<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1994
SECURITIES ACT FILE NO. 33-53997
INVESTMENT COMPANY ACT FILE NO. 811-7181
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. 1 /X/
POST-EFFECTIVE AMENDMENT NO. / /
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 1 /X/
(CHECK APPROPRIATE BOX OR BOXES)
---------------
MERRILL LYNCH ASSET ALLOCATION INCOME FUND, INC.
(FORMERLY MERRILL LYNCH ASSET ALLOCATION INCOME PORTFOLIO, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH ASSET ALLOCATION INCOME FUND, 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:
<TABLE>
<S> <C>
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
</TABLE>
---------------
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.
---------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940.
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<PAGE> 2
MERRILL LYNCH ASSET ALLOCATION INCOME FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
------------------------
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM
NO. LOCATION
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<C> <S> <C>
PART A
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Fee Table
Item 3. Financial Highlights.................. Not Applicable
Item 4. General Description of Registrant..... Investment Objectives 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 Objectives 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.
</TABLE>
<PAGE> 3
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.
PROSPECTUS (Subject to Completion)
Issued June 30, 1994
MERRILL LYNCH ASSET ALLOCATION INCOME FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Asset Allocation Income Fund, Inc. (the "Fund") is a
non-diversified mutual fund seeking a high level of current income 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. The Fund also
seeks capital appreciation. 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 objectives 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.
(continued on page 2)
------------------------
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
<PAGE> 4
(continued from cover page)
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
net 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."
2
<PAGE> 5
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A shares and Class B shares follows.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
CHARGE ALTERNATIVE CHARGE ALTERNATIVE
------------------ ----------------------
<S> <C> <C> <C> <C>
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
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)................. None(f) 4.0% during the first
year, decreasing 1.0%
annually to 0.0% after
the fourth year(b)
Exchange Fee.................................... None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
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.......... 1.% 2. %
=== =====
</TABLE>
---------------
(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 25.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 26.
(c) See "Management of the Fund--Management and Advisory Arrangements"--page 21.
(d) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares--Distribution Plan"--page 28. 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 21.
(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 25.
"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.
3
<PAGE> 6
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-----------------------------------------
EXAMPLE. 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
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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.......................................... $ $ $ $
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
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. 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.
4
<PAGE> 7
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 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.
5
<PAGE> 8
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 3 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 24.
6
<PAGE> 9
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. 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
7
<PAGE> 10
can be no assurance that a liquid secondary market for options and futures
contracts will exist at any specific time. See "Investment Objectives 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 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.
INVESTMENT OBJECTIVES AND POLICIES
The Fund is a non-diversified, open-end management investment company. The
Fund's primary investment objective is to seek a high level of current income,
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. A
secondary investment objective is capital appreciation. These objectives are
fundamental policies 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 objectives 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
8
<PAGE> 11
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. 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 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
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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.
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.
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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 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).
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<PAGE> 14
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.
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
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<PAGE> 15
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
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<PAGE> 16
enters into futures transactions. The Fund may purchase put options or write
call options on futures contracts and stock indices rather than selling the
underlying futures contract in anticipation of a decrease in the market value of
its securities. Similarly, the Fund may purchase call options, or write put
options on futures contracts and stock indices, as a substitute for the purchase
of such futures to hedge against the increased cost resulting from an increase
in the market value of securities which the Fund intends to purchase.
The Fund may 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
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<PAGE> 17
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
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.
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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 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 (the "Code"). 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
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<PAGE> 19
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 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
17
<PAGE> 20
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 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 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
18
<PAGE> 21
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. 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
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
19
<PAGE> 22
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.
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, L.P.; 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.
---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
20
<PAGE> 23
HARRY WOOLF--Professor and former Director of the Institute for Advanced
Study (private institution devoted to the encouragement, support and patronage
of learning).
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 May 31, 1994, the Manager and FAM had a total of
approximately $163.3 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Board of Directors of the Fund,
the Manager is responsible for the actual management of the Fund's portfolio.
The responsibility for making decisions to buy, sell or hold a particular
security rests with the Manager, subject to review by the Board of Directors.
The Manager provides the portfolio manager for the Fund who considers
analyses from various sources (including brokerage firms with which the Fund
does business), makes the necessary decisions, and places 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. Joel Heymsfeld, who has been a Vice President of the
Manager since 1978, is primarily responsible for the day-to-day management of
the Fund's portfolio.
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 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 $10.00 per Class A shareholder account and $12.00 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.
21
<PAGE> 24
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 offering may be terminated
by the Fund or the Distributor at any time, in which event no Class A or 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>
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 TMASM 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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
DOLLAR AMOUNT
AMOUNT OF PURCHASE SUBJECT TO CHANGE
------------------------------------------------------------------ --------------------------------
<S> <C>
$1 million up to $2.5 million..................................... 0.75%
Over $2.5 million up to $3.5 million.............................. 0.40
Over $3.5 million up to $5 million................................ 0.25
Over $5 million................................................... 0.20
</TABLE>
22
<PAGE> 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.
