Act of 1940, as amended.
No amendment of these Articles of Incorporation or repeal of any
provision hereof shall limit or eliminate the benefits provided
to directors and officers under this provision in connection with
any act or omission that occurred prior to such amendment or
repeal.
(5) To the fullest extent permitted by the General Laws of
the State of Maryland, subject to the requirements of the
Investment Company Act of 1940, as amended, no director or
officer of the Corporation shall be personally liable to the
Corporation or its security holders for money damages. No
amendment of these Articles of Incorporation or repeal of any
provision hereof shall limit or eliminate the benefits provided
to directors and officers under this provision in connection with
any act or omission that occurred prior to such amendment or
repeal.
(6) The Board of Directors of the Corporation is vested
with the sole power, to the exclusion of the stockholders, to
make, alter or repeal from time to time any of the By-Laws of the
Corporation except any particular By-Law which is specified as
not subject to alteration or repeal by the Board of Directors,
9
<PAGE>
subject to the requirements of the Investment Company Act of
1940, as amended.
(7) The Board of Directors of the Corporation from time to
time may change the Corporation's name, without the vote or
consent of the stockholders of the Corporation, in any manner and
to the extent now or hereafter permitted by the General Laws of
the State of Maryland and by these Articles of Incorporation.
ARTICLE VI
REDEMPTION
----------
Each holder of shares of capital stock of the Corporation
shall be entitled to require the Corporation to redeem all or any
part of the shares of capital stock of the Corporation standing
in the name of such holder on the books of the Corporation, and
all shares of capital stock issued by the Corporation shall be
subject to redemption by the Corporation, at the redemption price
of such shares as in effect from time to time as may be
determined by the Board of Directors of the Corporation in
accordance with the provisions hereof, subject to the right of
the Board of Directors of the Corporation to suspend the right of
redemption of shares of capital stock of the Corporation or
postpone the date of payment of such redemption price in
accordance with provisions of applicable law. The redemption
price of shares of capital stock of the Corporation shall be the
net asset value thereof as determined by the Board of Directors
of the Corporation from time to time in accordance with the
provisions of applicable law, less such redemption fee or other
10
<PAGE>
charge, if any, as may be fixed by resolution of the Board of
Directors of the Corporation. Payment of the redemption price
shall be made in cash by the Corporation at such time and in such
manner as may be determined from time to time by the Board of
Directors of the Corporation.
ARTICLE VII
DETERMINATION BINDING
---------------------
Any determination made in good faith, so far as accounting
matters are involved, in accordance with accepted accounting
practice by or pursuant to the direction of the Board of
Directors, as to the amount of assets, obligations or liabilities
of the Corporation, as to the amount of net income of the
Corporation from dividends and interest for any period or amounts
at any time legally available for the payment of dividends, as to
the amount of any reserves or charges set up and the propriety
thereof, as to the time of or purpose for creating reserves or as
to the use, alteration or cancellation of any reserves or charges
(whether or not any obligation or liability for which such
reserves or charges shall have been created, shall have been paid
or discharged or shall be then or thereafter required to be paid
or discharged), as to the price of any security owned by the
Corporation or as to any other matters relating to the issuance,
sale, redemption or other acquisition or disposition of
securities or shares of capital stock of the Corporation, and any
reasonable determination made in good faith by the Board of
Directors as to whether any transaction constitutes a purchase of
11
<PAGE>
securities on "margin," a sale of securities "short," or an
underwriting or the sale of, or a participation in any
underwriting or selling group in connection with the public
distribution of, any securities, shall be final and conclusive,
and shall be binding upon the Corporation and all holders of its
capital stock, past, present and future, and shares of the
capital stock of the Corporation are issued and sold on the
condition and understanding, evidenced by the purchase of shares
of capital stock or acceptance of share certificates, that any
and all such determinations shall be binding as aforesaid. No
provision of these Articles of Incorporation shall be effective
to (a) require a waiver of compliance with any provision of the
Securities Act of 1933, as amended, or the Investment Company Act
of 1940, as amended, or of any valid rule, regulation or order of
the Securities and Exchange Commission thereunder or (b) protect
or purport to protect any director or officer of the Corporation
against any liability to the Corporation or its security holders
to which he 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.
ARTICLE VIII
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
12
<PAGE>
ARTICLE IX
AMENDMENT
---------
The Corporation reserves the right to amend, alter, change
or repeal any provision contained in these Articles of
Incorporation, in any manner now or hereafter prescribed by
statute, including any amendment which alters the contract
rights, as expressly set forth in the charter, of any outstanding
stock and substantially adversely affects the stockholder's
rights, and all rights conferred upon stockholders herein are
granted subject to this reservation.
