<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 19, 1994
SECURITIES ACT FILE NO. 33-53997
INVESTMENT COMPANY ACT FILE NO. 811-7181
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. 2 / /
POST-EFFECTIVE AMENDMENT NO. 1 / /
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 3 /X/
(CHECK APPROPRIATE BOX OR BOXES)
-------------------
MERRILL LYNCH ASSET INCOME FUND, INC.
(FORMERLY MERRILL LYNCH ASSET ALLOCATION INCOME FUND, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Office) (Zip Code)
</TABLE>
Registrant's Telephone Number, including Area Code (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH ASSET INCOME FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
COPIES TO:
<TABLE>
<S> <C>
Counsel for the Company: Philip L. Kirstein, Esq.
Leonard B. Mackey, Jr., Esq. MERRILL LYNCH ASSET
ROGERS & WELLS MANAGEMENT
200 Park Avenue P.O. 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)
/X/ on October 21, 1994 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/ /_75 days after filing pursuant to paragraph (a)(ii)
/ /_on (date) pursuant to paragraph (a)(ii) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ /_ this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
-------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH ASSET INCOME FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------------------------------------------------------------------ ----------------------------------------------
<S> <C> <C> <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; ML Select Pricing-SM- System;
Shareholder Services; Purchase of Shares;
Item 8. Redemption or Repurchase........................ Fee Table; ML Select Pricing-SM- System;
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............................ Financial Statements (unaudited);
Statement of Assets and Liabilities
(audited)
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
ISSUED OCTOBER 21, 1994
MERRILL LYNCH ASSET INCOME FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
-------------------
Merrill Lynch Asset Income Fund, Inc. (the "Fund") is a non-diversified
mutual fund seeking a high level of current income consistent with prudent risk,
through an 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 CERTAIN
RISKS AND SPECIAL CONSIDERATIONS. SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS."
Pursuant to the Merrill Lynch Select Pricing-SM- System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing-SM- System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. See "Merrill
Lynch Select Pricing System" on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 ((609)
282-2800), or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100 and the minimum subsequent purchase is $1.00. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares."
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be retained
for future reference. A statement containing additional information about the
Fund, dated October 21, 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>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows.
<TABLE>
<CAPTION>
CLASS A(A) CLASS B(B) CLASS C(C) CLASS D(C)
---------- --------------------- ---------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases (as
a percentage of offering
price).................. 4.00%(d) None None 4.00%(d)
Sales Charge Imposed on
Dividend
Reinvestments........... None None None None
Deferred Sales Charge (as
a percentage of original
purchase price or
redemption proceeds,
whichever is lower)..... None(e) 4.0% during the first 1% for one None(e)
year, decreasing 1.0% year
annually thereafter
to 0.0% after the
fourth year
Exchange Fee.............. None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS).................
Investment Advisory
Fees(f)................. 0.75% 0.75% 0.75% 0.75%
---------- ------ ---------- ----------
12b-1 Fees(g):
Account Maintenance
Fees................ None 0.25% 0.25% 0.25%
------ ---------- ----------
Distribution Fees..... None 0.50% 0.55% None
------ ----------
(CLASS B SHARES
CONVERT TO CLASS D
SHARES AUTOMATICALLY
AFTER APPROXIMATELY
TEN YEARS AND CEASE
BEING SUBJECT TO
DISTRIBUTION FEES)
Other Expenses:
Custodial Fees........ 0.26% 0.26% 0.26% 0.26%
Shareholder Servicing
Costs(h)............ 0.19% 0.24% 0.24% 0.19%
Other................. 5.22% 5.22% 5.22% 5.22%
---------- ------ ---------- ----------
Total Other
Expenses.... 5.67% 5.72% 5.72% 5.67%
---------- ------ ---------- ----------
Reimbursement of
Expenses(i)......... (3.92) (3.97) (3.97) (3.92)
---------- ------ ---------- ----------
TOTAL FUND OPERATING
EXPENSES.................... 2.50% 3.25% 3.30% 2.75%
---------- ------ ---------- ----------
---------- ------ ---------- ----------
<FN>
- ------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 28.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 29.
(c) Prior to the date of this Prospectus, the Fund has not offered its Class C
and Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,0000 or more may not be subject to an initial sales charge. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 28.
(e) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge may instead be subject to a CDSC of
1.0% of amounts redeemed within the first year of purchase.
(f) See "Management of the Fund -- Management and Advisory Arrangements" --
page 24.
(g) See "Purchase of Shares -- Distribution Plans" -- page 32.
(h) See "Management of the Fund -- Transfer Agency Services" -- page 25.
(i) Pursuant to state expense limitations imposed on the Fund for the period
September 2, 1994 (commencement of operations) to September 30, 1994 the
Manager was required to reimburse its entire management fee and voluntarily
reimbursed the Fund for all other expenses (excluding 12b-1 fees).
"Investment Advisory 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 fiscal year ending December 31, 1994.
</TABLE>
2
<PAGE>
EXAMPLE.
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR
THE PERIOD OF:
------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ----------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment including the maximum $40
initial sales charge (Class A and Class D shares
only) and assuming (1) the Total Fund Operating
Expenses for each class set forth above; (2) a
5% annual return throughout the periods; and (3)
redemption at the end of the period:
Class A......................................... $64 $115 $168 $312
Class B......................................... $73 $120 $170 $355
Class C......................................... $43 $102 $172 $359
Class D......................................... $67 $122 $180 $336
An investor would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of the period:
Class A......................................... $64 $115 $168 $312
Class B......................................... $33 $100 $170 $355
Class C......................................... $33 $102 $172 $359
Class D......................................... $67 $122 $180 $336
</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 and Class C 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. ("NASD"). 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."
3
<PAGE>
MERRILL LYNCH SELECT PRICING-SM- SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing-SM- System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing-SM- System is used by more than
50 mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM" or the
"Manager") or an affiliate of MLAM, Fund Asset Management, L.P. ("FAM"). Funds
advised by MLAM or FAM are referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
the Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ only to
the extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing-SM- System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares
4
<PAGE>
under the Merrill Lynch Select Pricing-SM- System that the investor believes is
most beneficial under his particular circumstances. More detailed information as
to each class of shares is set forth under "Purchase of Shares."
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<C> <S> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(2,3)
B CDSC for a period of 4 years, at 0.25% 0.50% B shares convert to D shares
a rate of 4.0% during the first automatically after
year, decreasing 1.0% annually approximately ten years(4)
to 0.0%
C 1.0% CDSC for one year 0.25% 0.55% No
D Maximum 4.00% initial sales 0.25% No No
charge(3)
<FN>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("CDSCs") are
imposed if the redemption occurs within the applicable CDSC time period.
The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead will be subject to a 1.0% CDSC for one year. See "Class A" and
"Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an eight
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
</TABLE>
<TABLE>
<S> <C>
CLASS A: Class A shares incur an initial sales charge when they are purchased and bear no
ongoing distribution or account maintenance fees. Class A shares are offered to a
limited group of investors and also will be issued upon reinvestment of dividends
on outstanding Class A shares. Investors that currently own Class A shares in a
shareholder account are entitled to purchase additional Class A shares in that
account. Other eligible investors include certain retirement plans and
participants in certain investment programs. In addition, Class A shares will be
offered to Merrill Lynch & Co., Inc. and its subsidiaries (the term
"subsidiaries," when used herein with respect to Merrill Lynch & Co., Inc.
includes MLAM, FAM and certain other entities directly or indirectly wholly-owned
and controlled by Merrill Lynch & Co., Inc.) and their directors and employees
and to members of the Boards of MLAM-advised mutual funds. The maximum initial
sales charge is 4.00%, which is reduced for purchases of $25,000 and over.
Purchases of $1,000,000 or more may not be subject to an initial sales charge but
if the initial sales charge is waived such purchases will be subject to a CDSC of
1% if the shares are redeemed within one year after purchase. Sales charges also
are reduced under a right of accumulation which takes into account the investor's
holdings of all classes of all MLAM-advised mutual funds. See "Purchase of Shares
-- Initial Sales Charge Alternatives -- Class A and Class D Shares."
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
CLASS B: Class B shares do not incur a sales charge when they are purchased, but they are
subject to an ongoing account maintenance fee of 0.25% of the Fund's average net
assets attributable to the Class B shares, an ongoing distribution fee of 0.50%
and a CDSC if they are redeemed within four years of purchase. Approximately ten
years after issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made convert into Class D shares automatically after
approximately eight years. If Class B shares of the Fund are exchanged for Class
B shares of another MLAM-advised mutual fund, the conversion period applicable to
the Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares will occur
at least once a month on the basis of the relative net asset values of the shares
of the two classes on the conversion date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
Shares purchased through reinvestment of dividends on Class B shares also will
convert automatically to Class D shares. The conversion period for dividend
reinvestment shares and for certain retirement plans is modified as described
under "Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B and
Class C Shares -- Conversion of Class B Shares to Class D Shares."
CLASS C: Class C shares do not incur a sales charge when they are purchased, but they are
subject to an ongoing account maintenance fee of 0.25% of average net assets and
an ongoing distribution fee of 0.55%. Class C shares are also subject to a CDSC
if they are redeemed within one year of purchase. Although Class C shares are
subject to a 1.0% CDSC for only one year (as compared to four years for Class B),
Class C shares have no conversion feature and, accordingly, an investor that
purchases Class C shares will be subject to distribution fees that will be
imposed on Class C shares for an indefinite period subject to annual approval by
the Fund's Board of Directors and regulatory limitations.
CLASS D: Class D shares incur an initial sales charge when they are purchased and are
subject to an ongoing account maintenance fee of 0.25% of average net assets.
Class D shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchase of $1 million or more may not be subject to an
initial sales charge but if the initial sales charge is waived such purchases
will be subject to a CDSC of 1% if shares are redeemed within one year of
purchase. The schedule of initial sales charges and reductions for the Class D
shares is the same as the schedule for Class A shares. Class D shares also will
be issued upon conversion of Class B shares as described above under "Class B."
See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and Class
D Shares."
</TABLE>
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing-SM- System that the investor believes is most beneficial under the
investor's particular circumstances.
INITIAL SALES CHARGE ALTERNATIVES. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
6
<PAGE>
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee imposed
on Class D shares. Investors qualifying for significantly reduced initial sales
charges may find the initial sales charge alternative particularly attractive
because similar sales charge reductions are not available with respect to the
deferred sales charges imposed in connection with purchases of Class B or Class
C shares. Investors not qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors that previously purchased Class A
shares may no longer be eligible to purchase Class A shares of other
MLAM-advised mutual funds, those previously purchased Class A shares, together
with Class B, Class C and Class D share holdings, will count toward a right of
accumulation which may qualify the investor for reduced initial sales charges on
new initial sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C shares
to have higher expense ratios, pay lower dividends and have lower total returns
than the initial sales charge shares. The ongoing Class D account maintenance
fees will cause Class D shares to have a higher expense ratio, pay lower
dividends and have a lower total return than Class A shares.
DEFERRED SALES CHARGE ALTERNATIVES. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately ten years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forgo the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred
Sales Charges."
7
<PAGE>
FINANCIAL HIGHLIGHTS
The unaudited financial information in the table below is for the period
September 2, 1994 (commencement of operations) to September 30, 1994. Unaudited
financial statements for the period September 2, 1994 to September 30, 1994 are
included in the Statement of Additional Information. The following per share
data and ratios have been derived from information provided in the Fund's
unaudited financial statements. Financial information is not presented for Class
C or Class D shares, since no shares of those classes are publicly issued as of
the date of this Prospectus.
<TABLE>
<CAPTION>
FOR THE
PERIOD SEPTEMBER 2,
1994+ TO
SEPTEMBER 30, 1994
----------------------
CLASS A CLASS B
--------- ----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $10.00 $10.00
Investment Income -- net........................ 0.03 0.03
Realized and unrealized loss on investments --
net........................................... (0.09) (0.09)
--------- ----------
Total from investment operations.................. (0.06) (0.06)
--------- ----------
LESS DIVIDENDS:
Investment income -- net........................ (0.03) (0.03)
--------- ----------
Total dividends................................... (0.03) (0.03)
--------- ----------
Net asset value, end of period.................... $ 9.91 $ 9.91
--------- ----------
--------- ----------
TOTAL INVESTMENT RETURN*:
Based on net asset value per share................ (0.46%)++ (0.51%)++
--------- ----------
--------- ----------
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees and net of
reimbursement.................................... 0% 0%
--------- ----------
--------- ----------
Expenses, net of reimbursement.................... 0% .75%**
--------- ----------
--------- ----------
Expenses.......................................... 6.42%** 7.20%**
--------- ----------
--------- ----------
Investment income -- net.......................... 5.04%** 4.31%**
--------- ----------
--------- ----------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).......... $ 795 $5,099
--------- ----------
--------- ----------
Portfolio turnover................................ 0% 0%
--------- ----------
--------- ----------
<FN>
- ---------
+ Commencement of operations.
++ Aggregate total investment return.
* Total investment returns exclude the effects of sales loads.
** Annualized.
</TABLE>
8
<PAGE>
RISK FACTORS AND 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. The
foreign securities in which the Fund may invest are not limited to securities of
issuers in developed countries or economies and may include securities of
issuers in less developed or emerging market economies. 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.
9
<PAGE>
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 derivatives, such as options, futures and options
thereon. Utilization of options and futures transactions involves the risk of
imperfect correlation in movements in the price of options and futures and
movements in the price of the securities or currencies which are the subject of
the hedge. There can be no assurance that a liquid secondary market for options
and futures contracts will exist at any specific time. See "Investment
Objectives and Policies -- Portfolio Strategies Involving Options and Futures."
Certain derivative securities in which the Fund may invest, including
certain inverse securities, may have the effect of providing a degree of
investment leverage, because they may increase or decrease in value at a rate
that is a multiple of the changes in applicable indices. As a result, the market
values of such securities will generally be more volatile than the market values
of fixed-rate securities. See "Investment Objectives and Policies--Other
Investment Policies and Practices--Derivative Securities."
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 an 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 invests in a portfolio of U.S. and foreign debt, equity and money
market securities. The composition of the portfolio among these securities and
markets are 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 investment
approach provides the Fund with the opportunity to benefit from anticipated
shifts in the relative performance of different types of
10
<PAGE>
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, not to exceed 35% under normal market conditions, 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 within the
limits set forth above, the Manager considers, 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 considers the relative opportunity for capital appreciation of
equity and debt securities, dividend yields, and the level of interest rates
paid on debt securities of various maturities.
In selecting securities denominated in foreign currencies, the Manager
considers, 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").
11
<PAGE>
U.S. Government securities include: (i) U.S. Treasury obligations (bills,
notes and bonds), which differ in their interest rates, maturities and times of
issuance, all of which are backed by the full faith and credit of the U.S.; and
(ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related securities,
some of which are backed by the full faith and credit of the U.S. Treasury
(E.G., direct pass-through certificates of the Government National Mortgage
Association), some of which are supported by the right of the issuer to borrow
from the U.S. Government (E.G., obligations of Federal Home Loan Banks) and some
of which are backed only by the credit of the issuer itself (E.G., obligations
of the Student Loan Marketing Association).
In the case of mortgage-related securities, prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, a mortgage-related
security is often subject to more rapid prepayment of principal than its stated
maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the yield and price of
the securities. Accelerated prepayments adversely impact yields for pass-through
securities purchased at a premium (I.E., a price in excess of principal amount)
and may involve additional risk of loss of principal because the premium may not
have been fully amortized at the time the obligation is repaid. The opposite is
true for pass-through securities purchased at a discount. The Fund may purchase
mortgage-related securities at a premium or at a discount.
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing power. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund invests
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 invests 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.
12
<PAGE>
EQUITY SECURITIES
Within the portion, if any, of the Fund's portfolio allocated to equity
securities, the Manager seeks 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 seeks 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 seeks to identify small and emerging growth
companies that possess superior management, marketing ability, research and
product development skills and sound balance sheets. Investment in the
securities of small and emerging growth companies involves greater risk than
investment in larger, more established companies. Such risks include the fact
that securities of small or emerging growth companies may be subject to more
abrupt or erratic market movements than larger, more established companies or
the market average in general. Also, these companies may have limited product
lines, markets or financial resources, or they may be dependent on a limited
management group.
There may be periods when market and economic conditions exist that favor
certain types of tangible assets as compared to other types of investments. For
example, the value of precious metals can be expected to benefit from such
factors as rising inflationary pressures or other economic, political or
financial uncertainty or instability. Real estate values, which are influenced
by a variety of economic, financial and local factors, tend to be cyclical in
nature. During periods when the Manager believes that conditions favor a
particular real asset as compared to other investment opportunities, the Fund
may emphasize, within the portion of its portfolio allocated to equity
securities, investments related to that asset such as investments in precious or
industrial metal-related securities or real estate-related securities as
described below. The Fund may invest up to 25% of its total assets in any
particular industry sector.