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. 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 arrange-
23
<PAGE> 26
ments 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.
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 sales charge 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.
24
<PAGE> 27
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales loads) as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE
AS DISCOUNT TO
SALES CHARGE AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE THE OFFERING PRICE 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 TMASM Managed Trust, of
Class A shares of the Fund. In addition, purchases of Class A shares of the Fund
made in connection with a single investment of $1 million or more under the
Merrill Lynch Mutual Fund Adviser Program will not be subject to an initial
sales charge. Purchases described in this paragraph will be subject to a
contingent deferred sales charge if the shares are redeemed within one year
after purchase at the following rates.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
------------------------------------------------------------------ -------------------------------
<S> <C>
$1 million up to $2.5 million..................................... 0.75%
Over $2.5 million up to $3.5 million.............................. 0.40%
Over $3.5 million up to $5 million................................ 0.25%
Over $5 million................................................... 0.20%
</TABLE>
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 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
25
<PAGE> 28
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.
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<PAGE> 29
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.
The following table sets forth the rates of the contingent deferred sales
charge:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
----------------------------------------------------------------------- -------------------------
<S> <C>
0-1.................................................................... 4.0%
1-2.................................................................... 3.0%
2-3.................................................................... 2.0%
3-4.................................................................... 1.0%
4 and thereafter....................................................... None
</TABLE>
In determining whether a contingent deferred sales charge is applicable to
a redemption, the calculation will be determined in the manner that results in
the lowest possible rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the four-year period. The charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from 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.
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<PAGE> 30
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 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."
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<PAGE> 31
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.
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,
29
<PAGE> 32
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.
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 BlueprintSM 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
30
<PAGE> 33
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 quarterly statements
from the Transfer Agent. These quarterly statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
quarterly statements will also show any other activity in the account since the
preceding statement. Shareholders will receive separate transaction
confirmations for each purchase or sale transaction other than automatic
investment purchases and the investment of ordinary income dividends and
long-term capital gain distributions. A shareholder may make additions to his
Investment Account at any time by mailing a check directly to the Transfer
Agent. 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.
31
<PAGE> 34
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 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 payable 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.
Retirement Plans. Class A shares are offered at net asset value to
qualified retirement plans within the meaning of Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), and deferred compensation plans
within the meaning of Sections 403(b) and 457 of the Code ("Retirement Plans"),
provided the plan has $5 million or more in existing plan assets initially
invested in portfolios, mutual funds or trusts advised either directly or
through a subsidiary by the Manager or its affiliate, FAM. Class A shares may
also be offered at net asset value to Retirement Plans, provided the plan has
accumulated $5 million or more in existing plan assets invested in mutual funds
advised by the Manager or FAM charging a front-end sales charge or contingent
deferred sales charge. Assets of Retirement Plans with the same sponsor or an
affiliated
32
<PAGE> 35
sponsor may be aggregated. Retirement Plans that are also qualified under
Section 401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants ("Eligible 401(k) 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 Retirement Plans of the same sponsoring employer or its
affiliates may be aggregated. Retirement Plans meeting any of the foregoing
requirements and which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a wide
range of investments including individual corporate equities and other
securities in addition to mutual fund shares) by the Merrill Lynch BlueprintSM
Program, are offered Class A shares at a price equal to net asset value per
share plus a reduced sales charge of 0.50%. Any Retirement 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 this Prospectus, or if the Retirement Plan 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 Retirement Plans.
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.
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
33
<PAGE> 36
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
All or a portion of the Fund's net investment income will be declared as
dividends daily prior to the determination of net asset value on that day and
paid monthly. The Fund may at times pay out less than the entire amount of net
investment income earned in any particular period and may at times pay out such
accumulated undistributed income in addition to net investment income earned in
any particular period in order to permit the Fund to maintain a more stable
level of distributions. As a result, the distribution paid by the Fund for any
particular period may be more or less than the amount of net investment income
earned by the Fund during such period. However, it is the Fund's intention to
distribute during any fiscal year all its net investment income. Shares will
accrue dividends as long as they are issued and outstanding. Shares are issued
and outstanding as of the settlement date of a purchase order to the settlement
date of a redemption order. All net realized long-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--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.
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<PAGE> 37
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.
TAXES
The Fund intends to continue elect 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,
35
<PAGE> 38
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 gains.
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 and 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. The Fund will report annually to its shareholders
the amount per share of such withholding taxes.
Under certain provisions of the Code, certain non-corporate 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.
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 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
36
<PAGE> 39
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 and may change the rights
and preferences of issued shares as long as such change does not substantially
adversely affect the rights of holders of such issued shares. 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 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
37
<PAGE> 40
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.