IN WITNESS WHEREOF, the undersigned incorporator of MERRILL
LYNCH ASSET ALLOCATION INCOME PORTFOLIO, INC. hereby executes the
foregoing Articles of Incorporation and acknowledges the same to
be his act.
Dated this 2nd day of June, 1994.
/s/ John D. Lamb
------------------------------
John D. Lamb
13
<PAGE>
BY-LAWS
OF
MERRILL LYNCH ASSET ALLOCATION INCOME PORTFOLIO, INC.
ARTICLE I
Offices
-------
Section 1. Principal Office. The principal office of
----------------
Merrill Lynch Asset Allocation Income Portfolio, Inc. (the
"Corporation") shall be in the City of Baltimore, State of
Maryland.
Section 2. Principal Executive Office. The principal
--------------------------
executive office of the Corporation shall be at 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
Section 3. Other Offices. The Corporation may have
-------------
such other offices in such places as the Board of Directors may
from time to time determine.
ARTICLE II
Meetings of Stockholders
------------------------
Section 1. Annual Meeting. The Corporation shall not
--------------
be required to hold an annual meeting of its stockholders in any
year in which the election of directors is not required to be
acted upon under the Investment Company Act of 1940. In the
event that the Corporation shall be required to hold an annual
meeting of stockholders to elect directors by the Investment
Company Act of 1940, as amended, such meeting shall be held no
<PAGE>
later than 120 days after the occurrence of the event requiring
the meeting. Any stockholders' meeting held in accordance with
this Section shall for all purposes constitute the annual meeting
of stockholders for the year in which the meeting is held.
Section 2. Special Meetings. Special meetings of the
----------------
stockholders, unless otherwise provided by law, may be called for
any purpose or purposes by a majority of the Board of Directors,
the President, or on the written request of the holders of at
least 10% of the outstanding shares of capital stock of the
Corporation entitled to vote at such meeting if they comply with
Section 2-502(b) or (c) of the Maryland General Corporation Law.
Section 3. Place of Meetings. Meetings of the
-----------------
stockholders shall be held at such place within the United States
as the Board of Directors may from time to time determine.
Section 4. Notice of Meetings; Waiver of Notice.
------------------------------------
Notice of the place, date and time of the holding of each
stockholders' meeting and, if the meeting is a special meeting,
the purpose or purposes of the special meeting, shall be given
personally or by mail, not less than ten nor more than ninety
days before the date of such meeting, to each stockholder
entitled to vote at such meeting and to each other stockholder
entitled to notice of the meeting. Notice by mail shall be
deemed to be duly given when deposited in the United States mail
addressed to the stockholder at his address as it appears on the
records of the Corporation, with postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed
waived by any stockholder who shall attend such meeting in person
2
<PAGE>
or by proxy, or who shall, either before or after the meeting,
submit a signed waiver of notice which is filed with the records
of the meeting. When a meeting is adjourned to another time and
place, unless the Board of Directors, after the adjournment,
shall fix a new record date for an adjourned meeting, or the
adjournment is for more than one hundred and twenty days after
the original record date, notice of such adjourned meeting need
not be given if the time and place to which the meeting shall be
adjourned were announced at the meeting at which the adjournment
is taken.
Section 5. Quorum. At all meetings of the
------
stockholders, the holders of shares of stock of the Corporation
entitled to cast one-third of the votes entitled to be cast,
present in person or by proxy, shall constitute a quorum for the
transaction of any business, except with respect to any matter
which requires approval by a separate vote of one or more classes
of stock, in which case the presence in person or by proxy of the
holders of shares entitled to cast one-third of the votes
entitled to be cast by each class entitled to vote as a separate
class shall constitute a quorum. In the absence of a quorum no
business may be transacted, except that the holders of a majority
of the shares of stock present in person or by proxy and entitled
to vote may adjourn the meeting from time to time, without notice
other than announcement thereat except as otherwise required by
these By-Laws, until the holders of the requisite amount of
shares of stock shall be so present. At any such adjourned
meeting at which a quorum may be present any business may be
3
<PAGE>
transacted which might have been transacted at the meeting as
originally called. The absence from any meeting, in person or by
proxy, of holders of the number of shares of stock of the
Corporation in excess of a majority thereof which may be required
by the laws of the State of Maryland, the Investment Company Act
of 1940, as amended, or other applicable statute, the Articles of
Incorporation, or these By-Laws, for action upon any given matter
shall not prevent action at such meeting upon any other matter or
matters which may properly come before the meeting, if there
shall be present thereat, in person or by proxy, holders of the
number of shares of stock of the Corporation required for action
in respect of such other matter or matters.