PRECIOUS AND INDUSTRIAL METAL-RELATED SECURITIES. Precious and industrial
metal-related securities are equity securities of companies that explore for,
extract, process or deal in precious or industrial metals, I.E., gold, silver,
platinum, iron, copper and aluminum, and asset-based securities indexed to the
value of such metals. Based on historical experience, during periods of economic
or financial instability the securities of such companies may be subject to
extreme price fluctuations, reflecting the high volatility of precious and
industrial metal prices during such periods. In addition, the instability of
precious and industrial metal prices may result in volatile earnings of precious
and industrial metal-related companies which, in turn, may affect adversely the
financial condition of such companies. Asset-based securities are debt
securities, preferred stock or convertible securities, the principal amount,
redemption terms or conversion terms of which are related to the market price of
some precious or industrial metal such as gold bullion. The Fund will purchase
only asset-based securities which are rated, or are issued by issuers that have
outstanding debt obligations
13
<PAGE>
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
are 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).
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.
14
<PAGE>
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 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
15
<PAGE>
equal to the difference between the closing value of the index and the exercise
price of the option times a specified multiple. The Fund may invest in stock
index options based on a broad market index, E.G., the S&P 500 Index, or on a
narrow index representing an industry or market segment, E.G., the AMEX Oil &
Gas Index.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index futures contracts in
connection with the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant advance, it may
purchase futures in order to gain rapid market exposure that may in part or
entirely offset increases in the cost of securities that the Fund intends to
purchase. As such purchases are made, an equivalent amount of futures contracts
will be terminated by offsetting sales. The Fund does not consider purchases of
futures contracts to be a speculative practice under these circumstances. It is
anticipated that, in a substantial majority of these transactions, the Fund will
purchase such securities upon termination of the long futures position, whether
the long position is the purchase of a futures contract or the purchase of a
call option or the writing of a put option on a future, but under unusual
circumstances (E.G., the Fund experiences a significant amount of redemptions),
a long futures position may be terminated without the corresponding purchase of
securities.
The Fund also has authority to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies are utilized under the same market and market sector
conditions (I.E., conditions relating to specific types of investments) in which
the Fund enters into futures transactions. The Fund may purchase put options or
write call options on futures contracts and stock indices rather than selling
the underlying futures contract in anticipation of a decrease in the market
value of its securities. Similarly, the Fund may purchase call options, or write
put options on futures contracts and stock indices, as a substitute for the
purchase of such futures to hedge against the increased cost resulting from an
increase in the market value of securities which the Fund intends to purchase.
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.
16
<PAGE>
FOREIGN CURRENCY HEDGING. The Fund has authority to deal in forward foreign
exchange among currencies of the different countries in which it will invest and
multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. The Fund's dealings in
forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. The Fund will not speculate in forward foreign
exchange. Hedging against a decline in the value of a currency does not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to hedges
on non-U.S. dollar denominated securities owned by the Fund, sold by the Fund
but not yet delivered, or committed or anticipated to be purchased by the Fund.
As an illustration, the Fund may use such techniques to hedge the stated value
in U.S. dollars of an investment in a yen denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of yen for dollars at a specified price
by a future date. To the extent the hedge is successful, a loss in the value of
the yen relative to the dollar will tend to be offset by an increase in the
value of the put option. To offset, in whole or in part, the cost of acquiring
such a put option, the Fund may also sell a call option which, if exercised,
requires it to sell a specified amount of yen for dollars at a specified price
by a future date (a technique called a "straddle"). By selling such a call
option in this illustration, the Fund gives up the opportunity to profit without
limit from increases in the relative value of the yen to the dollar. The Manager
believes that "straddles" of the type which may be utilized by the Fund
constitute hedging transactions and are consistent with the policies described
above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade or
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of securities which it has committed
or anticipates to purchase which are denominated in such currency and, in the
case of securities which have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated currency. The Fund may not incur potential
net liabilities of more than 20% of its total assets from foreign currency
options, futures or related options.
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<PAGE>
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.
RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS. Utilization of
derivatives, such as options and futures, 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
18
<PAGE>
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.
The Fund presently does not intend to invest in other types of derivative
transactions; however, in response to changes in market conditions or if other
types of derivative instruments are developed in the future which the Manager
believes are appropriate for the Fund, the Fund will notify investors of its
intention to invest in these instruments.
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%
19
<PAGE>
of the market value of its total assets, not more than 5% of the market value of
its total assets will be invested in the securities of a single issuer, and the
Fund will not own more than 10% of the outstanding voting securities of a single
issuer. A fund which elects to be classified as "diversified" under the
Investment Company Act must satisfy the foregoing 5% and 10% requirements with
respect to 75% of its total assets. To the extent that the Fund assumes large
positions in the securities of a small number of issuers, the Fund's yield may
fluctuate to a greater extent than that of a diversified company as a result of
changes in the financial condition or in the market's assessment of the issuers.
PORTFOLIO TRANSACTIONS. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain of
such exchanges. See "Risk Factors and 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. Purchasing a security on a
when-issued or delayed basis can involve a risk that the market price at the
time of delivery may be lower than the agreed upon purchase price, in which case
there could be an unrealized loss at the time of delivery. 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.
DERIVATIVE SECURITIES. The Fund may invest in a variety of instruments
which may be characterized as "Derivative Securities." The Fund may invest in
derivative securities whose potential investment return is based on the change
in particular measurements of value or rate (an "index"). As an illustration,
the Fund
20
<PAGE>
may invest in a security that pays interest and returns principal based on the
change in an index of interest rates or of the value of a precious or industrial
metal. Interest and principal payable on a security may also be based on
relative changes among particular indices. In addition, the Fund may invest in
securities whose potential investment return is inversely based on the change in
particular indices. For example, the Fund may invest in securities that pay a
higher rate of interest and principal when a particular index decreases and pay
a lower rate of interest and principal when the value of the index increases. To
the extent that the Fund invests in such types of securities, it will be subject
to the risks associated with changes in the particular indices, which may
include reduced or eliminated interest payments and losses of invested
principal.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market values of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Fund believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow the Fund to seek
potential investment rewards, hedge other portfolio positions, or vary the
degree of portfolio 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.
21
<PAGE>
REPURCHASE AGREEMENTS. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. 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. Such agreements usually cover
short periods, often under one week. Repurchase agreements may be construed to
be collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, as a
purchaser, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but constitute only collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs of possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement, instead of the contractual fixed rate of return, the rate of return
to the Fund 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.
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
22
<PAGE>
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 5% of the Fund's assets in the securities of any
one investment company and up to an aggregate of 10% of the Fund's assets in
securities of investment companies and (iii) restrict the issuance of senior
securities and limit bank borrowings except that the Fund may borrow amounts of
up to 33 1/3% 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. In addition, high portfolio turnover can be expected to
result in the recognition of capital gains and losses. To the extent the Fund
distributes short-term capital gains, such distributions will be taxable as
dividends. The Fund's ability to enter into certain short-term transactions will
be limited by the requirement that gains on certain securities held by the Fund
for less than three months may not exceed 30% of its annual gross income for
Federal income tax purposes.
23
<PAGE>
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.; President and Director of Princeton Services, Inc.,
Executive Vice President of Merrill Lynch & Co., Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"); and Director of Merrill Lynch
Funds Distributor, Inc.
WALTER MINTZ -- Special Limited Partner of Cumberland Partners (investment
partnership).
MELVIN R. SEIDEN -- President of Silbanc Properties, Ltd. (real estate,
consulting and investments).
STEPHEN B. SWENSRUD -- Principal of Fernwood Associates (financial
consultants).
JOE GRILLS -- Member of the Committee on Investment of Employee Benefits
Assets of the Financial Executives Institute.
HARRY WOOLF -- Professor and former Director of the Institute for Advanced
Study (private institution devoted to the encouragement, support and patronage
of learning).
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 100 registered investment companies. The Manager also
provides investment advisory services to individual and institutional accounts.
As of August 31, 1994, the Manager and FAM had a total of approximately $165.7
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
- ---------
* Interested person, as defined in the Investment Company Act, of the Fund.
24
<PAGE>
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 $11.00 per Class A or Class D shareholder account and $14.00
per Class B or Class C shareholder account, nominal miscellaneous fees (e.g.,
account closing fees) and is entitled to reimbursement for out-of-pocket
expenses incurred by it under the Transfer Agency Agreement.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both the Manager and of Merrill Lynch, acts as the distributor of the shares of
the Fund.
Shares of the Fund are offered for sale by the Distributor and other
eligible securities dealers (including Merrill Lynch). Shares of the Fund may be
purchased from securities dealers or by mailing a purchase order directly to the
Transfer Agent. The minimum initial purchase is $1,000, and the minimum
subsequent purchase is $50, except for retirement plans, the minimum initial
purchase is $100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis, depending upon
the class of shares selected by the investor under the Merrill Lynch Select
Pricing-SM- System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to 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
25
<PAGE>
value as of 4:15 p.m., New York time, on the day the orders are placed with the
Distributor, provided the orders are received 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. The Fund or the Distributor may suspend the continuous offering of
the Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Distributor or the Fund. Neither
the Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a sale of shares to such customers.
Purchases directly through the Transfer Agent are not subject to the processing
fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing-SM- System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Class A and Class D shares are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and Class
C are sold to investors choosing the deferred sales charge alternative.
Investors should determine whether under their particular circumstances it is
more advantageous to incur an initial sales charge or to have the entire initial
purchase price invested in the Fund with the investment thereafter being subject
to a contingent deferred sales charge and ongoing distribution fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing-SM- System is
set forth under "Merrill Lynch Select Pricing-SM- System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund, and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
26
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing-SM- System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE (1) FEE FEE CONVERSION FEATURE
<C> <S> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(2)(3)
B CDSC for a period of 4 years, 0.25% 0.50% B shares convert to D shares
at a rate of 4.0% during the automatically after
first year, decreasing 1.0% approximately ten years(4)
annually to 0.0%
C 1.0% CDSC for one year 0.25% 0.55% No
D Maximum 4.00% initial sales 0.25% No No
charge(3)
<FN>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an eight
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
</TABLE>
27
<PAGE>
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
INVESTORS CHOOSING THE INITIAL SALES CHARGE ALTERNATIVES WHO ARE ELIGIBLE TO
PURCHASE CLASS A SHARES SHOULD PURCHASE CLASS A SHARES RATHER THAN CLASS D
SHARES BECAUSE THERE IS AN ACCOUNT MAINTENANCE FEE IMPOSED ON CLASS D SHARES.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (I.E., sales loads) as set forth below.
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS SALES CHARGE AS SELECTED DEALERS
PERCENTAGE OF PERCENTAGE* OF AS PERCENTAGE OF
THE OFFERING THE NET AMOUNT THE OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
- ------------------------------------------------------------ ----------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000........................................... 4.00% 4.17% 3.75%
$25,000 but less than $50,000............................... 3.75 3.90 3.50
$50,000 but less than $100,000.............................. 3.25 3.36 3.00
$100,000 but less than $250,000............................. 2.50 2.56 2.25
$250,000 but less than $1,000,000........................... 1.50 1.52 1.25
$1,000,000 and over**....................................... 0.00 0.00 0.00
<FN>
- ---------
* Rounded to the nearest one-hundredth percent.
** Class A and Class D purchases of $1,000,000 or more made on or after
October 21, 1994 may not be subject to an initial sales charge but will be
subject to a CDSC of 1% if the shares are redeemed within one year after
purchase. Class A purchases made prior to October 21, 1994 may be subject
to a CDSC if the shares are redeemed within one year of purchase at the
following annual rates: 0.75% on purchases of $1,000,000 to $2,500,000;
0.40% on purchases of $2,500,001 to $3,500,000; 0.25% on purchases of
$3,500,001 to $5,000,000; and 0.20% on purchases of more than $5,000,000 in
lieu of paying an initial sales charge. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. A sales charge of 0.75% will be charged on purchases
of $1 million or more of Class A or Class D shares by certain 401(k) plans.
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended (the "Securities Act"). For the period September 2, 1994 to September
30, 1994, the Fund sold 75,075 Class A shares for aggregate net proceeds of
$748,929. The gross sales charge for the sale of Class A shares of the Fund was
$16,037, of which $168 and $15,869 were received by the Distributor and Merrill
Lynch, respectively.
ELIGIBLE CLASS A INVESTORS. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors who currently own Class A shares in a
shareholder account including participants in the Merrill Lynch Blueprint-SM-
Program, are entitled to purchase additional Class A shares in that account.
Certain employer sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class A shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by MLAM or any of its affiliates. Class A shares are available at
net asset value to corporate warranty insurance reserve fund programs provided
that the program has $3 million or more initially invested in MLAM-advised
mutual funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA-TM- Managed Trusts to
which Merrill Lynch Trust Company provides
28
<PAGE>
discretionary trustee services and certain purchases made in connection with the
Merrill Lynch Mutual Fund Adviser Program. In addition, Class A shares will be
offered at net asset value to Merrill Lynch & Co., Inc. and its subsidiaries and
their directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired shares of
certain MLAM-advised closed-end funds who wish to reinvest the net proceeds from
a sale of their closed-end fund shares of common stock in shares of the Fund
also may purchase Class A shares of the Fund if certain conditions set forth in
the Statement of Additional Information are met. For example, Class A shares of
the Fund and certain other MLAM-advised mutual funds are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. who wish
to reinvest the net proceeds from a sale of certain of their shares of common
stock of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of such funds.
REDUCED INITIAL SALES CHARGES.__No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors."
Class D shares are also offered at net asset value without sales charge to
an investor who has a business relationship with a financial consultant, if
certain conditions set forth in the Statement of Additional Information are met.
Class D shares may be offered at net asset value in connection with the
acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint-SM- Program.
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored Retirement or
Savings Plans, is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
INVESTORS CHOOSING THE DEFERRED SALES CHARGE ALTERNATIVES SHOULD CONSIDER
CLASS B SHARES IF THEY INTEND TO HOLD THEIR SHARES FOR AN EXTENDED PERIOD OF
TIME AND CLASS C SHARES IF THEY ARE UNCERTAIN AS TO THE LENGTH OF TIME THEY
INTEND TO HOLD THEIR ASSETS IN MLAM-ADVISED MUTUAL FUNDS.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately ten years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
0.50% and 0.55%, respectively, of net assets as discussed below under
"Distribution Plans." The proceeds from the account maintenance fees are used to
compensate Merrill Lynch for providing continuing account maintenance
activities.
29
<PAGE>
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment, from its own funds, of compensation to financial
consultants for selling Class B and Class C shares. The combination of the CDSC
and the ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. Approximately ten years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee. Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately eight years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services --
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no 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 Class B CDSC:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
YEAR SINCE PURCHASE 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..................................................................... 0.0%
</TABLE>
30
<PAGE>
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 or her 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 Class B CDSC 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 Class B CDSC also is waived on redemptions of shares by certain eligible
401(a) and eligible 401(k) plans and in connection with certain group plans
placing orders through the Merrill Lynch Blueprint-SM- Program. The CDSC 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. The Class B CDSC is also waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information.
CONTINGENT DEFERRED SALES CHARGE -- CLASS C SHARES.__Class C shares which
are redeemed within one year of purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
31
<PAGE>
CONVERSION OF CLASS B SHARES TO CLASS D SHARES. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (I.E., ten years from the date the
relationship between MLAM-advised mutual funds and the Plan was established),
all Class B shares of all MLAM-advised mutual funds held in that Class B
Retirement Plan will be converted into Class D shares of the appropriate funds.
Subsequent to such conversion, that retirement plan will be sold Class D shares
of the appropriate funds at net asset value.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
32
<PAGE>
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.50% for
Class B shares and 0.55% for Class C shares of the average daily net assets of
the Fund attributable to the shares of the relevant class in order to compensate
the Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
shareholder and distribution services, and bearing certain distribution-related
expenses of the Fund, including payments to financial consultants for selling
Class B and Class C shares of the Fund. The Distribution Plans relating to Class
B and Class C shares are designed to permit an investor to purchase Class B and
Class C shares through dealers without the assessment of an initial sales charge
and at the same time permit the dealer to compensate its financial consultants
in connection with the sale of the Class B and Class C shares. In this regard,
the purpose and function of the ongoing distribution fees and the CDSC are the
same as those of the initial sales charge with respect to the Class A and Class
D shares of the Fund in that the deferred sales charges provide for the
financing of the distribution of the Fund's Class B and Class C shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. 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 CDSC and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, 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/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
33
<PAGE>
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the Fund's
distribution fee and the CDSC borne by the Class B and Class C shares but not
the account maintenance fee. The maximum sales charge rule is applied separately
to each class. As applicable to the Fund, the maximum sales charge rule limits
the aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges) plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, 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 Funds 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
34
<PAGE>
the Transfer Agent's register or on the certificate, as the case may be. The
signature(s) on the notice must be guaranteed by an "eligible guarantor
institution" (including, for example, Merrill Lynch branch offices and certain
other financial institutions) as such term is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of which
may be verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents, such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payment will be mailed within seven days of receipt of a
proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (E.G., cash or
certified check drawn on a U.S. bank) has been collected for the purchase of
such shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the New
York Stock Exchange on the day received and that such request is received by the
Fund from such dealer not later than 4:30 p.m., New York time, on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 4:30 p.m., New York time, in order to obtain that day's
closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $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 AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. 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 or Class D shareholder only the first time such
shareholder makes a redemption.