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.
38
<PAGE> 41
MERRILL LYNCH ASSET ALLOCATION INCOME FUND, INC.--AUTHORIZATION FORM
--------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST AN APPLICATION FOR PURCHASES THROUGH
MERRILL LYNCH BLUEPRINTSM PROGRAM BY CALLING (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 Fund, Inc.
and establish an Investment Account as described in the Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $...... payable to Financial Data Services, Inc.,
as an initial investment (minimum $1,000) (subsequent investments $50 or
more). I understand that this purchase will be executed at the applicable
offering price next to be determined after this Application is received by
you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information:
<TABLE>
<S> <C>
1. .................................................... 4. .......................................................
2. .................................................... 5. .......................................................
3. .................................................... 6. .......................................................
</TABLE>
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with
respect to dividends and distributions are elected:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
------------------------------------- -------------------------------------
Distribution ELECT / / reinvest dividends ELECT / / reinvest dividends
Options ONE / / pay dividends in cash ONE / / pay dividends in cash
------------------------------------- -------------------------------------
</TABLE>
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
------------------------
<TABLE>
<S> <C>
(PLEASE PRINT) ---------------------------
Name................................................................................
First Name Initial Last Name
---------------------------
Social Security No.
Name of Co-Owner (if any)........................................................... or Taxpayer Identification No.
First Name Initial Last Name
Address.............................................................................
....................................................................................
..................... , 19....
(Zip Code)
Date
Occupation.................................................. Name and Address of Employer................................
............................................................
............................................................
</TABLE>
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 Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Asset Allocation
Income Fund, 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 Fund, Inc. held as security.
<TABLE>
<S> <C> <C>
By........................................................... .............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C> <C>
(1) Name..................................................... (2) Name.....................................................
</TABLE>
39
<PAGE> 42
MERRILL LYNCH ASSET ALLOCATION INCOME FUND, INC.--AUTHORIZATION FORM
--------------------------------------------------------------------------------
3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for quarterly,
of shares in Merrill Lynch Asset Allocation Income Fund, Inc., at cost or
current offering price. Begin systematic withdrawal on ..............., 19....
(Date)
Withdrawals to be made either (check one) / / Monthly / / Quarterly*
*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):
--------------------------------------------------------------------------------
(a) I HEREBY AUTHORIZE PAYMENT BY CHECK
Draw checks payable
(check one)
/ / as indicated in item 1.
/ / to the order of............................................................
Mail to (check one)
/ / the address indicated in item 1.
/ / Name (Please Print)........................................................
Address.........................................................................
Signature of Owner..............................................................
Signature of Co-Owner (if any)..................................................
(b) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND (IF
NECESSARY) DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE IN ERROR TO
MY ACCOUNT.
Specify type of account (check one): / / checking / / savings
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Name on your Account............................................................
Bank............................................................................
Bank #................. Account #...............................................
Bank Address....................................................................
Signature of Depositor ........................... Date.........................
Signature of Depositor (if joint account).......................................
NOTE: If Automatic Direct Deposit is elected, your blank, unsigned check marked
"VOID" or a deposit slip from your savings account should accompany this
Application.
--------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase ..... Class A shares or ..... Class B shares (choose one)
of Merrill Lynch Asset Allocation Income Fund, Inc. subject to the terms set
forth below.
--------------------------------------------------------------------------------
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw a check or an ACH debit each month on my bank
account for investment in Merrill Lynch Asset Allocation Income Fund, Inc. as
indicated below:
Amount of each check or ACH debit $............................................
Account No.....................................................................
Please date and invest checks or draw ACH debits on the 20th of
each month beginning...........................................................
(Month)
or as soon thereafter as possible.
I agree that you are preparing these checks or drawing these debits voluntarily
at my request and that you shall not be liable for any loss arising from any
delay in preparing or failure to prepare any such check or debit. If I change
banks or desire to terminate or suspend this program, I agree to notify you
promptly in writing. I further agree that if a check or debit is not honored
upon presentation, Financial Data Services, Inc. is authorized to discontinue
immediately the Automatic Investment Plan and to liquidate sufficient shares
held in my account to offset the purchase made with the returned check or
dishonored debit.
<TABLE>
<S> <C>
...................... ........................................
Date Signature of Depositor
........................................
Signature of Depositor
(If joint account, both must sign)
</TABLE>
AUTHORIZATION TO HONOR CHECKS OR ACH
DEBITS DRAWN BY FINANCIAL DATA SERVICES, INC.
To......................................................................... Bank
(Investor's Bank)
Bank Address....................................................................
City........................ State.......... Zip Code........