Section 6. Organization. At each meeting of the
------------
stockholders, the Chairman of the Board (if one has been
designated by the Board), or in his absence or inability to act,
the President, or in the absence or inability to act of the
Chairman of the Board and the President, a Vice President, shall
act as chairman of the meeting. The Secretary, or in his absence
or inability to act, any person appointed by the chairman of the
meeting, shall act as secretary of the meeting and keep the
minutes thereof.
Section 7. Order of Business. The order of business
-----------------
at all meetings of the stockholders shall be as determined by the
chairman of the meeting.
Section 8. Voting. Except as otherwise provided by
------
statute or the Articles of Incorporation, each holder of record
of shares of stock of the Corporation having voting power shall
4
<PAGE>
be entitled at each meeting of the stockholders to one vote for
every share of such stock standing in his name on the record of
stockholders of the Corporation as of the record date determined
pursuant to Section 9 of this Article or if such record date
shall not have been so fixed, then at the later of (i) the close
of business on the day on which notice of the meeting is mailed
or (ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of
stockholders may authorize another person or persons to act for
him by a proxy signed by such stockholder or his attorney-in-
fact. No proxy shall be valid after the expiration of eleven
months from the date thereof, unless otherwise provided in the
proxy. Every proxy shall be revocable at the pleasure of the
stockholder executing it, except in those cases where such proxy
states that it is irrevocable and where an irrevocable proxy is
permitted by law. Except as otherwise provided by statute, the
Articles of Incorporation or these By-Laws, any corporate action
to be taken by vote of the stockholders (other than the election
of directors, which shall be by plurality vote) may be authorized
by a majority of the total votes cast at a meeting of
stockholders by the holders of shares present in person or
represented by proxy and entitled to vote on such action.
If a vote shall be taken on any question other than the
election of directors, which shall be by written ballot, then
unless required by statute or these By-Laws, or determined by the
chairman of the meeting to be advisable, any such vote need not
be by ballot. On a vote by ballot, each ballot shall be signed
5
<PAGE>
by the stockholder voting, or by his proxy, if there be such
proxy, and shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of
---------------------
Directors may set a record date for the purpose of determining
stockholders entitled to vote at any meeting of the stockholders.
The record date, which may not be prior to the close of business
on the day the record date is fixed, shall be not more than
ninety nor less than ten days before the date of the meeting of
the stockholders. All persons who were holders of record of
shares at such time, and not others, shall be entitled to vote at
such meeting and any adjournment thereof.
Section 10. Inspectors. The Board may, in advance of
----------
any meeting of stockholders, appoint one or more inspectors to
act at such meeting or any adjournment thereof. If the
inspectors shall not be so appointed or if any of them shall fail
to appear or act, the chairman of the meeting may appoint
inspectors. Each inspector, before entering upon the discharge
of his duties, may be required to take and sign an oath to
execute faithfully the duties of inspector at such meeting with
strict impartiality and according to the best of his ability.
The inspectors may be empowered to determine the number of shares
outstanding and the voting powers of each, the number of shares
represented at the meeting, the existence of a quorum, the
validity and effect of proxies, and shall receive votes, ballots
or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate
all votes, ballots or consents, determine the result, and do such
6
<PAGE>
acts as are proper to conduct the election or vote with fairness
to all stockholders. On request of the chairman of the meeting
or any stockholder entitled to vote thereat, the inspectors shall
make a report in writing of any challenge, request or matter
determined by them and shall execute a certificate of any fact
found by them. No director or candidate for the office of
director shall act as inspector of an election of directors.
Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of
----------------------------------
Meeting. Except as otherwise provided by statute or the Articles
- -------
of Incorporation, any action required to be taken at any meeting
of stockholders, or any action which may be taken at any meeting
of such stockholders, may be taken without a meeting, without
prior notice and without a vote, if the following are filed with
the records of stockholders meetings: (i) a unanimous written
consent which sets forth the action and is signed by each
stockholder entitled to vote on the matter and (ii) a written
waiver of any right to dissent signed by each stockholder
entitled to notice of the meeting but not entitled to vote
thereat.
ARTICLE III
Board of Directors
------------------
Section 1. General Powers. Except as otherwise
--------------
provided in the Articles of Incorporation, the business and
affairs of the Corporation shall be managed under the direction
of the Board of Directors. All powers of the Corporation may be
exercised by or under authority of the Board of Directors except
7
<PAGE>
as conferred on or reserved to the stockholders by law or by the
Articles of Incorporation or these By-Laws.