35
<PAGE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in its shares.
Certain of such services are not available to investors who place purchase
orders for the Fund's shares through the Merrill Lynch Blueprint-SM- Program.
Full details as to each of such services, copies of the various plans described
below and instructions as to how to participate in the various plans and
services, or to change options with respect thereto, can be obtained from the
Fund by calling the telephone number on the cover page hereof or from the
Distributor or Merrill Lynch. Certain of these services are available only to
U.S. investors.
INVESTMENT ACCOUNT. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements, at least
quarterly, from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for each
purchase or sale transaction other than automatic investment purchases and the
reinvestments 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 also may
maintain their accounts through Merrill Lynch. Upon the transfer of shares out
of a Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened automatically, without charge, at the Transfer
Agent. Shareholders considering transferring their Class A or Class D shares
from Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder at the Transfer Agent. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the retirement account is to be transferred will not
take delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
EXCHANGE PRIVILEGE. Shareholders of each class of shares of the Fund each
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Securities and Exchange Commission.
Under the Merrill Lynch Select Pricing-SM- System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to
36
<PAGE>
exchange Class A shares for shares of a second MLAM-advised mutual fund, and the
shareholder does not hold Class A shares of the second fund in his account at
the time of the exchange and is not otherwise eligible to acquire Class A shares
of the second fund, the shareholder will receive Class D shares of the second
fund as a result of the exchange. Class D shares also may be exchanged for Class
A shares of a second MLAM-advised mutual fund at any time as long as, at the
time of the exchange, the shareholder holds Class A shares of the second fund in
the account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares will be exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of Class
A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the program of Class A or Class D shares of
a MLAM-advised mutual fund for Class A or Class D shares of the Fund will be
made solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
37
<PAGE>
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. Cash payments
can also be directly deposited to the shareholder's bank account. No CDSC will
be imposed upon redemption of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS. A Class A or Class D 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 or Class D 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.
AUTOMATIC INVESTMENT PLANS. Regular additions of Class A, Class B, Class C
or Class D shares may be made to an investor's Investment Account by prearranged
charges of $50 or more to his regular bank account. Investors who maintain
CMA-R- accounts may arrange to have periodic investments made in the Fund in
their CMA-R- accounts or in certain related accounts in amounts of $250 or more
through the CMA-R- Automated Investment Program.
38
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Manager is responsible for the Fund's portfolio decisions and the placing of the
Fund's portfolio transactions. With respect to 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.
While the Manager generally seeks reasonably competitive commission rates, the
Fund will not necessarily be paying the lowest commission or spread available.
The Fund has no obligation to deal with any broker or dealer in the
execution of its portfolio transactions. The Fund pays brokerage fees to Merrill
Lynch in connection with portfolio transactions executed by Merrill Lynch.
Brokers and dealers, including Merrill Lynch, who provide supplemental
investment research to the Manager may receive orders for transactions by the
Fund. Information so received is 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. Supplemental investment research
received by the Manager also may be used in connection with other investment
advisory accounts of the Manager and its affiliates. Whether or not a particular
broker-dealer sells shares of the Fund neither qualifies nor disqualifies such
broker-dealer to execute transactions for the Fund.
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, Class B, Class C and Class D shares in accordance with a
formula specified by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B and
Class C shares and the maximum sales charge in the case of Class A and Class D
shares. Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance and
distribution fees and any incremental transfer agency costs relating to each
class of shares will be borne exclusively by that class. The Fund will include
performance data for all classes of shares of the Fund in any advertisement or
information including performance data of the Fund.
39
<PAGE>
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 waiver of
the CDSC in the case of Class B and Class C shares (such as investors in certain
retirement plans) or reduced sales charges in the case of Class A and Class D
shares, performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the 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
40
<PAGE>
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 each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class. See "Additional Information -- Determination of
Net Asset Value." Dividends and distributions may be reinvested automatically in
shares of the Fund, at net asset value without a sales charge. Shareholders may
elect in writing to receive any such dividends or distributions, or both, in
cash. Dividends and distributions are taxable to shareholders as described below
whether they are reinvested in shares of the Fund or received in cash. From time
to time, the Fund may declare a special distribution at or about the end of the
calendar year in order to comply with a Federal income tax requirement that
certain percentages of its ordinary income and capital gains be distributed
during the calendar year.
Certain gains or losses attributable to foreign currency related gains or
losses from certain of the Fund's investments may increase or decrease the
amount of the Fund's income available for distribution to shareholders. If such
losses exceed other income during a taxable year, (a) the Fund would not be able
to make any ordinary dividend distributions, and (b) distributions made before
the losses were realized would be recharacterized as returns of capital to
shareholders, rather than as ordinary dividends, reducing each shareholder's tax
basis in his Fund shares for Federal income tax purposes. For a detailed
discussion of the Federal tax considerations relevant to foreign currency
transactions, see "Additional Information -- Taxes." If in any fiscal year the
Fund has net income from certain foreign currency transactions, such income will
be distributed annually.
All net realized long-or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders annually after the close of the Fund's
fiscal year. Capital gains distributions will be automatically reinvested in
shares unless the shareholder elects to receive such distributions in cash.
See "Shareholder Services -- Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information as to how to elect either dividend
reinvestment or cash payments. Dividends and distributions are taxable to
shareholders as described below whether they are reinvested in shares of any
portfolio or received in cash.
DETERMINATION OF NET ASSET VALUE
Net asset value per share of all classes of the Fund 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 any account maintenance and for distribution fees payable to the
Distributor, are accrued daily. The per share net asset value of the Class A
shares generally will be higher than the per share net asset value of the shares
of the other classes, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to Class B and Class C shares and the
41
<PAGE>
daily expense accruals of the account maintenance fees applicable with respect
to Class D shares. Moreover, the per share net asset value of Class D shares
generally will be higher than the per share net asset value of Class B and Class
C shares, reflecting the daily expense accruals of the distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares. It
is expected, however, that the per share net asset value of the classes will
tend to converge immediately after the payment of dividends or distributions
which will differ by approximately the amount of the expense accrual
differentials 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. The Fund employs Merrill Lynch Securities
Pricing Service ("MLSPS"), an affiliate of the Manager, to provide securities
prices for the Fund. 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 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, Class B, Class C and Class D 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 if 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.
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<PAGE>
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 treaties 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 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 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.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an 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 shares in the absence of the exchange privilege. Instead, such sales charge
will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
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<PAGE>
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 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A,Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that Class B, Class C and Class D
shares bear certain expenses related to the account maintenance services
associated with such shares, and Class B and Class C shares bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to account maintenance and
distribution expenditures, as applicable. See "Purchase of Shares." The Fund has
received an order from the Securities and Exchange Commission permitting the
issuance and sale of multiple classes of Common Stock. The Board of Directors of
the Fund may classify and reclassify the shares of the Fund into additional
classes of Common Stock at a future date.
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 rights. Shares have the conversion rights
described in this Prospectus. Each share of Common Stock is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund on liquidation or dissolution after satisfaction of
outstanding liabilities, except as noted above, the Class B, Class C and Class D
shares bear certain additional expenses.
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<PAGE>
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, FL 32232-5289
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.
45
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[This page intentionally left blank]
46
<PAGE>
MERRILL LYNCH ASSET INCOME FUND - AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch Asset Income Fund and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $ . payable to Financial Data Services, Inc.,
as an initial investment (minimum $1,000). I understand that this purchase
will be executed at the applicable offering price next to be determined
after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds
that would qualify for the right of accumulation as outlined in the
Statement of Additional Information: (Please list all funds. Use a separate
sheet of paper if necessary.)
<TABLE>
<S> <C>
1. ......................................................... 4. .........................................................
2. ......................................................... 5. .........................................................
3. ......................................................... 6. .........................................................
</TABLE>
<TABLE>
<S> <C>
Name ...................................................................................................................
First Name Initial Last Name
Name of Co-Owner (if any) ..............................................................................................
First Name Initial Last Name
</TABLE>
<TABLE>
<S> <C>
Address ....................................................
........................................................... Name and Address of Employer ...............................
(Zip
Code)
Occupation ................................................. ............................................................
........................................................... ............................................................
Signature of Owner Signature of Co-Owner (if any)
(in the case of co-owner, a joint tenancy with right of survivorship will be presumed unless otherwise specified.)
</TABLE>
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
ORDINARY INCOME DIVIDENDS LONG-TERM CAPITAL GAINS
Select / / Reinvest Select / / Reinvest
One: / / Cash One: / / Cash
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Asset Income Fund Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) / / checking / / savings
Name on your account ...........................................................
Bank Name ......................................................................
Bank Number ........................ Account Number ........................
Bank address ...................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING THIS
SERVICE.
Signature of Depositor .........................................................
Signature of Depositor ........................ Date .......................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
47
<PAGE>
MERRILL LYNCH ASSET INCOME FUND - AUTHORIZATION FORM (PART 1) - (CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
------------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2) that
I am not subject to backup withholding (as discussed in the Prospectus under
"Distributions and Taxes -- Taxes") either because I have not been notified that
I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am no
longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
........................................................... ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND CLASS D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
Dear Sir/Madam:
..................................... , 19 ....................................
Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Asset Income Fund 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 Income Fund
Prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Asset Income Fund held as security.
<TABLE>
<S> <C>
By.......................................................... ............................................................
Signature of Owner Signature of Co-Owner
(if registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name.................................................... (2) Name....................................................
Account Number.............................................. Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
<TABLE>
<S> <C>
Branch Office, Address, Stamp 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.
This form, when completed, should be mailed to: ............................................................
Merrill Lynch Asset Income Fund Dealer Name and Address
c/o Financial Data Services, Inc. By: .......................................................
Transfer Agency Mutual Fund Operations Authorized Signature of Dealer
P.O. Box 45289 ------------ ----------------
Jacksonville, Florida 32232-5289 ------------ ----------------
............................................................
Branch Code F/C No. F/C Last Name
------------ --------------------
------------ --------------------
Dealer's Customer A/C No.
</TABLE>
48
<PAGE>
MERRILL LYNCH ASSET INCOME FUND - AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
Name of Owner .............................................. ----------------------------------------
Name of Co-Owner (if any) .................................. Social Security Number
Address .................................................... or Taxpayer Identification Number
........................................................... Account Number .............................................
(if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Asset Income
Fund at cost or current offering price. Withdrawals to be made either (check
one) / / Monthly on the 24th day of each month, or / / Quarterly on the 24th
day of March, June, September and December. If the 24th falls on a weekend or
holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on ________________(month)________________ or as soon as possible
thereafter.
SPECIFY HOW YOU WOULD LIKE
YOUR WITHDRAWAL PAID TO YOU
(CHECK ONE): / / $
- ----------------------------------------------------------------
or / /
- -----------------------------------------------------------------%
of the current value of
/ / Class A or / / Class D
shares in the account.
SPECIFY WITHDRAWAL METHOD:
/ / check or / / direct
deposit to bank account
(check one and complete part
(a) or (b) below):
DRAW CHECKS PAYABLE (CHECK
ONE)
(a) I hereby authorize
payment by check
/ / as indicated in Item
1.
/ / to the order of ....
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print) .....................................................
Address ........................................................................
........................................
Signature of Owner .......................... Date .........................
Signature of Co-Owner (if any) .................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one) / / checking / / savings
Name on your account ...........................................................
Bank Name ......................................................................
Bank Number ......................... Account Number .........................
Bank Address ...................................................................
........................................
Signature of Depositor ......................... Date ........................
Signature of Depositor .........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
49
<PAGE>
MERRILL LYNCH ASSET INCOME FUND - AUTHORIZATION FORM (PART 2) - (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below each
month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch Asset Income Fund subject to the terms set forth below. In the
event that I am not eligible to purchase Class A shares, I understand that Class
D shares will be purchased.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Asset Income Fund as indicated below:
Amount of each ACH debit $ .................................................
Account number ............................................................
Please date and invest ACH debits on the 20th of each month
beginning .................................. or as soon thereafter as possible.
(Month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a 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
dishonored debit.
................................... ..................................
Date Signature of Depositor
........................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR 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 ACH debits drawn on my account by and payable to Financial Data
Services, Inc. I agree that your rights in respect to each such debit shall be
the same as if it were a check drawn on you and signed personally by me. This
authority is to remain in effect until revoked personally by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................................... ..................................
Date Signature of Depositor
................................... ..................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
50
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. 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:
Attn: Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
The Chase Manhattan Bank, N.A.
4 MetroTech Center, 18th Floor
Brooklyn, New York 11245
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
<PAGE>
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...................................... 2
Merrill Lynch Select Pricing-SM- System........ 4
Financial Highlights........................... 8
Risk Factors and Special Considerations........ 9
Investment Objectives and Policies............. 10
Debt Securities.............................. 11
Equity Securities............................ 13
Money Market Securities...................... 14
Portfolio Strategies Involving Options and
Futures.................................... 14
Other Investment Policies and Practices...... 19
Management of the Fund......................... 24
Board of Directors........................... 24
Management and Advisory Arrangements......... 24
Transfer Agency Services..................... 25
Purchase of Shares............................. 25
Initial Sales Charge Alternatives--Class A
and Class D Shares......................... 28
Deferred Sales Charge Alternatives-- Class B
and Class C Shares......................... 29
Distribution Plans........................... 32
Limitations on the Payment of Deferred Sales
Charges.................................... 34
Redemption of Shares........................... 34
Redemption................................... 34
Repurchase................................... 35
Reinstatement Privilege--Class A and Class D
Shares..................................... 35
Shareholder Services........................... 36
Portfolio Transactions and Brokerage........... 39
Performance Data............................... 39
Additional Information......................... 40
Dividends and Distributions.................. 40
Determination of Net Asset Value............. 41
Taxes........................................ 42
Organization of the Fund..................... 44
Shareholder Reports.......................... 45
Shareholder Inquiries........................ 45
Authorization Form............................. 47
Code 18235 -- 1094
</TABLE>
[LOGO]
Merrill Lynch
Asset Income
Fund, Inc.
PROSPECTUS
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH ASSET INCOME FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
-------------------
Merrill Lynch Asset Income Fund, Inc. (the "Fund") is a non-diversified
mutual fund primarily seeking
a high level of current income, consistent with prudent risk, through an
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.
Pursuant to the Merrill Lynch Select Pricing-SM- System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Select Pricing System permits an investor
to choose the method of purchasing shares that the investor believes is most
beneficial given the amount of the purchase, the length of time the investor
expects to hold the shares and other relevant circumstances.
-------------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated October 21,
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 October 21, 1994.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to seek a high level of current
income, consistent with prudent risk, through an 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, although there can be no assurance in this regard.
2
<PAGE>
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 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
3
<PAGE>
the value of the real estate investments of the trusts. Real estate values are
affected by numerous factors including (i) governmental regulations (such as
zoning and environmental laws) and changes in tax laws, (ii) operating costs,
(iii) the location and the attractiveness of the properties, (iv) changes in
economic conditions (such as fluctuations in interest and inflation rates and
business conditions) and (v) supply and demand for improved real estate. Such
trusts also are dependent on management skill and may not be diversified in
their investments.
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 transactions in derivatives, such as
options and futures (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.
4
<PAGE>
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt or equity securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository with a value
equal to or greater than the exercise price of the underlying securities. By
writing a put, the Fund will be obligated to purchase the underlying security at
a price that may be higher than the market value of that security at the time of
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written.
Options referred to herein and in the Fund's Prospectus may be options
issued by The Options Clearing Corporation (the "Clearing Corporation") which
are currently traded on the Chicago Board Options Exchange, American Stock
Exchange, New York Stock Exchange, Philadelphia Stock Exchange 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
5
<PAGE>
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities which it intends to purchase. The Fund may purchase
either exchange traded options or OTC options. The Fund will not purchase
options on securities (including stock index options discussed below) if as a
result of such purchase the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
STOCK INDEX OPTIONS AND FUTURES AND FINANCIAL FUTURES. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
I.E., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called "variation margin," are required to be made on a daily basis as
the price of the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market." At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the 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
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currency at a specified future date and price set at the time of the contract.