As a convenience to me, I hereby request and authorize you to pay and charge to
my account checks or ACH debits drawn on my account by and payable to Financial
Data Services, Inc., Transfer Agency Mutual Fund Operations, Jacksonville,
Florida 32232-5289. I agree that your rights in respect to each such check or
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked personally by me in
writing. Until you receive such notice, you shall be fully protected in honoring
any such check or debit. I further agree that if any such check or debit be
dishonored, whether with or without cause and whether intentionally or
inadvertently, you shall be under no liability.
<TABLE>
<S> <C>
...................... ........................................
Date Signature of Depositor
...................... ........................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)
</TABLE>
NOTE: If Automatic Investment Plan is elected, your blank, unsigned check marked
"VOID" should accompany this Application.
--------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
--- ---
- -
- -
--- ---
This form when completed should be mailed to:
Merrill Lynch Asset Allocation Income Fund, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our
agent in connection with transactions under this authorization form and
agree to notify the Distributor of any purchases made under a Letter of
Intention or Systematic Withdrawal Plan. We guarantee the Shareholder's
Signature.
...........................................................................
Dealer Name and Address
By..........................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C>
------- ----------
------- ---------- ............................
Branch-Code F/C No. F/C Last Name
------- ------------
------- ------------
Dealer's Customer A/C No.
</TABLE>
40
<PAGE> 43
(This Page Intentionally Left Blank)
41
<PAGE> 44
(This Page Intentionally Left Blank)
42
<PAGE> 45
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:
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> 46
NO PERSON HAS BEEN 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 MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table............................... 3
Alternative Sales Arrangements.......... 4
Special Considerations.................. 7
Investment Objective and Policies....... 8
Debt Securities....................... 9
Equity Securities..................... 10
Money Market Securities............... 11
Portfolio Strategies Involving Options
and Futures......................... 12
Other Investment Policies and
Practices........................... 16
Management of the Fund.................. 20
Board of Directors.................... 20
Management and Advisory
Arrangements........................ 21
Transfer Agency Services.............. 21
Purchase of Shares...................... 22
Subscription Offering................. 22
Continuous Offering................... 23
Alternative Sales Arrangements........ 24
Initial Sales Charge Alternative--
Class A Shares...................... 25
Reduced Initial Sales Charge.......... 25
Deferred Sales Charge Alternative--
Class B Shares...................... 26
Contingent Deferred Sales Charge...... 27
Distribution Plan..................... 28
Limitations on the Payment of Deferred
Sales Charge........................ 29
Redemption of Shares.................... 29
Redemption............................ 29
Repurchase............................ 30
Reinstatement Privilege--Class A
Shares.............................. 30
Shareholder Services.................... 30
Performance Data........................ 33
Additional Information.................. 34
Dividends and Distributions........... 34
Determination of Net Asset Value...... 35
Taxes................................. 35
Organization of the Fund.............. 37
Shareholder Reports................... 38
Shareholder Inquiries................. 38
Authorization Form...................... 39
</TABLE>
PROSPECTUS
[LOGO]
---------------------------------------------------
MERRILL LYNCH
ASSET ALLOCATION
INCOME FUND, INC.
July , 1994
Distributor:
Merrill Lynch Funds Distributor, Inc.
This prospectus should be
retained for future reference.
Code 18235--0794
<PAGE> 47
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 STATEMENT OF ADDITIONAL INFORMATION 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.
STATEMENT OF ADDITIONAL INFORMATION (Subject to Completion)
Issued June 30, 1994
MERRILL LYNCH ASSET ALLOCATION INCOME FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Asset Allocation Income Fund, Inc. (the "Fund") is a
non-diversified mutual fund primarily seeking a high level of current income,
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. The Fund will also seek capital appreciation. 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 objectives 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 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
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is July , 1994.
<PAGE> 48
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to seek a high level of current
income, 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. A
secondary investment objective is capital appreciation. These objectives are
fundamental policies 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 Objectives and Policies" in
the Prospectus for a discussion of the investment objectives 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
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 the 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 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, altough there can be no assurance in this regard.
PRECIOUS AND INDUSTRIAL METAL-RELATED SECURITIES
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
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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 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
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real estate. Such trusts also are dependent on management skill and may not be
diversified in their investments.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment
Objectives 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 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
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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 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 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.
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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 broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
An order has been obtained from the Securities and Exchange Commission
exempting the Fund from the provisions of Section 17(f) and Section 18(f) of the
Investment Company Act of 1940, 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
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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 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 for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Options 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
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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 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.
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
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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 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 fluctuations. In the case of repurchase
agreements, the prices at which the trades are conducted do not reflect the
accrued interest on the underlying obligations; 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
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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
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
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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.
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 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.
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(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.
(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% (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-themoney." 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.
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<PAGE> 59
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.
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 Funds and Advanced Technology Laboratories and Space Labs Medical
(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 Funds Distributor, Inc. (the "Distributor") since 1986;
President of Princeton Administrators, Inc. since 1988; and Director of
Financial Data Services, Inc. since 1985.