Section 2. Number of Directors. The number of
-------------------
directors shall be fixed from time to time by resolution of the
Board of Directors adopted by a majority of the entire Board of
Directors; provided, however, that the number of directors shall
in no event be less than three nor more than fifteen. Any
vacancy created by an increase in Directors may be filled in
accordance with Section 6 of this Article III. No reduction in
the number of directors shall have the effect of removing any
director from office prior to the expiration of his term unless
such director is specifically removed pursuant to Section 5 of
this Article III at the time of such decrease. Directors need
not be stockholders.
Section 3. Election and Term of Directors. Directors
------------------------------
shall be elected annually at a meeting of stockholders held for
that purpose; provided, however, that if no meeting of the
stockholders of the Corporation is required to be held in a
particular year pursuant to Section 1 of Article II of these By-
Laws, directors shall be elected at the next meeting held. The
term of office of each director shall be from the time of his
election and qualification until the election of directors next
succeeding his election and until his successor shall have been
elected and shall have qualified, or until his death, or until he
shall have resigned or until December 31 of the year in which he
shall have reached seventy-two years of age, or until he shall
8
<PAGE>
have been removed as hereinafter provided in these By-Laws, or as
otherwise provided by statute or the Articles of Incorporation.
Section 4. Resignation. A director of the Corporation
-----------
may resign at any time by giving written notice of his
resignation to the Board or the Chairman of the Board or the
President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it
shall become effective shall not be specified therein,
immediately upon its receipt; and, unless otherwise specified
therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 5. Removal of Directors. Any director of the
--------------------
Corporation may be removed by the stockholders by a vote of a
majority of the votes entitled to be cast for the election of
directors.
Section 6. Vacancies. Any vacancies in the Board,
---------
whether arising from death, resignation, removal, an increase in
the number of directors or any other cause, may be filled by a
vote of the majority of the Board of Directors then in office
even though such majority is less than a quorum, provided that no
vacancies shall be filled by action of the remaining directors,
if after the filling of said vacancy or vacancies, less than two-
thirds of the directors then holding office shall have been
elected by the stockholders of the Corporation. In the event
that at any time there is a vacancy in any office of a director
which vacancy may not be filled by the remaining directors, a
special meeting of the stockholders shall be held as promptly as
9
<PAGE>
possible and in any event within sixty days, for the purpose of
filling said vacancy or vacancies.
Section 7. Place of Meetings. Meetings of the Board
-----------------
may be held at such place as the Board may from time to time
determine or as shall be specified in the notice of such meeting.
Section 8. Regular Meetings. Regular meetings of the
----------------
Board may be held without notice at such time and place as may be
determined by the Board of Directors.
Section 9. Special Meetings. Special meetings of the
----------------
Board may be called by two or more directors of the Corporation
or by the Chairman of the Board or the President.
Section 10. Telephone Meetings. Members of the Board
------------------
of Directors or of any committee thereof may participate in a
meeting by means of a conference telephone or similar
communications equipment if all persons participating in the
meeting can hear each other at the same time. Subject to the
provisions of the Investment Company Act of 1940, as amended,
participation in a meeting by these means constitutes presence in
person at the meeting.
Section 11. Notice of Special Meetings. Notice of
--------------------------
each special meeting of the Board shall be given by the Secretary
as hereinafter provided, in which notice shall be stated the time
and place of the meeting. Notice of each such meeting shall be
delivered to each director, either personally or by telephone or
any standard form of telecommunication, at least twenty-four
hours before the time at which such meeting is to be held, or by
first-class mail, postage prepaid, addressed to him at his
10
<PAGE>
residence or usual place of business, at least three days before
the day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of
----------------------------
any special meeting need not be given to any director who shall,
either before or after the meeting, sign a written waiver of
notice which is filed with the records of the meeting or who
shall attend such meeting. Except as otherwise specifically
required by these By-Laws, a notice or waiver or notice of any
meeting need not state the purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not
-----------------
less than two, of the members of the entire Board shall be
present in person at any meeting of the Board in order to
constitute a quorum for the transaction of business at such
meeting, and except as otherwise expressly required by statute,
the Articles of Incorporation, these By-Laws, the Investment
Company Act of 1940, as amended, or other applicable statute, the
act of a majority of the directors present at any meeting at
which a quorum is present shall be the act of the Board. In the
absence of a quorum at any meeting of the Board, a majority of
the directors present thereat may adjourn such meeting to another
time and place until a quorum shall be present thereat. Notice
of the time and place of any such adjourned meeting shall be
given to the directors who were not present at the time of the
adjournment and, unless such time and place were announced at the
meeting at which the adjournment was taken, to the other
directors. At any adjourned meeting at which a quorum is
11
<PAGE>
present, any business may be transacted which might have been
transacted at the meeting as originally called.