The Fund's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities, the sale and redemption of shares
of the Fund or the payment of dividends and distributions by the Fund. Position
hedging is the sale of forward foreign currency with respect to portfolio
security positions denominated or quoted in such foreign currency. The Fund will
not speculate in forward foreign exchange. The Fund may not position hedge with
respect to the currency of a particular country to an extent greater than the
aggregate market value (at the time of making such sale) of the securities held
in its portfolio denominated or quoted in that particular foreign currency. If
the Fund enters into a position hedging transaction, its custodian will place
cash or liquid equity or debt securities in a separate account of the Fund in an
amount equal to the value of the Fund's total assets committed to the
consummation of such 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 derivatives
such as options and futures 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
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options and futures contract moves more or less than the prices of the hedged
securities or currencies, the Fund will experience a gain or loss which will not
be completely offset by movements in the prices of the securities and currencies
which are the subject of the hedge. The successful use of options and futures
also depends on the Manager's ability to correctly predict price movements in
the market involved in a particular options or futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into an option or futures
transaction on an exchange only if there appears to be a liquid secondary market
for such options or futures. However, there can be no assurance that a liquid
secondary market will exist for any particular call or put option or futures
contract at any specific time. Thus, it may not be possible to close an option
or futures position. The Fund will acquire only over-the-counter options for
which management believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option), unless there is only one dealer, in which case that
dealer's price is used. In the case of a futures position or an option on a
futures position written by the Fund in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the security or currency underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the Fund's ability to hedge effectively its
portfolio. There is also the risk of loss by the Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or related option. The risk of loss from investing in futures
transactions is theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found 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
8
<PAGE>
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 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. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary
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<PAGE>
dealer in U.S. Government securities or an affiliate thereof. 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. Such agreements usually cover short periods, often under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, as a purchaser, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but constitute only collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur costs
of possible losses in connection with the disposition of the collateral. From
time to time the Fund also may invest in securities pursuant to a purchase and
sales contract. While purchase and sales contracts are similar to repurchase
agreements, purchase and sales contracts are structured to be in substance more
like a purchase and sale of the underlying security than is the case with
repurchase agreements. The Fund may not invest more than 10% of its net assets
in repurchase agreements maturing in more than seven days.
LENDING OF PORTFOLIO SECURITIES. Subject to investment restriction (5)
below, the Fund may lend securities from its portfolio to approved borrowers and
receive therefor collateral in cash or securities issued or guaranteed by the
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. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
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2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or
indirectly secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in
government obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers' acceptances, repurchase agreements or any
similar instruments shall not be deemed to be the making of a loan, and
except further that the Fund may lend its portfolio securities, provided
that the lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up to
an additional 5% of its total assets for temporary purposes, (iii) the Fund
may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (iv) the Fund may purchase
securities on margin to the extent permitted by applicable law. The Fund may
not pledge its assets other than to secure such borrowings or, to the extent
permitted by the Fund's investment policies as set forth in its Prospectus
and Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of
1933, as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Additional investment restrictions adopted by the Fund, which may be changed
by the Directors, provide that the Fund may not:
(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 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
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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 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 currently does not
intend to engage in short sales, except short sales "against the box."
(iii) Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed, or put to the issuer or to a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days, or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of the
date hereof, therefore, the Fund will not invest more than 10% of its total
assets in securities which are subject to this investment restriction (iii).
Securities purchased in accordance with Rule 144A under the Securities Act
(a "Rule 144A security") and determined to be liquid by the Fund's Board of
Directors are not subject to the limitations set forth in this investment
restriction (iii). Notwithstanding the fact that the Board may determine
that a Rule 144A security is liquid and not subject to limitations set forth
in this investment restriction (iii), the State of Ohio does not recognize
Rule 144A securities as securities that are free of restrictions as to
resale. To the extent required by Ohio law, the Fund will not invest more
than 5% of its total assets in securities of issuers that are restricted as
to disposition, including Rule 144A securities.
(iv) 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.
(v) Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more than
5% of the Fund's 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.
(vi) 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.
(vii) 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.
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(viii) Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
(ix) Notwithstanding fundamental investment restriction (7) above, the
Fund currently does not intend to borrow amounts in excess of 33 1/3% of its
total assets, taken at market value, and then only from banks as a temporary
measure for extraordinary or emergency purposes such as the redemption of
Fund shares. In addition, the Fund will not purchase securities while
borrowings are outstanding.
The Fund has undertaken to certain state securities administrators that as a
matter of operating policy it will not:
(a)Purchase securities of issuers which the company is restricted from
selling to the public without registration under the Securities Act of
1933 (including restricted securities determined by the Fund or the Board of
Directors to be liquid) if by any reason thereof the value of its aggregate
investment in such securities will exceed 10% of its total assets;
(b)Invest more than 5% of its total assets in the securities of
unseasoned issuers, including equity securities of issuers which are
not readily marketable;
(c)Invest more than 10% of its total assets in securities of one or more
real estate investment trusts;
(d)Engage in short term trading; or
(e)Invest in the securities of any open-end investment company.
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased OTC options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options if,
as a result of such transaction, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market value of the
underlying securities covered by OTC call options currently outstanding which
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceeds 10% of the total assets of the Fund, taken at market
value, together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the Fund to
a primary U.S. Government securities dealer recognized by the Federal Reserve
Bank of New York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities as is equal
to the repurchase price less the amount by which the option is "in-the-money"
(I.E., current market value of the underlying securities minus the option's
strike price). The repurchase price with the primary dealers is typically a
formula price which is generally based on a multiple of the premium received for
the option, plus the amount by which the option is "in-the-money." This policy
as to OTC options is not a fundamental policy of the Fund and may be amended by
the Directors of the Fund without the approval of the Fund's shareholders.
However, the Fund will not change or modify this policy prior to the change or
modification by the Commission staff of its position.
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Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Manager or its affiliates or any of their directors, general
partners, officers or employees, acting as principal, unless pursuant to a rule
or exemptive order under the Investment Company Act.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving the Manager's
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
or its affiliates except for brokerage transactions permitted under the
Investment Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions and Brokerage." Without such an exemptive order, the
Fund would be prohibited from engaging in portfolio transactions with Merrill
Lynch or its affiliates acting as principal and from purchasing securities in
public offerings which are not registered under the Securities Act of 1933, as
amended, in which such firm or any of its affiliates participate as an
underwriter or dealer.
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 P.O. 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 (which term
as used herein includes its corporate predecessors) since 1976; President and
Chief Investment Officer of Fund Asset Management, L.P. ("FAM") (which term as
used herein includes its corporate predecessors) since 1977; President and
Director of Princeton Services, Inc. ("Princeton Services") since 1993; Director
of Merrill Lynch Funds Distributor, Inc.; Executive Vice President of Merrill
Lynch & Co., Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated since
1990.
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.
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.
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
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encouragement, support and patronage of learning) since 1976; Director, Alex.
Brown Funds, 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; Executive Vice President and Director of Princeton Services since 1993;
and Director of Financial Data Services, Inc. since 1985.
BERNARD J. DURNIN -- SENIOR VICE PRESIDENT(1)(2) -- Senior Vice President of
the Manager since 1981 and Vice President from 1977 to 1981.
DONALD C. BURKE -- VICE PRESIDENT(1)(2) -- Vice President of the Manager
since 1990; employee of Deloitte & Touche LLP 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
Services since 1993.
MARK B. GOLDFUS -- SECRETARY(1)(2) -- Vice President of the Manager since
1985.
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(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, Burke, Richard and Goldfus are
officers, of certain other investment companies for which the Manager or FAM
acts as investment adviser.
At September 30, 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 $2,600
per year plus $250 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, a fee of $800 per year, plus a fee at the rate of $150 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
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and clients in a manner deemed equitable to all. To the extent that transactions
on behalf of more than one client of the Manager or its affiliates during the
same period may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). As discussed in the Prospectus, the Management
Agreement provides that the Fund will pay the Manager a monthly fee at the
annual rate of 0.75% of the average daily net assets of the Fund. This fee is
higher than that of most mutual funds, but management of the Fund believes this
fee, which is typical for a global fund, is justified by the global nature of
the Fund.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Manager reimburse the Fund in an amount necessary
to prevent the ordinary operating expenses of the Fund (excluding interest,
taxes, distribution fees, brokerage fees and commissions and extraordinary
charges such as litigation costs) from exceeding 2.5% of the Fund's first $30
million of average daily net assets, 2.0% of the next $70 million of average
daily net assets and 1.5% of the remaining average daily net assets. The
Manager's obligation to reimburse the Fund is limited to the amount of the
management fee. No fee payment will be made to the Manager during any fiscal
year which will cause such expenses to exceed the most restrictive expense
limitation applicable at the time of such payment.
The 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 shares will be
financed by the Fund pursuant to distribution plans in compliance with Rule
12b-1 under the Investment Company Act. See "Purchase of Shares -- Distribution
Plans."
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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PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing-SM- System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund, and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which the
account maintenance and/or distribution fees are paid. Each class has different
exchange privileges. See "Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select Pricing-SM- System is used by more than 50 mutual
funds advised by MLAM or its affiliate, FAM. Funds advised by MLAM or FAM are
referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with Merrill
Lynch Funds Distributor, Inc. (the "Distributor") in connection with the
continuous offering of each class of shares of the Fund (the "Distribution
Agreements"). The Distribution Agreements obligate the Distributor to pay
certain expenses in connection with the offering of each class of shares of the
Fund. After the prospectuses, statements of additional information and periodic
reports have been prepared, set in type and mailed to shareholders, the
Distributor pays for the printing and distribution of copies thereof used in
connection with the offering to dealers and investors. The Distributor also pays
for other supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provision as the Management Agreement described under "Management of the Fund --
Management and Advisory Arrangements."
INITIAL SALES CHARGE ALTERNATIVE--CLASS A AND CLASS D SHARES
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (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
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group of individuals whose sole organizational nexus is that the participants
therein are credit cardholders of a company, policyholders of an insurance
company, customers of either a bank or broker-dealer or clients of an investment
adviser.
REDUCED INITIAL SALES CHARGES
RIGHT OF ACCUMULATION. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the offering price applicable
to the total of (a) the public offering price of the shares then being purchased
plus (b) an amount equal to the then current net asset value or cost, whichever
is higher, of the purchaser's combined holdings of all classes of shares of the
Fund and of other MLAM-advised mutual funds. For any such right of accumulation
to be made available, the Distributor must be provided at the time of purchase,
by the purchaser or the purchaser's securities dealer, with sufficient
information to permit confirmation of qualification. Acceptance of the purchase
order is subject to such confirmation. The right of accumulation may be amended
or terminated at any time. Shares held in the name of a nominee or custodian
under pension, profit-sharing or other employee benefit plans may not be
combined with other shares to qualify for the right of accumulation.
LETTER OF INTENTION. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at 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 or Class D shares; however,
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
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 or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A shares or Class D shares equal to five percent of the intended amount
will be held in escrow during the 13-month period (while remaining registered in
the name of the purchaser) for this purpose. The first purchase under the Letter
of Intention must be at least five percent of the dollar amount of such Letter.
If a purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to the reduced
percentage sales charge but there will be no retroactive reduction of the sales
charges on any previous purchase. The value of any shares redeemed or otherwise
disposed of by the purchaser prior to termination or completion of the Letter of
Intention will be deducted from the total purchases made under such Letter. An
exchange from a MLAM-advised money market fund into the Fund that creates a
sales charge will count toward completing a new or existing Letter of Intention
for the Fund.
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<PAGE>
MERRILL LYNCH BLUEPRINT-SM- PROGRAM. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint-SM- Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. Blueprint is
directed to small investors, group Individual Retirement Accounts ("IRAs") and
participants in certain affinity groups such as credit unions, trade
associations and benefit plans. Investors placing orders to purchase Class A or
Class D shares of the Fund through Blueprint will acquire the Class A or Class D
shares at net asset value plus a sales charge calculated in accordance with the
Blueprint sales charge schedule (I.E., up to $5,000 at 3.50% plus $3.00 and
$5,000.01 or more at the standard sales charge rates disclosed in the
Prospectus). In addition, Class A or Class D shares of the Fund are offered at
net asset value plus a sales charge of 1/2 of 1% for corporate or group IRA
programs placing orders to purchase their Class A or Class D shares through
Blueprint. Services, including the exchange privilege, available to Class A and
Class D investors through Blueprint, however, may differ from those available to
other investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value 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 Employer Sponsored Retirement and Savings Plans
(as defined below) whose Trustee and/or Plan Sponsor offers the Merrill Lynch
Directed IRA Rollover Program.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint-SM-Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
EMPLOYER SPONSORED RETIREMENT AND SAVINGS PLANS. Class A shares and Class D
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 Section 403(b) and 457 of the
Code, other deferred compensation arrangements, Voluntary Employee Benefits
Association ("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 accumulated at least $5 million in MLAM-advised mutual funds for Class
D shares or at least $20 million in MLAM-advised mutual funds for Class A
shares. Class D shares may be offered at net asset value to new Employer
Sponsored Retirement or Savings Plans, provided the plan has at least $3 million
initially invested in MLAM-advised mutual funds. Assets of Employer Sponsored
Retirement or Savings Plans sponsored by the same sponsor or an affiliated
sponsor may be aggregated. Class A shares and Class D shares are also offered at
net asset value, provided the plan has between 500-999 employees eligible to
participate in the plan for Class D shares or at least 1,000 employees eligible
to participate in the plan for Class A shares. Employees eligible to participate
in Employer Sponsored Retirement or Savings Plans of the same sponsoring
employer or its affiliates may be aggregated. Tax qualified retirement plans
within the meaning of Section 401(a) of the Code meeting any of the foregoing
requirements and which are provided specialized
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<PAGE>
services (e.g., plans whose participants may direct on a daily basis their plan
allocations among a wide range of investments including individual corporate
equities and other securities in addition to mutual fund shares) by the Merrill
Lynch Blueprint-SM- Program, are offered Class A shares at a price equal to net
asset value per share plus a reduced sales charge of 0.50%. Any Employer
Sponsored Retirement or Savings Plan which does not meet the above described
qualifications to purchase Class A shares or Class D shares at net asset value
has the option of (i) purchasing Class A shares at the initial sales charge
schedule and possible CDSC schedule disclosed in the Prospectus if it is
otherwise eligible to purchase Class A shares, (ii) purchasing Class D shares at
the initial sales charge and possible CDSC schedule disclosed in the Prospectus,
(iii) if the Employer Sponsored Retirement or Savings Plan meets the specified
requirements, purchasing Class B shares with a waiver of the CDSC upon
redemption; or if the Employer Sponsored Retirement or Savings Plan does not
qualify to purchase Class B shares with a waiver of the CDSC upon redemption,
then it may purchase Class C shares at the CDSC schedule disclosed in the
Prospectus. 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, members of the
Boards of other MLAM-advised investment companies and Merrill Lynch & Co., Inc.
and its subsidiaries (the term "subsidiaries", when used herein with respect to
Merrill Lynch & Co., Inc. includes MLAM, FAM and certain other entities directly
or indirectly wholly-owned and controlled by Merrill Lynch & Co., Inc.) and
their directors and employees, and any trust, pension, profit-sharing or other
benefit plan for such persons may purchase Class A shares of the Fund at net
asset value. Class D 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 advise Merrill
Lynch that they will purchase Class D 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 was subject to a sales charge either at the time
of purchase or on a deferred basis. Second, the investor must also establish
that such redemption had been made within 60 days prior to the investment in the
Fund, and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class A shares of the Fund are offered at net asset value to shareholders of
Senior Floating Rate Fund, Inc. ("Senior Floating Rate Fund") who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
of Senior Floating Rate Fund in shares of the Fund. In order to exercise this
investment option, Senior Floating Rate Fund shareholders must sell their Senior
Floating Rate Fund shares to the Senior Floating Rate Fund in connection with a
tender offer conducted by the Senior Floating Rate Fund and reinvest the
proceeds immediately in the Fund. This investment option is available only with
respect to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day.
Class A shares of the Fund and other MLAM-advised mutual funds ("Eligible
Class A Shares") are offered at net asset value to shareholders of certain
closed-end funds advised by the Manager or FAM who purchased such closed-end
fund shares prior to October 21, 1994 and wish to reinvest the net proceeds from
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a sale of their closed-end fund shares of common stock in shares of the Fund, if
the conditions set forth below are satisfied. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994 and wish to
reinvest the net proceeds from a sale of their closed-end fund shares are
offered Class A shares (if eligible to buy Class A shares) or Class D shares of
the Fund and other MLAM-advised mutual funds ("Eligible Class D Shares") if the
following conditions are met. Closed-end fund shareholders must (i) sell their
closed-end fund shares through Merrill Lynch and reinvest the proceeds
immediately in the Fund, (ii) have acquired the shares in the closed-end fund's
initial public offering or through reinvestment of dividends earned on shares
purchased in such offering, (iii) have maintained their closed-end fund shares
continuously in a Merrill Lynch account, and (iv) purchase a minimum of $250
worth of Fund shares.