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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.
---------------
(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. Grills, 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
(12 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.
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
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<PAGE> 61
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 pursuant
to the applicable expense limitation provisions discussed above.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of the Manager or any of
their affiliates. The Fund pays all other expenses incurred in 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.
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<PAGE> 62
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues 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 Distributor, 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."
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 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
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<PAGE> 63
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 $25,000 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
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 $25,000), the
investor will be notified and must pay, within 20 days of the expiration of such
Letter, the difference between the sales charge on the Class A 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 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.
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<PAGE> 64
Merrill Lynch BlueprintSM Program. Class A shares of the Fund are offered
to participants in the Merrill Lynch BlueprintSM Program ("Blueprint").
Blueprint is directed to small investors, group IRAs and participants in certain
affinity groups such as credit unions, 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 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 BlueprintSM Program, P.O. Box
30441, New Brunswick, New Jersey 08989-0441.
Employer Sponsored Retirement and Savings Plans. Class A shares are offered
at net asset value to employer sponsored retirement or savings plans, such as
tax qualified retirement plans within the meaning of Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), deferred compensation
plans within the meaning of Sections 403(b) and 457 of the Code, other deferred
compensation arrangements, VEBA plans, and non-qualified After Tax Savings and
Investment programs, maintained on the Merrill Lynch Group Employee Services
system, herein referred to as "Employer Sponsored Retirement or Savings Plans,"
provided the plan has $5 million or more in existing plan assets initially
invested in portfolios, mutual funds or trusts advised by the Manager either
directly or through an affiliate. Class A shares may also be offered at net
asset value to Employer Sponsored Retirement or Savings Plans, provided the plan
has accumulated $5 million or more in existing plan assets invested in mutual
funds advised by the Manager charging a front-end sales charge or contingent
deferred sales charge. Assets of Employer Sponsored Retirement or Savings
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<PAGE> 65
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 BlueprintSM Program, are offered Class A shares at a price
equal to net asset value per share plus a reduced sales charge of 0.50%. Any
Employer Sponsored Retirement or Savings Plan which does not meet the above
described qualifications to purchase Class A shares at net asset value has the
option of purchasing Class A shares at the sales charge schedule disclosed in
the Prospectus, or if the Employer Sponsored Retirement or Savings Plan is a
qualified retirement plan and meets the specified requirements, then it may
purchase Class B shares with a waiver of the contingent deferred sales charge
upon redemption. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Employer Sponsored Retirement
or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, directors and
trustees of certain other Merrill Lynch sponsored investment companies,
directors of Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc.
and its subsidiaries and any trust, pension, profit-sharing or other benefit
plan for such persons may purchase Class A shares of the Fund at net asset
value. 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, Inc. (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, Inc. in shares of the Fund.
In order to exercise this investment option, Senior Floating Rate Fund, Inc.
shareholders must sell their Senior Floating Rate Fund shares to the Senior
Floating Rate Fund, Inc. in connection with a tender offer conducted by the
Senior Floating Rate Fund, Inc. and reinvest the proceeds immediately in the
Fund. This investment option is available only with respect to the proceeds of
Senior Floating Rate Fund, Inc. shares as to which no Early Withdrawal Charge
(as defined in the Senior Floating Rate Fund, Inc. prospectus) is applicable.
Purchase orders from Senior Floating Rate Fund, Inc. shareholders wishing to
exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund, Inc. 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 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
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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.
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
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
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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.
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 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 BlueprintSM Program. Class B shares are offered to certain
participants in the Merrill Lynch BlueprintSM 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
BlueprintSM 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
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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 Objectives and Policies--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 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 thosecircumstances 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 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
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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 connectionwith
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 ofthe 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 offset against the advisory fee paid by the Fund. After considering all
factors deemed relevant, the Directors made a determination not to seek such
recapture. The Directors will reconsider this matter from time to time.
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.
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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 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 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 within a CMA(R)
account may arrange to have periodic investments made in the Fund in
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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.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for Class A shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
A Class A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the
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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 Asset Allocation Growth Fund, Inc.,
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 Connecticut Municipal Bond Fund, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch 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
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 Mexico 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
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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 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 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 BlueprintSM 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 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.
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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
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:
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC. High current income consistent with a
policy of limiting the degree of
fluctuation in net asset value by
investing primarily in a portfolio
of adjustable rate securities,
consisting principally of
mortgage-backed and asset-backed
securities.
MERRILL LYNCH AMERICAS
INCOME FUND, INC. 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
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exempt from Federal and Arizona
income taxes as is consistent with
prudent investment management.
MERRILL LYNCH ASSET ALLOCATION GROWTH
FUND, INC. High total investment return,
consistent with prudent risk, from
investment in United States and
foreign equity, debt and money
market securities the combination
of which will be varied both with
respect to types of securities and
markets in response to changing
market and economic trends.