Section 14. Organization. The Board may, by
------------
resolution adopted by a majority of the entire Board, designate a
Chairman of the Board, who shall preside at each meeting of the
Board. In the absence or inability of the Chairman of the Board
to preside at a meeting, the President or, in his absence or
inability to act, another director chosen by a majority of the
directors present, shall act as chairman of the meeting and
preside thereat. The Secretary (or, in his absence or inability
to act, any person appointed by the Chairman) shall act as
secretary of the meeting and keep the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a
-----------------------------------------
Meeting. Subject to the provisions of the Investment Company Act
- -------
of 1940, as amended, any action required or permitted to be taken
at any meting of the Board of Directors or of any committee
thereof may be taken without a meeting if all members of the
Board or committee, as the case may be, consent thereto in
writing, and the writings or writing are filed with the minutes
of the proceedings of the Board or committee.
Section 16. Compensation. Directors may receive
------------
compensation for services to the Corporation in their capacities
as directors or otherwise in such manner and in such amounts as
may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty
-------------------
of the Board of Directors to direct that the purchase, sale,
retention and disposal of portfolio securities and the other
12
<PAGE>
investment practices of the Corporation are at all times
consistent with the investment policies and restrictions with
respect to securities investments and otherwise of the
Corporation, as recited in the Prospectus of the Corporation
included in the Registration Statement of the Corporation, as
recited in the current Prospectus and Statement of Additional
Information of the Corporation, as filed from time to time with
the Securities and Exchange Commission and as required by the
Investment Company Act of 1940, as amended. The Board however,
may delegate the duty of management of the assets and the
administration of its day to day operations to an individual or
corporate management company and/or investment adviser pursuant
to a written contract or contracts which have obtained the
requisite approvals, including the requisite approvals of
renewals thereof, of the Board of Directors and/or the
stockholders of the Corporation in accordance with the provisions
of the Investment Company Act of 1940, as amended.
ARTICLE IV
Committees
----------
Section 1. Executive Committee. The Board may, by
-------------------
resolution adopted by a majority of the entire Board, designate
an Executive Committee consisting of two or more of the directors
of the Corporation, which committee shall have and may exercise
all the powers and authority of the Board with respect to all
matters other than:
13
<PAGE>
(a) the submission to stockholders of any action
requiring authorization of stockholders pursuant to statute or
the Articles of Incorporation;
(b) the filling of vacancies on the Board of
Directors;
(c) the fixing of compensation of the directors
for serving on the Board or on any committee of the Board,
including the Executive Committee;
(d) the approval or termination of any contract
with an investment adviser or principal underwriter, as such
terms are defined in the Investment Company Act of 1940, as
amended, or the taking of any other action required to be taken
by the Board of Directors by the Investment Company Act of 1940,
as amended;
(e) the amendment or repeal of these By-Laws or
the adoption of new By-Laws;
(f) the amendment or repeal of any resolution of
the Board which by its terms may be amended or repealed only by
the Board;
(g) the declaration of dividends and the issuance
of capital stock of the Corporation; and
(h) the approval of any merger or share exchange
which does not require stockholder approval.
The Executive Committee shall keep written minutes of
its proceedings and shall report such minutes to the Board. All
such proceedings shall be subject to revision or alteration by
14
<PAGE>
the Board; provided, however, that third parties shall not be
prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board
-----------------------------
of Directors may from time to time, by resolution adopted by a
majority of the whole Board, designate one or more other
committees of the Board, each such committee to consist of two or
more directors and to have such powers and duties as the Board of
Directors may, by resolution, prescribe.
Section 3. General. One-third, but not less than two,
-------
of the members of any committee shall be present in person at any
meeting of such committee in order to constitute a quorum for the
transaction of business at such meeting, and the act of a
majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or
any two members of any committee may fix the time and place of
its meetings unless the Board shall otherwise provide. In the
absence or disqualification of any member of any committee, the
member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent
or disqualified member. The Board shall have the power at any
time to change the membership of any committee, to fill all
vacancies, to designate alternate members to replace any absent
or disqualified member, or to dissolve any such committee.
Nothing herein shall be deemed to prevent the Board from
appointing one or more committees consisting in whole or in part
15
<PAGE>
of persons who are not directors of the Corporation; provided,
however, that no such committee shall have or may exercise any
authority or power of the Board in the management of the business
or affairs of the Corporation.