Class D shares of the Fund will be offered at the net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that they will
purchase Class D shares of the Fund with proceeds from a redemption of such
shares of other mutual funds that have been outstanding for a period of no less
than six months. Second, the investor must also establish that such purchase of
Class D shares had been made within 60 days after the redemption and the
proceeds from the redemption must have been maintained in the interim in cash or
a money market fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
first, the investor must purchase Class D shares of the Fund with proceeds from
a redemption of shares of such other mutual fund and such fund was subject to a
sales charge either at the time of purchase or on a deferred basis; and second,
such purchase of Class D shares must be made within 90 days after such notice of
termination.
ACQUISITION OF CERTAIN INVESTMENT COMPANIES. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
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.
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DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each, a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. See
"General Information -- Description of Shares." Among other things, each
Distribution Plan provides that the Distributor will provide and the Directors
will review quarterly reports of the disbursement of the account maintenance
fees and/or distribution fees paid to the Distributor. In their consideration of
each Distribution Plan, the Directors must consider all factors they deem
relevant, including information as to the benefits of the Distribution Plan to
the Fund and to its related class of shareholders. Each 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 each 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 related class of shareholders.
Each Distribution Plan can be terminated at any time, without penalty, by the
vote of a majority of the Independent Directors or by the vote of the holders of
a majority of the outstanding related class of voting securities of the Fund. A
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without the approval of the related class of shareholders, and
all material amendments are required to be approved by the vote of Directors,
including a majority of the Independent Directors who have no direct or indirect
financial interest in such Distribution Plan, cast in person at a meeting called
for that purpose. Rule 12b-1 further requires that the Fund preserve copies of
such 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.
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 distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the
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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
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.
DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
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 part of
a series of equal periodic payments (not less frequently than annually) made for
the life (or life expectancy) or any redemption resulting from the tax-free
return of an excess contribution to an IRA or (b) any partial or complete
redemption following the death or disability (as defined in the Code) of a Class
B shareholder (including one who owns the Class B shares as joint tenant with
his or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability.
MERRILL LYNCH BLUEPRINT-SM- PROGRAM. Class B shares are offered to certain
participants in the Merrill Lynch Blueprint-SM- Program ("Blueprint"). Blueprint
is directed to small investors, group IRAs and participants in certain affinity
groups such as trade associations and credit unions. Class B shares of the Fund
are offered through Blueprint only to members of certain affinity groups. The
CDSC is waived in connection with purchase orders placed through Blueprint.
Services, including the exchange privilege, available to Class B investors
through Blueprint, however, may differ from those available to other investors
in Class B shares. Orders for purchases and redemptions of Class B shares of the
Fund will be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There is no minimum initial
or subsequent purchase requirement for investors who are part of the Blueprint
automatic investment plan. Additional information concerning these Blueprint
programs, including any annual fees or transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint-SM- Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
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RETIREMENT PLANS. Any Retirement Plan which does not meet the qualifications
to purchase Class A or Class D shares at net asset value may purchase Class B
shares with a waiver of the CDSC upon redemption if the following qualifications
are met. The CDSC is waived for any Eligible 401(k) Plan redeeming Class B
shares. "Eligible 401(k) Plan" is defined as a retirement plan qualified under
section 401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. CDSC is also waived for Class B redemptions
from a 401(a) plan qualified under the Code, provided that each such plan has
the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares ("Eligible 401(a) Plan"). Other tax qualified
retirement plans within the meaning of Section 401(a) and 403(b) of the Code
which are provided specialized services (e.g., plans whose participants may
direct on a daily basis their plan allocations among a menu of investments) by
independent administration firms contracted through Merrill Lynch may also
purchase Class B shares with a waiver of the CDSC. The CDSC is also 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
Class B CDSC is also waived for shares purchased by a Merrill Lynch rollover IRA
that was funded by a rollover from a terminated 401(k) plan managed by the MLAM
Private Portfolio Group and held in such account at the time of redemption. The
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
24
<PAGE>
generally higher than in the United States, although the Fund will endeavor to
achieve the best net results in effecting its portfolio transactions. There is
generally less governmental supervision and regulation of foreign stock
exchanges and brokers than in the United States.
The Fund invests in certain securities traded in the over-the-counter market
and, where possible, deals directly with the dealers who make a market in the
securities involved except in those circumstances in which better prices and
execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund and persons who are affiliated with such affiliated
persons are prohibited from dealing with the Fund as principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Commission. Since transactions in the over-the-counter market
usually involve transactions with dealers acting as principal for their own
accounts, affiliated persons of the Fund, including Merrill Lynch and any of its
affiliates, will not serve as the Fund's dealer in such transactions. However,
affiliated persons of the Fund may serve as its broker in listed or
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in U.S. dollars, the Fund intends to manage its portfolio so as to give
reasonable assurance that it will be able to obtain U.S. dollars to the extent
necessary to meet anticipated redemptions. Under present conditions, it is not
believed that these considerations will have any significant effect on its
portfolio strategy.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with the aggregate compensation received by the member in effecting such
transactions, and (iii) complies with any rules the Commission has prescribed
with respect to the requirements of clauses (i) and (ii). To the extent Section
11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of its
portfolio transactions executed on any such securities exchange of which it is a
member, appropriate consents have been obtained from the Fund and annual
statements as to aggregate compensation will be provided to the Fund.
The Directors have considered the possibilities of seeking to recapture for
the benefit of the Fund brokerage commissions and other expenses of possible
portfolio transactions by conducting portfolio transactions through affiliated
entities. For example, brokerage commissions received by affiliated brokers
could be 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
25
<PAGE>
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, Class C and
Class D shares generally will be lower than the per share net asset value of the
Class A shares reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares and the daily expense accruals of the account
maintenance fees applicable with respect to Class D shares. Moreover, the per
share net asset value of the Class B and Class C shares generally will be lower
than the per share net asset value of its Class D shares reflecting the daily
expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to the Class B and Class C shares of the Fund. It is
expected, however, that the per share net asset value of the four classes will
tend to converge immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differential between the classes.
Securities traded in the over-the-counter market are valued at the last
available bid price or yield equivalents obtained from one or more dealers in
the over-the-counter market prior to the time of valuation. The Fund employs
Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of the Manager,
to provide securities prices for the Fund. 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, including valuations furnished by a pricing service retained by the Fund,
which may utilize a matrix system for valuations. The procedures of the pricing
service and its valuations are reviewed by the officers of the Fund under the
general supervision of 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.
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<PAGE>
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent showing any reinvestments of dividends and capital gains
distributions activity in the account since the previous 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 PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if an eligible Class A investor as described in the
Prospectus) or Class B, Class C or Class D shares at the applicable public
offering price either through the shareholder's securities dealer or by mail
directly to the transfer agent, acting as agent for such securities dealer.
Voluntary accumulation also can be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks or
automated clearing house debits of $50 or more to charge the regular bank
account of the shareholder on a regular basis to provide systematic additions to
the Investment Account of such shareholder. 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 amounts of $150 or more ($1 for retirement accounts) through the
CMA-R- Automated Investment Program.
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 or direct deposited 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 AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic 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 or Class D shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more and monthly withdrawals are available
for shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The
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<PAGE>
shareholder may specify either a dollar amount or a percentage of the value of
his Class A or Class D 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 or Class D 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 or Class D shares in the Investment
Account are reinvested automatically in Fund Class A or Class D shares,
respectively. A shareholder's Systematic Withdrawal Plan may be terminated at
any time, without charge or penalty, by the shareholder, the Fund, the Fund's
transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A or Class D 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 or Class D 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 or Class D shareholder whose shares are held within a CMA-R-,
CBA-R- or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions are
made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing-SM- System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund, and
the shareholder does not hold Class A shares of the second fund in his account
at the time of the exchange and is not otherwise eligible to acquire Class A
shares of the second fund, the shareholder will receive Class D shares of the
second fund as a result of the exchange. Class D shares also may be exchanged
for Class A
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<PAGE>
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase Class
A shares of the second fund. Class B, Class C and Class D shares will be
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other fund as more fully described below. Class A, Class B, Class
C and Class D shares also will be exchangeable for shares of certain
MLAM-advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C or Class D shares. Shares with
a net asset value of at least $100 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have been held by the
shareholder for at least 15 days. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A or Class D shares acquired through dividend reinvestment shall be deemed
to have been sold with a sales charge equal to the sales charge previously paid
on the Class A or Class D shares on which the dividend was paid. Based on this
formula, Class A and Class D shares of the Fund generally may be exchanged into
the Class A or Class D shares of the other funds or into shares of the Class A
and Class D money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's 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 or Class C shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the Class B shares of the fund from which the
exchange has been made. For purposes of computing the sales charge that may be
payable on a disposition of the new Class B or Class C shares, the holding
period for the outstanding Class B or Class C shares is "tacked" to the holding
period of the new Class B or Class C shares. For example, an investor may
exchange Class B shares of the Fund for those of Merrill Lynch 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
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<PAGE>
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 four years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, respectively, but the
period of time that Class B or Class C shares are held in a money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or, with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a Class B or Class C
money market fund which were acquired as a result of an exchange for Class B or
Class C shares of the fund may, in turn, be exchanged back into Class B or Class
C shares, respectively, of any fund offering such shares, in which event the
holding period for Class B or Class C shares of the fund will be aggregated with
previous holding periods for purposes of reducing the CDSC. Thus, for example,
an investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Class B shares
for two and a half years and three years later decide to redeem the shares of
Institutional Fund for cash. At the time of this redemption, the 2% 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 one and a half years, any
subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
<TABLE>
<S> <C>
FUNDS ISSUING CLASS A, CLASS B, CLASS C AND
CLASS D SHARES:
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).
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
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 as high a level of
income exempt from Federal and Arizona
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH ARKANSAS MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arkansas
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH ASSET 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.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH CALIFORNIA INSURED
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide 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
as high a level of income exempt from
Federal and California income taxes as is
consistent with prudent investment
management through investment in a port-
folio 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 as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CAPITAL FUND, INC.............. The highest total investment return
consistent with prudent risk through a fully
managed investment policy utilizing equity,
debt and convertible securities.
MERRILL LYNCH COLORADO MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide 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....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and 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.
</TABLE>
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<TABLE>
<S> <C>
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.
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 to provide
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 intangi-
ble 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 to provide 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.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH FUNDAMENTAL GROWTH FUND,
INC........................................ Long-term growth of capital through
investment in a diversified portfolio of
equity securities placing particular
emphasis on companies that have exhibited
an 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.
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, INC.
(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 SMALLCAP
FUND, INC.................................. Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market
capitalizations located in various foreign
countries and in the United States.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH GLOBAL UTILITY FUND, INC....... Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt securities
issued by domestic and foreign companies
which are primarily engaged in the
ownership or operation of facilities used
to generate, transmit or distribute
electricity, telecommunications, gas or
water.
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 un-
dervalued.
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents of Wisconsin must meet investor
suitability standards)..................... Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
MERRILL LYNCH 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 to provide as high a level of
income exempt from Federal and Maryland
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MASSACHUSETTS LIMITED
MATURITY MUNICIPAL BOND FUND............... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Massachusetts income taxes as
is consistent with prudent investment
management through investment in a port-
folio primarily of intermediate-term
investment grade Massachusetts Municipal
Bonds.
</TABLE>
35
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH MASSACHUSETTS MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and
Massachusetts income taxes as is con-
sistent with prudent investment management.
MERRILL LYNCH MICHIGAN LIMITED MATURITY
MUNICIPAL BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Michigan income taxes as is
consistent with prudent investment
management through investment in a port-
folio primarily of intermediate-term
investment grade Michigan Municipal Bonds.
MERRILL LYNCH MICHIGAN MUNICIPAL BOND FUND... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Michigan
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MINNESOTA MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide 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.
</TABLE>
36
<PAGE>
<TABLE>
<S> <C>
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 to provide
as high a level of income exempt from
Federal and New Jersey income taxes as is
consistent with prudent investment
management through a portfolio primarily of
intermediate-term investment grade New
Jersey Municipal Bonds.
MERRILL LYNCH NEW JERSEY MUNICIPAL BOND
FUND....................................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide 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 to provide 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 to provide
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 to provide 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 to provide as high a level of
income exempt from Federal and North
Carolina income taxes as is consistent with
prudent investment management.
</TABLE>
37
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH OHIO MUNICIPAL BOND FUND....... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Ohio income
taxes as is consistent with prudent
investment management.
MERRILL LYNCH OREGON MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Oregon
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH PACIFIC FUND, INC.............. Capital appreciation by investing in equity
securities of corporations domiciled in Far
Eastern and Western Pacific countries,
including Japan, Australia, Hong Kong and
Singapore.
MERRILL LYNCH PENNSYLVANIA LIMITED
MATURITY MUNICIPAL BOND FUND............... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide
as high a level of income exempt from
Federal and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a port-
folio 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 to provide 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 SHORT-TERM GLOBAL INCOME FUND,
INC........................................ As high a level of current income as is
consistent with prudent investment management
from a global portfolio of high quality
debt securities denominated in various
currencies and multinational currency units
and having remaining maturities not
exceeding three years.
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH SPECIAL VALUE FUND, INC........ Long-term growth of capital from investments
in securities, primarily common stocks, of
relatively small companies believed to have
special investment value and emerging
growth companies regardless of size.
MERRILL LYNCH STRATEGIC DIVIDEND FUND........ Long-term total return from investment in
dividend paying common stocks which yield
more than Standard & Poor's 500 Composite
Stock Price
Index.
MERRILL LYNCH TECHNOLOGY FUND, INC........... Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in technology.
MERRILL LYNCH TEXAS MUNICIPAL
BOND FUND.................................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide 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 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
port-
folio of fixed income securities
denominated
in various currencies, including
multinational
currencies.
</TABLE>
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
<TABLE>
<S> <C>
CLASS A SHARE MONEY MARKET FUNDS:
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.
</TABLE>
39
<PAGE>
<TABLE>
<S> <C>
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 U.S.A. GOVERNMENT
RESERVES................................... Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY
MONEY FUND................................. Preservation of capital, liquidity and
current income through investment exclusively
in a diversified portfolio of short-term
marketable securities which are direct
obligations of the U.S. Treasury.
CLASS B, CLASS C AND CLASS D SHARE MONEY
MARKET FUNDS:
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 is-
sued or guaranteed by the U.S. Government,
its agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
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.
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
MERRILL LYNCH TREASURY FUND.................. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct obliga-
tions of the U.S. Treasury and up to 10% of
its total assets in repurchase agreements
secured by such obligations.
</TABLE>
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire 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 at any time and may thereafter resume such offering
from time to time. The exchange privilege is available only to U.S. shareholders
in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
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 and
Class C shares will be lower than the per share dividends and distributions on
Class A and Class D shares as a result of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and Class
C shares. Similarly, the per share dividends and distributions on Class D shares
will be lower than the per share dividends and distributions on Class A shares
as a result of the account maintenance fees applicable with respect to the Class
D shares. See "Determination of Net Asset Value."
41
<PAGE>
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, Class B, Class C
and Class D 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 if 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, Class B,
Class C and Class D shareholders according to a method (which it believes is
consistent with the Securities and Exchange Commission exemptive order
permitting the issuance and sale of multiple classes of stock) that is based on
the gross income allocable to Class A, Class B, Class C and Class D shareholders
during the taxable year, or such other method as the Internal Revenue Service
may prescribe. If the Fund pays a dividend in January 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.
42
<PAGE>
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares for Class D shares. A shareholder's basis in the Class D
shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period of the converted Class B shares.
If 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 shares in the absence of the exchange privilege. Instead,
such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The 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. Unless such contract is a forward foreign exchange
contract, or is a non-equity option or a regulated futures contract for a
non-U.S. currency and the Fund elects to have gain or loss in connection with
the contract treated as ordinary gain or loss under Code Section 988 (as
described below), gain or loss from Section 1256 contracts will be 60% long-term
and 40% short-term capital gain or loss. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
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.
43
<PAGE>
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.
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.
44
<PAGE>
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, Class B, Class
C and Class D shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, 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.