MERRILL LYNCH 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.
MERRILL LYNCH CALIFORNIA LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is to provide
shareholders with as high a level
of income exempt from Federal and
California income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of
intermediate-term investment grade
California Municipal Bonds.
MERRILL LYNCH CALIFORNIA MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
California Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
and California income taxes
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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 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.
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.
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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.
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.
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MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC. High total return from investment
primarily in an internationally
diversified portfolio of
convertible debt securities,
convertible preferred stock and
"synthetic" convertible securities
consisting of a combination of debt
securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS
(residents of Arizona must meet
investor
suitability standards) The highest total investment return
consistent with prudent risk
through worldwide investment in an
internationally diversified
portfolio of securities.
MERRILL LYNCH GLOBAL RESOURCES TRUST Long-term growth and protection of
capital from investment in
securities of domestic and foreign
companies that possess substantial
natural resource assets.
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.
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MERRILL LYNCH INSTITUTIONAL FUND A portfolio of Merrill Lynch Funds
for Institutions Series, a series
fund, whose objective is to provide
maximum current income consistent
with liquidity and the maintenance
of a high quality portfolio of
money market securities.
MERRILL LYNCH INSTITUTIONAL TAX-EXEMPT
FUND A portfolio of Merrill Lynch Funds
for Institutions Series, a series
fund, whose objective is to provide
current income exempt from Federal
income taxes, preservation of
capital and liquidity available
from investing in a diversified
portfolio of short-term, high
quality municipal bonds.
MERRILL LYNCH 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
BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Massachusetts income taxes as
is consistent with prudent
investment management through
investment in a portfolio primarily
of intermediate-term investment
grade Massachusetts Municipal
Bonds.
MERRILL LYNCH MASSACHUSETTS
MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
as high a level of income exempt
from Federal and Massachusetts
income taxes as is consistent with
prudent investment management.
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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
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.
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.
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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
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.
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
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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, 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.
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
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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. 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.
MERRILL LYNCH U.S.A. GOVERNMENT
RESERVES Preservation of capital, current
income and liquidity available from
investing in direct obligations of
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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.
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 exchange privilege. Certain funds
may suspend the continuous offering of their shares to the general public at any
time and may thereafter resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made.
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<PAGE> 85
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
All or a portion of the Fund's net investment income will be declared as
dividends daily prior to the determination of net asset value on that day and
paid monthly. The Fund may at times pay out less than the entire amount of net
investment income earned in any particular period and may at times pay out such
accumulated undistributed income in addition to net investment income earned in
any particular period in order to permit the Fund to maintain a more stable
level of distributions. As a result, the distribution paid by the Fund for any
particular period may be more or less than the amount of net investment income
earned by the Fund during such period. However, it is the Fund's intention to
distribute during any fiscal year all its net investment income. Shares will
accrue dividends as long as they are issued and outstanding. Shares are issued
and outstanding as of the settlement date of a purchase order or the settlement
date of a redemption order. All net realized long-term and short-term capital
gains, if any, will be distributed to the Fund's shareholders at least annually.
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 elect 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 and gains.
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). 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 and 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
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<PAGE> 86
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, certain non-corporate 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.
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,
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, which may
cause the Fund to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy certain distribution requirements
for relief from income and excise taxes. 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.
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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.
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 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 intends to monitor developments in
this area and 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 income available to be
distributed to shareholders as ordinary income. Additionally, if Code Section
988 losses exceed other ordinary 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.
41
<PAGE> 88
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 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 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 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.
42
<PAGE> 89
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 and
may change the rights and preferences of issued shares as long as such change
does not substantially adversely affect the rights of holders of such issued
shares. 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
non-assessable and have no preemptive or conversion rights. Redemption rights
are discussed elsewhere herein and in the Prospectus. Each share is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund upon liquidation or dissolution after satisfaction of
outstanding liabilities. Stock certificates are issued by the transfer agent
only on specific request. Certificates for fractional shares are not issued in
any case.
The Manager provided the initial capital for the Fund by purchasing 5,000
shares of each class of stock for an aggregate of $100,000. Such shares were
acquired for investment and can only be disposed of by redemption. The
organizational expenses of the Fund 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.
43
<PAGE> 90
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:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ ------------
<S> <C> <C>
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........................................... $ $
=========== ===========
</TABLE>
---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B shares are not subject to an initial sales charge but may be subject
to a contingent deferred sales charge on redemption of shares within four
years of purchase. See "Purchase of Shares--Deferred Sales Charge
Alternative--Class B Shares" in the Prospectus 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.
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 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.
44
<PAGE> 91
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 December 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, 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.
45
<PAGE> 92
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
("MOODY'S") CORPORATE RATINGS
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds. They
are rated lower than the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations, (i.e., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and 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.
</TABLE>
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.