ARTICLE V
Officers, Agents and Employees
------------------------------
Section 1. Number of Qualifications. The officers of
------------------------
the Corporation shall be a President, a Secretary and a
Treasurer, each of whom shall be elected by the Board of
Directors. The Board of Directors may elect or appoint one or
more Vice Presidents and may also appoint such other officers,
agents and employees as it may deem necessary or proper. Any two
or more offices may be held by the same person, except the
offices of President and Vice President, but no officer shall
execute, acknowledge or verify any instrument in more than one
capacity. Such officers shall be elected by the Board of
Directors each year at a meeting of the Board of Directors, each
to hold office for the ensuing year and until his successor shall
have been duly elected and shall have qualified, or until his
death, or until he shall have resigned, or have been removed, as
hereinafter provided in these By-Laws. The Board may from time
to time elect, or delegate to the President the power to appoint,
such officers (including one or more Assistant Vice Presidents,
one or more Assistant Treasurers and one or more Assistant
Secretaries) and such agents, as may be necessary or desirable
for the business of the Corporation. Such officers and agents
shall have such duties and shall hold their offices for such
16
<PAGE>
terms as may be prescribed by the Board or by the appointing
authority.
Section 2. Resignations. Any officer of the
------------
Corporation may resign at any time by giving written notice of
resignation to the Board, the Chairman of the Board, President or
the Secretary. Any such resignation shall take effect at the
time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its
receipt; and, unless otherwise specified therein, the acceptance
of such resignation shall not be necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any
-------------------------------------
officer, agent or employee of the Corporation may be removed by
the Board of Directors with or without cause at any time, and the
Board may delegate such power of removal as to agents and
employees not elected or appointed by the Board of Directors.
Such removal shall be without prejudice to such person's contract
rights, if any, but the appointment of any person as an officer,
agent or employee of the Corporation shall not of itself create
contract rights.
Section 4. Vacancies. A vacancy in any office,
---------
whether arising from death, resignation, removal or any other
cause, may be filled for the unexpired portion of the term of the
office which shall be vacant, in the manner prescribed in these
By-Laws for the regular election or appointment to such office.
Section 5. Compensation. The compensation of the
------------
officers of the Corporation shall be fixed by the Board of
17
<PAGE>
Directors, but this power may be delegated to any officer in
respect of other officers under his control.
Section 6. Bonds or Other Security. If required by
-----------------------
the Board, any officer, agent or employee of the Corporation
shall give a bond or other security for the faithful performance
of his duties, in such amount and with such surety or sureties as
the Board may require.
Section 7. President. The President shall be the
---------
chief executive officer of the Corporation. In the absence of
the Chairman of the Board (or if there be none), he shall preside
at all meetings of the stockholders and of the Board of
Directors. He shall have, subject to the control of the Board of
Directors, general charge of the business and affairs of the
Corporation. He may employ and discharge employees and agents of
the Corporation, except such as shall be appointed by the Board,
and he may delegate these powers.
Section 8. Vice President. Each Vice President shall
--------------
have such powers and perform such duties as the Board of
Directors or the President may from time to time prescribe.
Section 9. Treasurer. The Treasurer shall
---------
(a) have charge and custody of, and be
responsible for, all the funds and securities of the Corporation,
except those which the Corporation has placed in the custody of a
bank or trust company or member of a national securities exchange
(as that term is defined in the Securities Exchange Act of 1934,
as amended) pursuant to a written agreement designating such bank
18
<PAGE>
or trust company or member of a national securities exchange as
custodian of the property of the Corporation;
(b) keep full and accurate accounts of receipts
and disbursements in books belonging to the Corporation;
(c) cause all moneys and other valuables to be
deposited to the credit of the Corporation;
(d) receive, and give receipts for, moneys due
and payable, to the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and
supervise the investment of its funds as ordered or authorized by
the Board, taking proper vouchers therefor; and
(f) in general, perform all the duties incident
to the office of Treasurer and such other duties as from time to
time may be assigned to him by the Board or the President.
Section 10. Secretary. The Secretary shall
---------
(a) keep or cause to be kept in one or more books
provided for the purpose, the minutes of all meetings of the
Board, the committees of the Board and the stockholders;
(b) see that all notices are duly given in
accordance with the provisions of these By-Laws and as required
by Law;
(c) be custodian of the records and the seal of
the Corporation and affix and attest the seal to all stock
certificates of the Corporation (unless the seal of the
Corporation on such certificates shall be a facsimile, as
hereinafter provided) and affix and attest the seal to all other
19
<PAGE>
documents to be executed on behalf of the Corporation under its
seal;
(d) see that the books, reports, statements,
certificates and other documents and records required by law to
be kept and filed are properly kept and filed; and
(e) in general, perform all the duties incident
to the office of Secretary and such other duties as from time to
time may be assigned to him by the Board or the President.