Set forth below is total return information for the Class A and Class B
shares for the Fund. Since Class C and Class D shares have not been issued prior
to the date of this Statement of Additional Information, performance information
concerning Class C and Class D shares is not yet provided.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------- -------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL HYPOTHETICAL
EXPRESSED AS A $1,000 EXPRESSED AS A $1,000
PERCENTAGE BASED ON INVESTMENT AT PERCENTAGE BASED ON INVESTMENT AT
A HYPOTHETICAL THE END OF THE A HYPOTHETICAL THE END OF THE
PERIOD $1,000 INVESTMENT PERIOD $1,000 INVESTMENT PERIOD
- ------------------------------------ ------------------- ---------------- ------------------- ----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
September 2, 1994 to September 30,
1994............................... (44.68)% $ 955.60 (44.96)% $ 955.20
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
September 2, 1994 to September 30,
1994............................... (.46)% $ 995.40 (.51)% $ 994.90
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
September 2, 1994 to September 30,
1994............................... (4.44)% $ 955.60 (4.48)% $ 955.20
</TABLE>
45
<PAGE>
In order to reflect the reduced sales charges, in the case of Class A or
Class D shares, or the waiver of the contingent deferred sales charge, in the
case of Class B or Class C shares, applicable to certain investors, as described
under "Purchase of Shares" and "Redemption of Shares," respectively, the total
return data quoted by the Fund in advertisements directed to such investors may
take into account the reduced, and not the maximum, sales charge or may not take
into account the contingent deferred sales charge and therefore may reflect
greater total return since, due to the reduced sales charges or the waiver of
sales charges, a lower amount of expenses may be deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on June 6, 1994. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the account maintenance and/or
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 multiple classes of Common Stock. The Board of Directors of the Fund may
classify and reclassify the shares of the Fund into additional classes of Common
Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent accountants. Also, the by-laws of the Fund require that a special
meeting of stockholders be held upon the written request of at least 10% of the
outstanding shares of the Fund entitled to vote at such meeting. Voting rights
for Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive or conversion rights. Redemption and
conversion rights are discussed elsewhere herein and in the Prospectus. Each
share is entitled to participate equally in dividends and distributions declared
by the Fund and in the net assets of the Fund upon liquidation or dissolution
after satisfaction of outstanding liabilities. Stock certificates are issued by
the transfer agent only on specific request. Certificates for fractional shares
are not issued in any case.
The Manager provided the initial capital for the Fund by purchasing 5,000
shares of each of Class A and Class B 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.
46
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A and Class B shares of the Fund, based on the
value of the Fund's net assets and number of shares outstanding as of September
30, 1994, is calculated as set forth below. Information is not provided for
Class C or Class D shares since no Class C or Class D shares were publicly
offered prior to the date of this Statement of Additional Information. The
offering price for Class B and Class C shares of the Fund is the net asset value
of Class B and Class C shares, respectively.
<TABLE>
<CAPTION>
CLASS A CLASS B
---------- ------------
<S> <C> <C>
Net Assets.................................................................... $ 795,179 $ 5,099,106
---------- ------------
---------- ------------
Number of Shares Outstanding.................................................. 80,224 514,429
---------- ------------
---------- ------------
Net Asset Value Per Share (net assets divided by number of shares
outstanding)................................................................. $ 9.91 $ 9.91
Sales Charge (for Class A shares: 4.00% of offering price (4.17% of net amount
invested))*.................................................................. .41 **
---------- ------------
Offering Price................................................................ $ 10.32 $ 9.91
---------- ------------
---------- ------------
<FN>
- ---------
* 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 CDSC on redemption of shares. See "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares" in the
Prospectus.
</TABLE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 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
The Chase Manhattan Bank, N.A., 4 MetroTech Center, 18th Floor, Brooklyn,
New York 11245 (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.
47
<PAGE>
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.
48
<PAGE>
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>
49
<PAGE>
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.
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.
50
<PAGE>
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.
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>
51
<PAGE>
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S
("STANDARD & POOR'S") CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it 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
</TABLE>
52
<PAGE>
<TABLE>
<S> <C>
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 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.
53
<PAGE>
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.
54
<PAGE>
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.
55
<PAGE>
THE FOLLOWING FINANCIAL
STATEMENTS FOR THE FUND FOR THE PERIOD
SEPTEMBER 2, 1994 TO SEPTEMBER 30, 1994 ARE UNAUDITED.
These unaudited interim financial statements reflect all adjustments which
are, in the opinion of management, necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a normal recurring
nature.
56
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) (IN U.S. DOLLARS)
<TABLE>
<CAPTION>
MERRILL LYNCH ASSET INCOME FUND, INC. SEPTEMBER 30, 1994
---------------------------------------------------------------------------------------------------------
SHARES VALUE PERCENT OF
INDUSTRIES HELD STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
ARGENTINA Banking 600 Banco Frances del Rio de la Plata $ 18,594 $ 18,000 0.3%
S.A.
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in Argentina 18,594 18,000 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
AUSTRALIA Multi-Industry 6,000 CSR Ltd. 20,467 19,891 0.3
6,000 Pacific Dunlop Ltd. 18,156 18,204 0.3
---------- ---------- -----
38,623 38,095 0.6
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in Australia 38,623 38,095 0.6
- ---------------------------------------------------------------------------------------------------------------------------------
CANADA Natural Resources 1,900 Canadian Pacific Ltd. 33,447 31,825 0.5
- ---------------------------------------------------------------------------------------------------------------------------------
Telecommunications 500 Northern Telecom Ltd. 17,405 17,375 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in Canada 50,852 49,200 0.8
- ---------------------------------------------------------------------------------------------------------------------------------
FRANCE Capital Goods 1,500 Alcatel Alsthom (ADR)* 32,271 27,750 0.5
- ---------------------------------------------------------------------------------------------------------------------------------
Petroleum 300 TOTAL SA 17,819 17,661 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in France 50,090 45,411 0.8
- ---------------------------------------------------------------------------------------------------------------------------------
GERMANY Electronics 50 Siemens AG 22,176 20,416 0.4
- ---------------------------------------------------------------------------------------------------------------------------------
Machinery & 70 Mannesmann AG 19,573 17,602 0.3
Equipment
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in Germany 41,749 38,018 0.7
- ---------------------------------------------------------------------------------------------------------------------------------
HONG KONG Multi-Industry 2,000 Swire Pacific 'A' Ltd. 16,946 15,660 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Real Estate 2,000 Sun Hung Kai Properties, Ltd. 15,357 14,883 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Utilities--Electric 3,000 China Light & Power Co., Ltd. 15,713 15,259 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in Hong Kong 48,016 45,802 0.9
- ---------------------------------------------------------------------------------------------------------------------------------
JAPAN Building & 2,000 Asahi Glass Co., Ltd. 24,617 24,696 0.4
Construction
- ---------------------------------------------------------------------------------------------------------------------------------
Capital Goods 2,000 Hitachi Cable Ltd. 17,296 17,024 0.3
2,000 Mitsubishi Heavy Industries 16,156 15,587 0.3
America, Inc.
---------- ---------- -----
33,452 32,611 0.6
- ---------------------------------------------------------------------------------------------------------------------------------
Electrical Equipment 3,000 Mitsubishi Electric Corp. 20,723 21,437 0.4
- ---------------------------------------------------------------------------------------------------------------------------------
Electronics 1,000 Matsushita Electric Industrial Co., 16,802 15,992 0.3
Ltd.
1,000 Sharp Corp. 17,969 17,814 0.3
---------- ---------- -----
34,771 33,806 0.6
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) (IN U.S. DOLLARS)
<TABLE>
<CAPTION>
MERRILL LYNCH ASSET INCOME FUND, INC. SEPTEMBER 30, 1994
---------------------------------------------------------------------------------------------------------
SHARES VALUE PERCENT OF
INDUSTRIES HELD STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Insurance 3,000 Nippon Fire & Marine Insurance Co., $ 22,453 $ 21,862 0.4%
Ltd.
2,000 Tokio Marine & Fire Insurance Co., 23,827 23,887 0.4
Ltd.
---------- ---------- -----
46,280 45,749 0.8
- ---------------------------------------------------------------------------------------------------------------------------------
Machinery 2,000 Makino Milling Machine Co. 17,764 18,421 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Miscellaneous 2,000 Sumitomo Corp. 20,137 19,636 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Petroleum 3,000 Nippon Oil Co., Ltd. 22,211 20,891 0.4
- ---------------------------------------------------------------------------------------------------------------------------------
Photography 1,000 Canon Inc. 17,439 17,611 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Shipping 2,000 Kamigumi Co., ltd. 23,315 22,875 0.4
- ---------------------------------------------------------------------------------------------------------------------------------
Textiles 2,000 Toray Industries Ltd. 15,740 15,587 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in Japan 276,449 273,320 4.8
- ---------------------------------------------------------------------------------------------------------------------------------
MEXICO Advertising 1,500 Consorcio G Grupo Dina S.A. de C.V. 19,778 18,000 0.3
(ADR)*
- ---------------------------------------------------------------------------------------------------------------------------------
Capital Goods 2,000 Cementos Mexicanos, S.A. de C.V. 18,043 18,420 0.3
(Class B Cemex)
- ---------------------------------------------------------------------------------------------------------------------------------
Telecommunications 1,000 Empresas ICA Sociedad Controladora 31,364 32,250 0.6
S.A. de C.V.
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in Mexico 69,185 68,670 1.2
- ---------------------------------------------------------------------------------------------------------------------------------
NORWAY Diagnostics 1,000 Hafslund Nycomed Inc. 18,184 17,000 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in Norway 18,184 17,000 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
SINGAPORE Machinery 2,000 Jurong Shipyard Ltd. 19,114 18,624 0.3
Shipping 11,000 Neptune Orient Lines Ltd. 17,077 16,255 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in Singapore 36,191 34,879 0.6
- ---------------------------------------------------------------------------------------------------------------------------------
SPAIN Energy & Petroleum 600 Repsol S.A. 19,311 18,375 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in Spain 19,311 18,375 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
SWEDEN Engineering & 1,000 SKF AB 17,877 17,458 0.3
Construction
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in Sweden 17,877 17,458 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
SWITZERLAND Electrical Equipment 25 BBC Brown Boveri & Cie (Bearer) 22,679 21,604 0.4
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in Switzerland 22,679 21,604 0.4
- ---------------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM Beverages 700 Grand Metropolitan PLC (ADR)* 19,242 18,113 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Chemicals 400 Imperial Chemical Industries PLC 20,682 20,900 0.4
(ADR)*
- ---------------------------------------------------------------------------------------------------------------------------------
Conglomerates 1,000 Hanson PLC (ADR)* 19,185 18,125 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) (IN U.S. DOLLARS)
<TABLE>
<CAPTION>
MERRILL LYNCH ASSET INCOME FUND, INC. SEPTEMBER 30, 1994
---------------------------------------------------------------------------------------------------------
SHARES VALUE PERCENT OF
INDUSTRIES HELD STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Electrical Equipment 5,000 General Electric Co. PLC $ 22,639 $ 22,985 0.4%
- ---------------------------------------------------------------------------------------------------------------------------------
Utilities--Gas 400 British Gas PLC (ADR)* 18,428 18,700 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in the United Kingdom 100,176 98,823 1.7
- ---------------------------------------------------------------------------------------------------------------------------------
UNITED STATES Aerospace 500 United Technologies Corp. 31,448 31,313 0.5
- ---------------------------------------------------------------------------------------------------------------------------------
Banking 300 Morgan (J.P.) & Co. Inc. 19,074 18,225 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Chemicals 300 Eastman Chemical Co. 15,959 16,313 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Computer Technology 200 Hewlett-Packard Co. 17,891 17,475 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Consumer--Services 1,100 Kelly Services, Inc. 33,500 28,875 0.5
- ---------------------------------------------------------------------------------------------------------------------------------
Environmental 1,900 Wheelabrator Technologies Inc. 31,172 29,213 0.5
Control Systems
- ---------------------------------------------------------------------------------------------------------------------------------
Foods 700 Archer-Daniels-Midland Co. 18,154 18,200 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Oil--Integrated 1,000 Phillips Petroleum Co. 34,364 34,250 0.6
- ---------------------------------------------------------------------------------------------------------------------------------
Oil Field Equipment 600 Schlumberger Ltd., Inc. 33,232 32,625 0.6
- ---------------------------------------------------------------------------------------------------------------------------------
Petroleum 1,000 Dresser Industries, Inc. 20,435 20,250 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 900 Merck & Co., Inc. 30,882 31,950 0.5
- ---------------------------------------------------------------------------------------------------------------------------------
Semiconductor 600 Teradyne Inc. 17,286 17,625 0.3
Production Equipment
- ---------------------------------------------------------------------------------------------------------------------------------
Telecommunications 400 AT&T Corp. 21,682 21,600 0.4
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stocks in the United States 325,079 317,914 5.4
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investments in Common Stocks 1,133,055 1,102,569 19.1
- ---------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT FIXED-INCOME SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------------
CANADA Foreign Government C$ 300,000 National Bank of Canada, 7.25% due 201,403 202,122 3.4
Obligations 6/01/2003
- ---------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Securities in Canada 201,403 202,122 3.4
- ---------------------------------------------------------------------------------------------------------------------------------
UNITED STATES US Government US Treasury Notes:
Securities
US$ 750,000 6.875% due 8/31/1999 745,195 737,580 12.5
750,000 7.25% due 8/15/2004 741,328 731,835 12.4
- ---------------------------------------------------------------------------------------------------------------------------------
Total Fixed-Income Securities in the United 1,486,523 1,469,415 24.9
States
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investments in Fixed-Income Securities 1,687,926 1,671,537 28.3
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) (IN U.S. DOLLARS)
<TABLE>
<CAPTION>
MERRILL LYNCH ASSET INCOME FUND, INC. SEPTEMBER 30, 1994
---------------------------------------------------------------------------------------------------------
FACE VALUE PERCENT OF
INDUSTRIES AMOUNT SHORT-TERM SECURITIES COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
UNITED STATES Government Agency US$1,065,000 Farm Credit Corp., 4.66% due $1,064,586 $1,064,586 18.0%
10/06/1994
200,000 Federal Home Loan Bank, 4.66% due 199,974 199,974 3.3
10/04/1994
Commercial Paper** American Express Credit Corp.:
300,000 4.70% due 10/06/1994 299,882 299,882 5.0
250,000 4.85% due 10/04/1994 249,966 249,966 4.2
224,000 General Electric Capital Corp., 224,000 224,000 3.8
4.95% due 10/03/1994
1,000,000 Student Loan Marketing Association, 997,766 997,766 16.9
4.73% due 10/20/1994
- ---------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities in the United 3,036,174 3,036,174 51.2
States of America
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities 3,036,174 3,036,174 51.2
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $5,857,155 5,810,280 98.6
----------
----------
OTHER ASSETS LESS LIABILITIES 84,005 1.4
---------- -----
NET ASSETS $5,894,285 100.0%
---------- -----
---------- -----
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
*American Depositary Receipt (ADR).
**Commercial Paper and certain US Government Agency Obligations are traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund.
</TABLE>
See Notes to Financial Statements.
60
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH ASSET INCOME FUND, INC.
FINANCIAL INFORMATION (UNAUDITED) (IN U.S. DOLLARS)
...............................................................................
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES AS OF SEPTEMBER 30, 1994
<TABLE>
<S> <C> <C> <C>
ASSETS: Investments, at value (identified cost -- $5,857,155) (Note 1a)....... $5,810,280
Receivables:
Securities sold....................................................... $ 281,000
Capital shares sold................................................... 97,640
Investment adviser (Note 2)........................................... 24,025
Interest.............................................................. 17,453
Dividends............................................................. 1,459 421,577
----------
Deferred organization expenses (Note 1h).............................. 57,350
Prepaid registration fees and other assets (Note 1h).................. 110,725
----------
Total assets.......................................................... 6,399,932
----------
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES: Payables:
Securities purchased.................................................. 241,748
Dividends............................................................. 4,315
Distributor (Note 2).................................................. 2,798
Capital shares redeemed............................................... 596 249,457
----------
Accrued expenses and other liabilities................................ 256,190
----------
Total liabilities..................................................... 505,647
----------
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS: Net assets............................................................ $5,894,285
----------
----------
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF: Class A Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized............................................................ $ 8,022
Class B Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized............................................................ 51,443
Paid-in capital in excess of par...................................... 5,882,224
Accumulated realized capital losses on investments and foreign
currency transactions-net............................................. (554)
Unrealized depreciation on investments and foreign currency
transactions-net...................................................... (46,850)
----------
Net assets............................................................ $5,894,285
----------
----------
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE: Class A -- Based on net assets of $795,179 and 80,224 shares
outstanding........................................................... $9.91
----------
----------
Class B -- Based on net assets of $5,099,106 and 514,429 shares
outstanding........................................................... $9.91
----------
----------
- ----------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
61
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH ASSET INCOME FUND, INC.
FINANCIAL INFORMATION (UNAUDITED)(CONTINUED) (IN U.S. DOLLARS)
...............................................................................