46
<PAGE> 93
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
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 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.
47
<PAGE> 94
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred 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:
<TABLE>
<S> <C>
"aaa" An issue which is rated "aaa" is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
within the universe of preferred stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred stock. This rating
indicates that there is 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.
"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.
</TABLE>
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.
48
<PAGE> 95
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform 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 and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Speculative Debt rated BB, B, CCC, CC and C is regarded as having predominantly speculative
Grade 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.
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
</TABLE>
49
<PAGE> 96
<TABLE>
<S> <C>
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.
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.
</TABLE>
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
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 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.
50
<PAGE> 97
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:
<TABLE>
<S> <C>
A Issues assigned this highest rating are regarded as having the greatest capacity for
timely payment. Issues in this category are delineated with the numbers 1, 2, and 3 to
indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong. However,
the relative degree of safety is not as high as for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only 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.
</TABLE>
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the bond rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment--capacity and willingness of the issuer to
meet the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
51
<PAGE> 98
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.
<TABLE>
<S> <C>
AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong, although
not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity to make payments for a preferred stock in this
category than for issues in the "A" category.
BB Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
B predominately speculative with respect to the issuer's capacity to pay preferred
CCC 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.
</TABLE>
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.
52
<PAGE> 99
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
MERRILL LYNCH ASSET ALLOCATION INCOME FUND, INC.:
We have audited the accompanying statement of assets and liabilities, of Merrill
Lynch Asset Allocation Income Fund, 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 Fund,
Inc. as of July , 1994, in conformity with generally accepted accounting
principles.
Deloitte & Touche
Princeton, New Jersey
July , 1994.
53
<PAGE> 100
MERRILL LYNCH ASSET ALLOCATION INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
, 1994
<TABLE>
<S> <C>
Assets:
Cash in Bank................................................................. $100,000
Prepaid registration fees (Note 3)...........................................
Deferred organization expenses (Note 4)......................................
--------
Total Assets......................................................................
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
========
</TABLE>
---------------
(1) Merrill Lynch Asset Allocation Income Fund, Inc. (the "Fund") was
incorporated in the State of Maryland on June 6, 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.
54
<PAGE> 101
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and
Policies.......................... 2
Precious Metal-Related
Securities..................... 2
Real Estate-Related Securities.... 3
Portfolio Strategies Involving
Options and Futures............ 4
Other Investment Policies and
Practices...................... 8
Investment Restrictions........... 10
Management of the Fund.............. 13
Directors and Officers............ 13
Management and Advisory
Arrangements................... 14
Purchase of Shares.................. 16
Alternative Sales Arrangements.... 16
Initial Sales Charge Alternative--
Class A Shares................. 16
Reduced Initial Sales
Charges--Class A Shares........ 17
Deferred Sales Charge
Alternative-- Class B Shares... 20
Redemption of Shares................ 21
Contingent Deferred Sales Charge--
Class B Shares................. 21
Portfolio Transactions and
Brokerage......................... 22
Determination of Net Asset Value.... 23
Shareholder Services................ 24
Investment Account................ 24
Automatic Investment Plan......... 24
Automatic Reinvestment of
Dividends and Capital Gains
Distributions.................. 25
Systematic Withdrawal Plans--Class
A Shares....................... 25
Exchange Privilege................ 26
Dividends, Distributions and
Taxes............................. 39
Dividends and Distributions....... 39
Taxes............................. 39
Performance Data.................... 42
General Information................. 43
Description of Shares............. 43
Computation of Offering Price Per
Share.......................... 44
Independent Auditors................ 44
Custodian........................... 44
Transfer Agent...................... 44
Legal Counsel....................... 45
Reports to Shareholders............. 45
Additional Information.............. 45
Appendix............................ 46
Independent Auditors' Report........ 53
Statement of Assets and
Liabilities....................... 54
</TABLE>
Statement of
Additional Information
[LOGO]
---------------------------------------------------
MERRILL LYNCH
ASSET ALLOCATION
INCOME FUND, INC.
July , 1994
Distributor:
Merrill Lynch Funds Distributor, Inc.
Code 18238 -- 0794
<PAGE> 102
PART C. OTHER INFORMATION
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:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C> <C>
1 -- Articles of Incorporation of Registrant, as amended.
2 -- By-Laws of Registrant, as amended.
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.*
</TABLE>
---------------
* 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.
C-1
<PAGE> 103
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT EFFECTIVE
DATE OF THE
TITLE OF CLASS REGISTRATION STATEMENT
------------------------------------------------------------------------- ----------------------
<S> <C>
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
</TABLE>
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 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
C-2
<PAGE> 104
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28.BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(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 Growth Fund, Inc., Merrill Lynch Asset Allocation
Income Fund, Inc., Merrill Lynch Balanced Fund for Investment and Retirement,
Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund,
Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental 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 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, Inc. 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., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York
Holdings, Inc. and Worldwide DollarVest Fund, Inc. The address of each of these
investment companies is Box 9011, Princeton, New Jersey 08543-9011, except that
C-3
<PAGE> 105
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.