Section 11. Delegation of Duties. In case of the
--------------------
absence of any officer of the Corporation, or for any other
reason that the Board may deem sufficient, the Board may confer
for the time being the powers or duties, or any of them, of such
officer upon any other officer or upon any director.
ARTICLE VI
Indemnification
---------------
Each officer and director of the Corporation shall be
indemnified by the Corporation to the full extent permitted under
the Maryland General Corporation Law, except that such indemnity
shall not protect any such person against any liability to the
Corporation 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 Corporation to
20
<PAGE>
indemnify such person must be based upon the reasonable
determination of independent legal counsel in a written opinion
or the vote of a majority of a quorum of the directors who are
neither "interested persons," as defined in Section 2(a)(19) of
the Investment Company Act of 1940, as amended, nor parties to
the proceeding ("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 Corporation claiming
indemnification within the scope of this Article VI shall be
entitled to advances from the Corporation 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 Maryland General Corporation Law
without a preliminary determination as to his or her ultimate
entitlement to indemnification (except as set forth below);
provided, however, that the person seeking indemnification shall
provide to the Corporation a written affirmation of his good
faith belief that the standard of conduct necessary for
indemnification by the Corporation 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
Corporation for his undertaking; (b) the Corporation is insured
21
<PAGE>
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 the facts readily available to the Corporation 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 Corporation 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 Corporation. The Corporation, however, may not purchase
insurance on behalf of any officer or director of the Corporation
that protects or purports to protect such person from liability
to the Corporation 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 Corporation may indemnify, make advances or
purchase insurance to the extent provided in this Article VI on
behalf of an employee or agent who is not an officer or director
of the Corporation.
22
<PAGE>
ARTICLE VII
Capital Stock
-------------
Section 1. Stock Certificates. Each holder of stock
------------------
of the Corporation shall be entitled upon request to have a
certificate or certificates, in such form as shall be approved by
the Board, representing the number of shares of stock of the
Corporation owned by him, provided, however, that certificates
for fractional shares will not be delivered in any case. The
certificates representing shares of stock shall be signed by or
in the name of the Corporation by the Chairman, President or a
Vice President and by the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer and sealed with the seal
of the Corporation. Any or all of the signatures or the seal on
the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to
be such officer, transfer agent or registrar before such
certificate shall be issued, it may be issued by the Corporation
with the same effect as if such officer, transfer agent or
registrar were still in office at the date of issue.
Section 2. Books of Account and Record of
------------------------------
Stockholders. There shall be kept at the principal executive
- ------------
office of the Corporation correct and complete books and records
of account of all the business and transactions of the
Corporation. There shall be made available upon request of any
stockholder, in accordance with Maryland law, a record containing
the number of shares of stock issued during a specified period
23
<PAGE>
not to exceed twelve months and the consideration received by the
Corporation for each such share.
Section 3. Transfers of Shares. Transfers of shares
-------------------
of stock of the Corporation shall be made on the stock records of
the Corporation only by the registered holder thereof, or by his
attorney thereunto authorized by power of attorney duly executed
and filed with the Secretary or with a transfer agent or transfer
clerk, and on surrender of the certificate or certificates, if
issued, for such shares properly endorsed or accompanied by a
duly executed stock transfer power and the payment of all taxes
thereon. Except as otherwise provided by law, the Corporation
shall be entitled to recognize the exclusive right of a person in
whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all
purposes, including, without limitation, the rights to receive
dividends or other distributions, and to vote as such owner, and
the Corporation shall not be bound to recognize any equitable or
legal claim to or interest in any such share or shares on the
part of any other person.
Section 4. Regulations. The Board may make such
-----------
additional rules and regulations, not inconsistent with these By-
Laws, as it may deem expedient concerning the issue, transfer and
registration of certificates for shares of stock of the
Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer agents or one or more
transfer clerks and one or more registrars and may require all
24
<PAGE>
certificates for shares of stock to bear the signature or
signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates.
-----------------------------------------
The holder of any certificates representing shares of stock of
the Corporation shall immediately notify the Corporation of any
loss, destruction or mutilation of such certificate, and the
Corporation may issue a new certificate of stock in the place of
any certificate theretofore issued by it which the owner thereof
shall allege to have been lost or destroyed or which shall have
been mutilated, and the Board may, in its discretion, require
such owner or his legal representatives to give to the
Corporation a bond in such sum, limited or unlimited, and in
such form and with such surety or sureties, as the Board in its
absolute discretion shall determine, to indemnify the Corporation
against any claim that may be made against it on account of the
alleged loss or destruction of any such certificate, or issuance
of a new certificate. Anything herein to the contrary
notwithstanding, the Board, in its absolute discretion, may
refuse to issue any such new certificate, except pursuant to
legal proceedings under the laws of the State of Maryland.