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPT. 2, 1994+
TO SEPT. 30,
1994
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME Interest and discount earned..................................... $ 19,873
(NOTES 1F & 1G): Dividends (net of $152 foreign withholding tax).................. 1,463
---------------
Total Income..................................................... 21,336
---------------
- ----------------------------------------------------------------------------------------------------------------------------
EXPENSES: Distribution fees -- Class B (Note 2)............................ 2,798
Investment advisory fees (Note 2)................................ 3,164
Transfer agent fees -- Class B (Note 2).......................... 859
Custodian fees................................................... 1,012
Printing and shareholder reports................................. 4,556
Accounting services (Note 2)..................................... 2,582
Professional fees................................................ 2,025
Registration fees (Note 1h)...................................... 9,738
Transfer agent fees -- Class A (Note 2).......................... 103
Directors' fees and expenses..................................... 1,953
Amortization of organization expenses (Note 1h).................. 968
Other............................................................ 228
---------------
Total expenses before reimbursement.............................. 29,986
Reimbursement of expenses........................................ (27,188)
---------------
Total expenses after reimbursement............................... 2,798
---------------
Investment income -- net......................................... 18,538
---------------
- ----------------------------------------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN Realized loss from:
Investments -- net............................................... $ (38)
(LOSS) ON INVESTMENT &
FOREIGN CURRENCY Foreign currency transactions -- net............................. (516) (554)
TRANSACTIONS -- NET Unrealized appreciation/depreciation on:
(NOTES 1C, 1G & 3): Investments -- net............................................... (46,875)
Foreign currency transactions -- net............................. 25 (46,850)
---------- ---------------
Net realized and unrealized loss on investments and foreign
currency transactions............................................ (47,404)
---------------
Net Decrease in Net Assets Resulting from Operations............. ($28,866)
---------------
---------------
- ----------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
See Notes to Financial Statements.
</TABLE>
62
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH ASSET INCOME FUND, INC.
FINANCIAL INFORMATION (UNAUDITED)(CONTINUED) (IN U.S. DOLLARS)
...............................................................................
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS:
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPT. 2, 1994+
TO SEPT. 30, 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATIONS: Investment income -- net......................................... $ 18,538
Realized loss on investments and foreign currency transactions --
net.............................................................. (554)
Unrealized depreciation on investments and foreign currency
transactions -- net.............................................. (46,850)
-----------
Net decrease in net assets resulting from operations............. (28,866)
-----------
- ---------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS Investment income -- net:
(NOTE 1I): Class A.......................................................... (2,460)
Class B.......................................................... (16,078)
-----------
Net decrease in net assets resulting from dividends and
distributions to shareholders.................................... (18,538)
-----------
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS Net increase in net assets derived from capital share
(NOTE 4): transactions..................................................... 5,841,689
-----------
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS: Total increase in net assets..................................... 5,794,285
Beginning of period.............................................. 100,000
-----------
End of period.................................................... $5,894,285
-----------
-----------
- ---------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
See Notes to Financial Statements.
</TABLE>
63
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH ASSET INCOME FUND, INC.
FINANCIAL INFORMATION (UNAUDITED)(CONCLUDED) (IN U.S. DOLLARS)
...............................................................................
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. CLASS A CLASS B
INCREASE (DECREASE) IN NET ASSET VALUE: ------------------------ ------------------------
FOR THE PERIOD FOR THE PERIOD
SEPTEMBER 2, 1994+ SEPTEMBER 2, 1994+
TO SEPTEMBER 30, 1994 TO SEPTEMBER 30, 1994
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING Net asset value, beginning of period......... $ 10.00 $ 10.00
------- -------
PERFORMANCE: Investment income -- net..................... 0.03 0.03
Realized and unrealized loss on investments
and foreign currency transactions -- net..... (0.09) (0.09)
------- -------
Total from investment operations............. (0.06) (0.06)
------- -------
Less dividends:
Investment income -- net..................... (0.03) (0.03)
------- -------
Total dividends.............................. (0.03) (0.03)
------- -------
Net asset value, end of period............... $ 9.91 $ 9.91
------- -------
------- -------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN*: Based on net asset value per share........... (0.46%)++ (0.51%)++
------- -------
------- -------
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursement and excluding
distribution fees............................ 0% 0%
------- -------
------- -------
Expenses, net of reimbursement............... 0% 0.75%**
------- -------
------- -------
Expenses..................................... 6.42%** 7.20%**
------- -------
------- -------
Investment income -- net..................... 5.04%** 4.31%**
------- -------
------- -------
- --------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA: Net assets, end of period (in thousands)..... $ 795 $ 5,099
------- -------
------- -------
Portfolio turnover........................... 0% 0%
------- -------
------- -------
- --------------------------------------------------------------------------------------------------------------------------------
*Total investment returns exclude the effect
of sales loads.
**Annualized.
+Commencement of operations.
++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
64
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH ASSET INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
...............................................................................
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Asset Income Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. Prior to commencement of operations on September 2, 1994,
the Fund had no operations other than those relating to organizational matters
and the sale of 5,000 Class A Shares and 5,000 Class B Shares of common stock to
Merrill Lynch Asset Management L.P. ("MLAM") for $100,000. The shares of the
Fund are divided into Class A Shares and Class B Shares. Class A shares are sold
with a front-end sales charge. Class B Shares may be subject to a contingent
deferred sales charge. Both classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
Class B Shares bear certain expenses related to the account maintenance and
distribution of such shares and have exclusive voting rights with respect to
matters relating to such account maintenance and distribution expenditures. On
August 3, 1994, the directors approved the implementation of the Merrill Lynch
Select Pricing-SM- System, which will offer two new classes, Class C and Class
D. The following is a summary of significant accounting policies followed by the
Fund.
(A) VALUATION OF INVESTMENTS -- Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the 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. 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. The Fund employs
Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of MLAM, to
provide securities prices for the Fund. In cases where securities are traded on
more than one exchange, the securities are valued on the exchange designated by
or under the authority of the Board of Directors as the primary market. Other
investments, including futures contracts and related options, are stated at
market value. Short-term securities are valued at amortized cost which
approximates market.
Options written by the Fund are valued at the last asked price in the case of
exchanged-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 obtained from two or
more dealers, unless there is only one dealer, in which case that dealer's price
is used.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund, including valuations furnished by a pricing
service retained by the Fund, which may utilize a matrix system for valuations.
(B) REPURCHASE AGREEMENTS -- The Fund invests in US Government securities
pursuant to repurchase agreements with a member bank of the Federal Reserve
System or a primary dealer in US Government securities. Under such agreements,
the bank or primary dealer agrees to repurchase the security at a mutually
agreed upon time and price. The Fund takes possession of the underlying
securities, marks to market such securities and, if necessary, receives
additions to such securities daily to ensure that the contract is fully
collateralized.
(C) FOREIGN CURRENCY TRANSACTIONS -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized)
65
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH ASSET INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
...............................................................................
receivables or payables expressed in foreign currencies into US dollars.
Realized and unrealized gains or losses from investments include the effects of
foreign exchange sales on investments.
The Fund is authorized to enter into forward foreign exchange contracts as a
hedge against either specific transactions or portfolio positions. Such
contracts are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
The Fund may also 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-US 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.
(D) OPTIONS -- The Fund can write covered call options and purchase put options.
When the Fund writes an option, an amount equal to the premium received by the
Fund is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current value of the
option written.
When a security is sold through an exercise of an option, the related premium
received (or paid) is deducted from (or added to) the basis of the security
sold. When an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the closing
transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(E) FINANCIAL FUTURES CONTRACTS -- The Fund may purchase or sell stock index
futures contracts and options on such futures contracts. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
(F) INCOME TAXES -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(G) SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates except that if the
ex-dividend date has passed, certain dividends from foreign securities are
recorded as soon as the Fund is informed of the ex-dividend date. Interest
income (including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(H) DEFERRED ORGANIZATION EXPENSES AND PREPAID REGISTRATION FEES -- Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expense as the
related shares are issued.
(I) DIVIDENDS AND DISTRIBUTIONS -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
66
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH ASSET INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
...............................................................................
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTION WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with MLAM. Ultimate
control of MLAM is vested with Merrill Lynch & Co., Inc. ("ML & Co."). The
general partner of MLAM is Princeton Services, Inc., an indirect wholly-owned
subsidiary of ML & Co. The limited partners are ML & Co. and Merrill Lynch
Investment Management, Inc. ("MLIM"), which is also an indirect wholly-owned
subsidiary of ML & Co. The Fund has also entered into a Distribution Agreement
and a Distribution Plan with Merrill Lynch Funds Distributor, Inc. ("MLFD" or
"Distributor"), a wholly-owned subsidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee of
0.75%, on an annual basis, of the average daily value of the Fund's net assets.
Certain of the states in which the shares of the Fund are qualified for sale
impose limitations on the expenses of the Fund. The most restrictive annual
expense limitation requires that the Investment Adviser reimburse the Fund to
the extent the Fund's expenses (excluding interest, taxes, distribution fees,
brokerage fees and commissions, and extraordinary items) exceed 2.5% of the
Fund's first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets, and 1.5% of the average daily net assets in
excess thereof. MLAM's obligation to reimburse the Fund is limited to the amount
of the management fee. No fee payment will be made to MLAM during any fiscal
year which will cause such expenses to exceed the most restrictive expense
limitation applicable at the time of such payment.
Pursuant to a distribution plan (the "Distribution Plan") adopted by the Fund in
accordance with Rule 12B-1 under the Investment Company Act of 1940, the Fund
pays the Distributor an ongoing account maintenance fee and a distribution fee,
which are accrued daily and paid monthly, at the annual rates of 0.25% and
0.50%, respectively, of the average daily net assets of the Class B shares of
the Fund. Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner, and Smith ("MLPF&S"), a subsidiary of ML & Co., also provides
account maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B shareholders. The ongoing distribution fee
compensates the Distributor and MLPF&S for providing shareholder and
distribution services and bearing certain distribution-related expenses of the
Fund.
For the period ended September 30, 1994, MLFD earned underwriting discounts of
$168, and MLPF&S received dealer concessions of $15,869 on sales of the Fund's
Class A Shares.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, MLIM, MLPF&S, FDS, MLFD, and/or ML & Co.
3. INVESTMENTS:
Purchases of investments, excluding short-term securities, for the period ended
September 30, 1994 was $2,820,979.
67
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH ASSET INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED)
...............................................................................
Net realized and unrealized gains (losses) as of September 30, 1994 were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------
REALIZED UNREALIZED
LOSSES GAINS (LOSSES)
- ---------------------------------------------------
<S> <C> <C>
Long-term investments.... -- $ (46,875)
Short-term investments... $ (38) --
Foreign currency
transactions............ (516) 25
----- --------------
Total.................... $ (554) $ (46,850)
----- --------------
----- --------------
- ---------------------------------------------------
</TABLE>
As of September 30, 1994, net unrealized depreciation for Federal income tax
purposes aggregated $46,875 of which $6,356 related to appreciated securities
and $53,231 related to depreciated securities. The aggregate cost of investments
at September 30, 1994 for Federal income tax purposes was $5,857,155.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions was
$5,841,689 for the period ended September 30, 1994.
Transactions in capital shares for Class A and Class B Shares were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------
CLASS A SHARES FOR THE
PERIOD
SEPTEMBER 2, 1994+ TO DOLLAR
SEPTEMBER 30, 1994 SHARES AMOUNT
- -----------------------------------------------
<S> <C> <C>
Shares sold.............. 75,075 $ 748,929
Shares issued to
shareholders in
reinvestment of
dividends................ 149 1,484
--------- ---------
Total issued............. 75,224 750,413
--------- ---------
Net increase............. 75,224 $ 750,413
--------- ---------
--------- ---------
- -----------------------------------------------
+COMMENCEMENT OF OPERATIONS. PRIOR TO SEPTEMBER
2, 1994 THE FUND ISSUED 5,000 SHARES TO MLAM
FOR $50,000.
- -----------------------------------------------
<CAPTION>
CLASS B SHARES FOR THE
PERIOD
SEPTEMBER 2, 1994+ TO DOLLAR
SEPTEMBER 30, 1994 SHARES AMOUNT
<S> <C> <C>
- -----------------------------------------------
Shares sold.............. 512,946 $5,126,427
Shares issued to
shareholders in
reinvestment of
dividends................ 653 6,487
--------- ---------
Total issued............. 513,599 5,132,914
Shares redeemed.......... (4,170) (41,638)
Net increase............. 509,429 $5,091,276
--------- ---------
--------- ---------
- -----------------------------------------------
+COMMENCEMENT OF OPERATIONS. PRIOR TO SEPTEMBER
2, 1994 THE FUND ISSUED 5,000 SHARES TO MLAM
FOR $50,000.
</TABLE>
68
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder of
MERRILL LYNCH ASSET INCOME FUND, INC.:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Asset Income Fund, Inc. as of July 22, 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of Merrill Lynch Asset Income Fund, Inc. as of
July 22, 1994 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
July 26, 1994.
69
<PAGE>
MERRILL LYNCH ASSET INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JULY 22, 1994
<TABLE>
<S> <C>
Assets:
Cash in Bank........................................................................ $ 100,000
Prepaid registration fees (Note 3).................................................. 33,450
Deferred organization expenses (Note 4)............................................. 58,100
---------
Total assets.......................................................................... 191,550
Liabilities -- accrued expenses....................................................... (91,550)
---------
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
---------
---------
<FN>
- ----------
(1) Merrill Lynch Asset 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.
</TABLE>
70
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objectives and Policies............. 2
Precious and Industrial Metal-Related
Securities................................. 3
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......................... 14
Directors and Officers....................... 14
Management and Advisory Arrangements......... 15
Purchase of Shares............................. 17
Alternative Sales Arrangements............... 17
Initial Sales Charge Alternative--Class A and
Class D Shares............................. 17
Reduced Initial Sales Charges................ 18
Distribution Plans........................... 22
Limitations on the Payment of Deferred Sales
Charges.................................... 22
Redemption of Shares........................... 23
Deferred Sales Charge--Class B Shares........ 23
Portfolio Transactions and Brokerage........... 24
Determination of Net Asset Value............... 25
Shareholder Services........................... 26
Investment Account........................... 27
Automatic Investment Plans................... 27
Automatic Reinvestment of Dividends and
Capital Gains Distributions................ 27
Systematic Withdrawal Plans--Class A and
Class D Shares............................. 27
Exchange Privilege........................... 28
Dividends, Distributions and Taxes............. 41
Dividends and Distributions.................. 41
Taxes........................................ 42
Performance Data............................... 45
General Information............................ 46
Description of Shares........................ 46
Computation of Offering Price
Per Share.................................. 46
Independent Auditors........................... 47
Custodian...................................... 47
Transfer Agent................................. 47
Legal Counsel.................................. 47
Reports to Shareholders........................ 48
Additional Information......................... 48
Appendix....................................... 49
Unaudited Financial Statements................. 56
Independent Auditors' Report................... 69
Statement of Assets and Liabilities (Audited).. 70
Code 18238 -- 1094
</TABLE>
[LOGO]
Merrill Lynch
Asset Income
Fund, Inc.
STATEMENT OF
ADDITIONAL
INFORMATION
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for the period September 2, 1994 (commencement of
operations) to September 30, 1994 (unaudited).
Contained in Part B:
Schedule of Investments as of September 30, 1994 (unaudited).
Statement of Assets and Liabilities, as of September 30, 1994
(unaudited).
Statement of Operations for the period September 2, 1994 (commencement
of operations) to September 30, 1994 (unaudited).
Statement of Changes in Net Assets for the period September 2, 1994
(commencement of operations) to September 30, 1994 (unaudited).
Financial Highlights for the period September 2, 1994 (commencement of
operations) to September 30, 1994 (unaudited).
Statement of Assets and Liabilities, as of July 22, 1994 (audited).
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------
<C> <C> <S>
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.(a)
5 -- Form of Management Agreement between Registrant and Merrill Lynch Asset Management, L.P.*
6(a) -- Form of Class A Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.
(b) -- Form of Class B Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.*
(c) -- Form of Class C Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.
(d) -- Form of Class D Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.
7 -- None.
8 -- Form of Custodian Agreement between Registrant and The Chase Manhattan Bank, N.A.*
9(a) -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Financial Data Services, Inc.*
</TABLE>
C-1
<PAGE>
<TABLE>
<C> <C> <S>
(b) -- Form of Agreement between Merrill Lynch & Co., Inc. and the Registrant relating to use by
Registrant of Merrill Lynch name.*
10(a) -- Opinion and consent of Rogers & Wells.*
(b) -- Opinion and consent of Galland, Kharasch, Morse & Garfinkle, P.C.*
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
13(a) -- Certificate of Merrill Lynch Asset Management, L.P. relating to Class A and Class B Shares.*
13(b) -- Certificate of Merrill Lynch Asset Management, L.P. relating to Class C and Class D Shares.