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>
OTHER SUBSTANTIAL BUSINESS,
POSITION WITH 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
</TABLE>
<TABLE>
<S> <C> <C>
Princeton Services, Inc.
("Princeton Services")..... General Partner General Partner of FAM
Arthur Zeikel................ President President of FAM; President and
Director of Princeton Services;
Director of 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
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, Senior Vice President, General
General Counsel and Counsel and Secretary of FAM; Senior
Secretary Vice President, General Counsel,
Director and Secretary of Princeton
Services, Director of MLF
</TABLE>
C-4
<PAGE> 106
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION WITH PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
----------------------------- -------------------------- -------------------------------------
<S> <C> <C>
Ronald M. Kloss.............. Senior Vice President and Senior Vice President and Controller
Controller of FAM; Senior Vice President and
Controller of Princeton Services
Stephen M.M. Miller.......... Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr. ...... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
</TABLE>
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
----------------------------------------------- ------------------------- -------------------------
<S> <C> <C>
Robert Harris.................................. Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and Financial Data Services, Inc., 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund --
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Fund -- Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, 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-5
<PAGE> 107
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 AMENDMENT TO 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 29TH DAY OF JUNE, 1994.
MERRILL LYNCH ASSET ALLOCATION
INCOME FUND, INC.
By /s/ PHILIP L. KIRSTEIN
------------------------------------
(PHILIP L. KIRSTEIN, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------------- ------------------------- -----------------
<C> <S> <C>
Director and President June 29, 1994
/s/ PHILIP L. KIRSTEIN (Principal Executive
------------------------------------------------- Officer)
PHILIP L. KIRSTEIN
Director and Treasurer June 29, 1994
/s/ MARK B. GOLDFUS (Principal Financial and
------------------------------------------------- Accounting Officer)
MARK B. GOLDFUS
Director June 29, 1994
/s/ ROBERT HARRIS
-------------------------------------------------
ROBERT HARRIS
</TABLE>
C-6
<PAGE> 108
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NUMBERED
NUMBER PAGE
------ ----------
<C> <S> <C>
1 -- Articles of Incorporation of Registrant, as amended. ..................
2 -- By-Laws of Registrant, as amended. ....................................
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.* ..................................................................
</TABLE>
---------------
* To be filed by amendment
<PAGE> 1
EXHIBIT 1
FORM OF
ARTICLES OF INCORPORATION
As amended through the date hereof
MERRILL LYNCH ASSET ALLOCATION INCOME FUND, 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
FUND, 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.
<PAGE> 2
(2) To hold, invest and reinvest its assets in securities, and in
connection therewith to hold part or all of its assets in cash.
(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.
2
<PAGE> 3
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 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
3
<PAGE> 4
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 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
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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 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
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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 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).
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(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, 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
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Corporation as amended, supplemented and restated from time to time by Articles
of Amendment, Articles Supplementary, Articles of Restatement or otherwise.
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
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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 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, subject
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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 charge, if any, as may be fixed by
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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 securities on "margin," a
sale of securities "short," or an underwriting or the sale of, or a
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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.
ARTICLE IX
AMENDMENT
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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 FUND, INC. hereby executes the foregoing Articles of
Incorporation and acknowledges the same to be his act.
Dated this day of June, 1994.
/s/ John D. Lamb
John D. Lamb
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EXHIBIT 2
BY-LAWS
OF
MERRILL LYNCH ASSET ALLOCATION INCOME FUND, INC.
As amended, June 24, 1994
ARTICLE I
Offices
Section 1. Principal Office. The principal office of Merrill
Lynch Asset Allocation Income Fund, 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 later than 120
days
<PAGE> 2
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
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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 transacted which
might have been transacted at the meeting as originally called. The absence
from
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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 be entitled at each meeting of the
stockholders to one vote for every
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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 by the
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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 acts as are proper to conduct the election
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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 as conferred on or reserved to the stockholders by law or by
the Articles of Incorporation or these By-Laws.
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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 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
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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 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.
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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 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
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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 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,
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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 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
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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:
(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
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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 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
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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 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
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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 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
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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 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.
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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 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.
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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
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.
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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 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
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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 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
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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.
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
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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 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.
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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 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.
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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
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.
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ARTICLE IX
Fiscal Year
Unless otherwise determined by the Board, the fiscal year of
the Corporation shall end on the 31st day of December.
ARTICLE X
Depositories and Custodians
Section 1. Depositories. The funds of the Corporation 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 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
Section 1. Checks, Notes, Drafts, etc. Checks, notes,
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.
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Section 2. Sale or Transfer of Securities. Stock
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
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
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
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
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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 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
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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