Section 6. Fixing of a Record Date for Dividends and
-----------------------------------------
Distributions. The Board may fix, in advance, a date not more
- -------------
than ninety days preceding the date fixed for the payment of any
dividend or the making of any distribution or the allotment of
rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising
out of any change, conversion or exchange of common stock or
25
<PAGE>
other securities, as the record date for the determination of the
stockholders entitled to receive any such dividend, distribution,
allotment, rights or interests, and in such case only the
stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or
interests.
Section 7. Information to Stockholders and Others.
--------------------------------------
Any stockholder of the Corporation or his agent may inspect and
copy during usual business hours the Corporation's By-Laws,
minutes of the proceedings of its stockholders, annual statement
of its affairs, and voting trust agreements on file at its
principal office.
ARTICLE VIII
Seal
----
The seal of the Corporation shall be circular in form
and shall bear, in addition to any other emblem or device
approved by the Board of Directors, the name of the Corporation,
the year of its incorporation and the words "Corporate Seal" and
"Maryland." Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any other manner
reproduced.
ARTICLE IX
Fiscal Year
-----------
Unless otherwise determined by the Board, the fiscal
year of the Corporation shall end on the 31st day of October.
26
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ARTICLE X
Depositories and Custodians
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Section 1. Depositories. The funds of the Corporation
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shall be deposited with such banks or other depositories as the
Board of Directors of the Corporation may from time to time
determine.
Section 2. Custodians. All securities and other
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investments shall be deposited in the safe keeping of such banks
or other companies as the Board of Directors of the Corporation
may from time to time determine. Every arrangement entered into
with any bank or other company for the safe keeping of the
securities and investments of the Corporation shall contain
provisions complying with the Investment Company Act of 1940, as
amended, and the general rules and regulations thereunder.
ARTICLE XI
Execution of Instruments
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Section 1. Checks, Notes, Drafts, etc. Checks, notes,
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drafts, acceptances, bills of exchange and other orders or
obligations for the payment of money shall be signed by such
officer or officers or person or persons as the Board of
Directors by resolution shall form time to time designate.
Section 2. Sale or Transfer of Securities. Stock
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certificates, bonds or other securities at any time owned by the
Corporation may be held on behalf of the Corporation or sold,
transferred or otherwise disposed of subject to any limits
imposed by these By-Laws and pursuant to authorization by the
Board and, when so authorized to be held on behalf of the
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Corporation or sold, transferred or otherwise disposed of, may be
transferred from the name of the Corporation by the signature of
the President or a Vice President or the Treasurer or pursuant to
any procedure approved by the Board of Directors, subject to
applicable law.
ARTICLE XII
Independent Public Accountants
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The firm of independent public accountants which shall
sign or certify the financial statements of the Corporation which
are filed with the Securities and Exchange Commission shall be
selected annually by the Board of Directors and, if required by
the provisions of the Investment Company Act of 1940, as amended,
ratified by the stockholders.
ARTICLE XIII
Annual Statement
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The books of account of the Corporation shall be
examined by an independent firm of public accountants at the
close of each annual period of the Corporation and at such other
times as may be directed by the Board. A report to the
stockholders based upon each such examination shall be mailed to
each stockholder of the Corporation of record on such date with
respect to each report as may be determined by the Board, at his
address as the same appears on the books of the Corporation.
Such annual statement shall also be available at the annual
meeting of stockholders, if any, and, within 20 days after the
meeting (or, in the absence of an annual meeting, within 120 days
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after the end of the fiscal year), shall be placed on file at the
Corporation's principal office. Each such report shall show the
assets and liabilities of the Corporation as of the close of the
annual or quarterly period covered by the report and the
securities in which the funds of the Corporation were then
invested. Such report shall also show the Corporation's income
and expenses for the period from the end of the Corporation's
preceding fiscal year to the close of the annual or quarterly
period covered by the report and any other information required
by the Investment Company Act of 1940, as amended, and shall set
forth such other matters as the Board or such firm of independent
public accountants shall determine.
ARTICLE XIV
Amendments
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These By-Laws or any of them may be amended, altered or
repealed by the Board of Directors. The stockholders shall have
no power to make, amend, alter or repeal By-Laws.
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