14 -- None.
15(a) -- Class B Distribution Plan of the Registrant and Distribution Plan Sub-Agreement.*
(b) -- Class C Distribution Plan of the Registrant and Distribution Plan Sub-Agreement.
(c) -- Class D Distribution Plan of the Registrant and Distribution Plan Sub-Agreement.
17(a) -- Financial Data Schedule -- Class A Shares.
(b) -- Financial Data Schedule -- Class B Shares.
<FN>
- ---------
(a) Reference is made to Article II (Sections 3 and 4), Article V (Section 3),
Article IV, Article VI, Article VII and Article IX of the Registrant's
Articles of Incorporation, filed as Exhibit (1) to Amendment No. 2 to the
Registration Statement; and Article II, Article III (Sections 1, 3, 5, 6
and 17), Article IV (Section 2), Article V (Section 7), Article VI, Article
VII, Article XII, Article XIII, and Article XIV of the Registrant's
By-laws, as amended, previously filed as Exhibit (2) to Amendment No. 2 to
the Registration Statement.
* Previously filed with Pre-Effective Amendment No. 2 to the Registration
Statement.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT SEPTEMBER
TITLE OF CLASS 30, 1994
- --------------------------------------------------------------------------------- ---------------------
<S> <C>
Shares of Class A Common Stock, par value $0.10 per share........................ 3
Shares of Class B Common Stock, par value $0.10 per share........................ 11
Shares of Class C Common Stock, par value $0.10 per share........................ 0
Shares of Class D Common Stock, par value $0.10 per share........................ 0
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article V 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, Class B and Class C Distribution
Agreements.
C-2
<PAGE>
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, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933 (the "Act"),
against certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer, or controlling person of the Registrant
and the principal
C-3
<PAGE>
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 Growth Fund, Inc., Merrill Lynch Asset 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 Global SmallCap
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.,
C-4
<PAGE>
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 P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Manager and FAM is also P.O. 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, Monagle and Ms. Griffin are directors,
trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
- ------------------------------------ ---------------------------- ---------------------------------------------
<S> <C> <C>
ML & Co. Limited Partner Financial Services Holding Company
Merrill Lynch Management, Inc. Limited Partner Investment Advisory Services; Limited Partner
of FAM
Princeton Services, Inc. General Partner General Partner of FAM
("Princeton Services")
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
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
- ------------------------------------ ---------------------------- ---------------------------------------------
<S> <C> <C>
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 Counsel and
General Counsel and Secretary of FAM; Senior Vice President,
Secretary General Counsel, Director and Secretary of
Princeton Services, Director of MLFD
Ronald M. Kloss Senior Vice President and Senior Vice President and Controller of FAM;
Controller 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
Gerald M. Richard Senior Vice President and Senior Vice President and Treasurer of the
Treasurer Manager and FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Richard L. Rufener Senior Vice President Vice President of FAM; Senior Vice President
of Princeton Services
Ronald L. Welburn Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Anthony Wiseman Senior Vice President Senior Vice President of Princeton Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the investment companies referred to in the first paragraph of Item 28 except
Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation
Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., MuniAssets Fund, Inc., MuniBond Income Fund,
C-6
<PAGE>
Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund,
Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund, MuniYield Arizona Fund
II, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured
Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York Insured
Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High
Income Portfolio II, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew
York Holding, Inc. and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Breen, Graczyk, Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
- ------------------------------------ -------------------------------- ----------------------------
<S> <C> <C>
Terry K. Glenn President and Director Executive Vice President
Arthur Zeikel Director President and Director
Philip L. Kirstein Director None
William E. Aldrich Senior Vice President None
Robert W. Crook Senior Vice President None
Kevin P. Boman Vice President None
Michael J. Brady Vice President None
William M. Breen Vice President None
Sharon Creveling Vice President and None
Assistant Treasurer
Mark A. DeSario Vice President None
James T. Fatseas Vice President None
Stanley Graczyk Vice President None
Michelle T. Lau Vice President None
Debra W. Landsman-Yaros Vice President None
Gerald M. Richard Vice President and Treasurer Treasurer
Richard L. Rufener Vice President None
Salvatore Venezia Vice President None
William Wasel Vice President None
Robert Harris Secretary None
</TABLE>
(c) Not applicable.
C-7
<PAGE>
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.
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective amendment to this
Registration Statement, using financial statements which need not be certified,
within four to six months from the effective date of this Registration
Statement.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this Post-Effective Amendment
to its Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro, and State of New Jersey on the 14th day of October,
1994.
MERRILL LYNCH ASSET
INCOME FUND, INC.
By /s/ ARTHUR ZEIKEL
--------------------------------------
(ARTHUR ZEIKEL, 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>
/s/ ARTHUR ZEIKEL
------------------------------------------- President and Director (Principal October 14, 1994
Arthur Zeikel Executive Officer)
*
------------------------------------------- Director October 14, 1994
Joe Grills
*
------------------------------------------- Director October 14, 1994
Walter Mintz
*
------------------------------------------- Director October 14, 1994
Melvin R. Seiden
*
------------------------------------------- Director October 14, 1994
Harry Woolf
*
------------------------------------------- Director October 14, 1994
Stephen B. Swensrud
/s/ GERALD M. RICHARD
------------------------------------------- Treasurer (Principal Financial October 14, 1994
Gerald M. Richard and Accounting Officer)
*By /s/GERALD M. RICHARD
--------------------------------------
(Gerald M. Richard, Attorney-in-fact)
</TABLE>
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NUMBERED
NUMBER PAGE
- ------------- -----------
<C> <C> <S> <C>
6(a) -- Form of Amended Class A Shares Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc...................................................................
(c) -- Form of Class C Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.........................................................................
(d) -- Form of Class D Shares Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.........................................................................
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.................
13 -- Certificate of Merrill Lynch Asset Management, Inc........................................
15(a) -- Form of Class B Distribution Plan of the Registrant and Distribution Plan Sub-Agreement...
(b) -- Form of Class C Distribution Plan of the Registrant and Distribution Plan Sub-Agreement...
(c) -- Form of Class D Distribution Plan of the Registrant and Distribution Plan Sub-Agreement...
17(a) -- Financial Data Schedule -- Class A Shares.................................................
(b) -- Financial Data Schedule -- Class B Shares.................................................
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR Submission file due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<PAGE>
EXHIBIT 6(a)
<PAGE>
CLASS A SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 25th day of August, 1994, and amended this
21st day of October 1994, between MERRILL LYNCH ASSET INCOME FUND, INC., a
Maryland corporation (the "Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a
Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"), as an open-end investment
company, and it is affirmatively in the interest of the Fund to offer its shares
for sale continuously; and
WHEREAS, the Distributor is a securities firm engaged in the business
of selling shares of investment companies either directly to purchasers or
through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of the Class A shares of
common stock in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR. The Fund hereby appoints
the Distributor as the principal underwriter and distributor of the Fund to sell
Class A shares of common stock in the Fund (sometimes herein referred to as
"Class A shares") to eligible investors (as defined below) and hereby agrees
during the term of this Agreement to sell Class A shares of the Fund to the
Distributor upon the terms and conditions herein set forth.
<PAGE>
Section 2. EXCLUSIVE NATURE OF DUTIES. The Distributor shall be the
exclusive representative of the Fund to act as principal underwriter and
distributor, except that:
(a) The Fund may, upon written notice to the Distributor, from time
to time designate other principal underwriters and distributors of Class A
shares with respect to areas other than the United States as to which the
Distributor may have expressly waived in writing its right to act as such.
If such designation is deemed exclusive, the right of the Distributor under
this Agreement to sell Class A shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full effect until
terminated in accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class
A shares from the Fund shall not apply to Class A shares issued in
connection with the merger or consolidation of any other investment company
or personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding
shares of any such company by the Fund.
(c) Such exclusive right shall not apply to Class A shares issued by
the Fund pursuant to reinvestment of dividends or capital gains
distributions.
(d) Such exclusive right shall not apply to Class A shares issued by
the Fund pursuant to any conversion, exchange or reinstatement privilege
afforded redeeming shareholders or
2
<PAGE>
to any other Class A shares as shall be agreed between the Fund and the
Distributor from time to time.
Section 3. PURCHASE OF CLASS A SHARES FROM THE FUND.
(a) The Fund will offer its Class A shares and thereafter the
Distributor shall have the right to buy from the Fund the Class A shares needed,
but not more than the Class A shares needed (except for clerical errors in
transmission) to fill unconditional orders for Class A shares of the Fund placed
with the Distributor by eligible investors or securities dealers. Investors
eligible to purchase Class A shares shall be those persons so identified in the
currently effective prospectus and statement of additional information (the
"prospectus" and "statement of additional information," respectively) under the
Securities Act of 1933, as amended (the "Securities Act"), relating to such
Class A shares ("eligible investors"). The price which the Distributor shall
pay for any Class A shares so purchased from the Fund shall be the net asset
value, determined as set forth in Section 3(d) hereof, used in determining the
public offering price on which such orders were based.
(b) The Class A shares are to be resold by the Distributor to
eligible investors at the public offering price, as set forth in Section 3(c)
hereof, or to securities dealers having agreements with the Distributor upon the
terms and conditions set forth in Section 7 hereof.
(c) The public offering price of the Class A shares, I.E., the price
per share at which the Distributor or selected dealers may sell Class A shares
to eligible investors, shall be the
3
<PAGE>
public offering price as set forth in the prospectus and statement of additional
information relating to such Class A shares, but not to exceed the net asset
value at which the Distributor is to purchase the Class A shares, plus a sales
charge not to exceed 4.0% of the public offering price (4.17% of the net amount
invested), subject to reductions for volume purchases. Class A shares may be
sold to certain Directors, officers and employees of the Fund, directors and
employees of Merrill Lynch & Co., Inc., and its subsidiaries, and to certain
other persons described in the prospectus and statement of additional
information, without a sales charge or at a reduced sales charge, upon terms and
conditions set forth in the prospectus and the statement of additional
information. If the public offering price does not equal an even cent, the
public offering price may be adjusted to the nearest cent. All payments to the
Fund hereunder shall be made in the manner set forth in Section 3(f).
(d) The net asset value of the Class A shares shall be determined by
the Fund or any agent of the Fund in accordance with the method set forth in the
prospectus and statement of additional information of the Fund and guidelines
established by the Directors.
(e) The Fund shall have the right to suspend the sale of its Class A
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend the
sale of its Class A shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by Federal or
New
4
<PAGE>
York authorities, or if there shall have been some other extraordinary event,
which, in the judgment of the Fund, makes it impracticable or inadvisable to
sell the Class A shares.
(f) The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class A shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class A shares for eligible
investors. The Fund (or its agent) will confirm orders upon their receipt, will
make appropriate book entries and, upon receipt by the Fund (or its agent) of
payment therefor, will deliver deposit receipts or certificates for such Class
A shares pursuant to the instructions of the Distributor. Payment shall be made
to the Fund in New York Clearing House funds. The Distributor agrees to cause
such payment and such instructions to be delivered promptly to the Fund (or its
agent).
Section 4. REPURCHASE OR REDEMPTION OF SHARES BY THE FUND.
(a) Any of the outstanding Class A shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class A
shares so tendered in accordance with its obligations as set forth in Article VI
of its Articles of Incorporation, as amended from time to time, and in
accordance with the applicable provisions set forth in the prospectus and
statement of additional information. The price to be paid to redeem or
repurchase the Class A shares shall be equal to the net asset value
5
<PAGE>
calculated in accordance with the provisions of Section 3(d) hereof less any
contingent deferred sales charge ("CDSC"), redemption fee or other charge(s), if
any, set forth in the prospectus and statement of additional information of the
Fund. All payments by the Fund hereunder shall be made in the manner set forth
below. The redemption or repurchase by the Fund of any of the Class A shares
purchased by or through the Distributor will not affect the sales charge secured
by the Distributor or any selected dealer in the course of the original sale,
except that if any Class A shares are tendered for redemption or repurchase
within seven business days after the date of the confirmation of the original
purchase, the right to the sales charge shall be forfeited by the Distributor
and the selected dealer which sold such Class A shares.
The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor in New
York Clearing House funds on or before the seventh business day subsequent to
its having received the notice of redemption in proper form. The proceeds of
any redemption of shares shall be paid by the Fund as follows: (i) any
applicable CDSC shall be paid to the Distributor, and (ii) the balance shall be
paid to or for the account of the shareholder, in each case in accordance with
the applicable provisions of the prospectus and statement of additional
information.
(b) Redemption of Class A shares or payment may be suspended at times
when the New York Stock Exchange is suspended, when trading on said Exchange is
suspended, when trading on said
6
<PAGE>
Exchange is restricted, when an emergency exists as a result of which disposal
by the Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or during any other period when the Securities and Exchange Commission,
by order, so permits.
Section 5. DUTIES OF THE FUND.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Class A shares
of the Fund, and this shall include, upon request by the Distributor, one
certified copy of all financial statements prepared for the Fund by independent
public accountants. The Fund shall make available to the Distributor such
number of copies of the prospectus and statement of additional information as
the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to any
necessary approval of the Class A shareholders, all necessary action to fix the
number of authorized Class A shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Class A shares as the Distributor reasonably
may be expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of Class A shares for sale under the
securities laws of such states as the Distributor and the Fund may approve. Any
such qualification may
7
<PAGE>
be withheld, terminated or withdrawn by the Fund at any time in its discretion.
As provided in Section 8(c) hereof, the expense of qualification and maintenance
of qualification shall be borne by the Fund. The Distributor shall furnish such
information and other material relating to its affairs and activities as may be
required by the Fund in connection with such qualification.
(d) The Fund will furnish, in reasonable quantities upon request by
the Distributor, copies of annual and interim reports of the Fund.
Section 6. DUTIES OF THE DISTRIBUTOR.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class A shares of the Fund, but shall not be obligated to sell any
specific number of Class A shares. The services of the Distributor to the Fund
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class A shares of the Fund, the Distributor shall
use its best efforts in all respects duly to conform with the requirements of
all federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Fund to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of
8
<PAGE>
additional information and any sales literature specifically approved by the
Fund.
(c) The Distributor shall adopt and follow procedures, as approved by
the officers of the Fund, for the confirmation of sales to eligible investors
and selected dealers, the collection of amounts payable by eligible investors
and selected dealers on such sales, and the cancellation of unsettled
transactions, as may be necessary to comply with the requirements of the
National Association of Securities Dealers, Inc. (the "NASD"), as such
requirements may from time to time exist.
Section 7. SELECTED DEALERS AGREEMENT.
(a) The Distributor shall have the right to enter into selected
dealers agreements with securities dealers of its choice ("selected dealers")
for the sale of Class A shares and fix therein the portion of the sales charge
which may be allocated to the selected dealers; provided that the Fund shall
approve the forms of agreements with dealers and the dealer compensation set
forth therein. Class A shares sold to selected dealers shall be for resale by
such dealers only at the public offering price(s) set forth in the prospectus
and statement of additional information. The initial form of agreement with
selected dealers to be used in the continuous offering of the Class A shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer and sell
Class A shares only to selected dealers which are members in good standing of
the NASD.
9
<PAGE>
Section 8. PAYMENT OF EXPENSES.
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class A
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments of
sales commissions to financial consultants. In addition, after the
prospectuses, statements of additional information and annual and interim
reports have been prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof which are to be
used in connection with the offering of Class A shares to selected dealers or
eligible investors pursuant to this Agreement. The Distributor shall bear the
costs and expenses of preparing, printing and distributing any other literature
used by the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class A shares for sale to eligible
investors and any expenses of advertising incurred by the Distributor in
connection with such offering.
10
<PAGE>
(c) The Fund shall bear the cost and expenses of qualification of the
Class A shares for sale pursuant to this Agreement, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5(c) hereof and the cost and
expenses payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5(c)
hereof.
Section 9. INDEMNIFICATION.
(a) The Fund shall indemnify and hold harmless the Distributor and
each person, if any, who controls the Distributor against any loss, liability,
claim, damage or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damage or expense and reasonable
counsel fees incurred in connection therewith), as incurred, arising by reason
of any person acquiring any Class A shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the ground that the
registration statement or related prospectus or statement of additional
information, as from time to time amended and supplemented, or an annual or
interim report to shareholders of the Fund, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading, unless such
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Fund in connection therewith by or on behalf of the
Distributor; provided, however, that in no case
11
<PAGE>
(i) is the indemnity of the Fund in favor of the Distributor and any such
controlling persons to be deemed to protect such Distributor or any such
controlling persons thereof against any liability to the Fund or its security
holders to which the Distributor or any such controlling persons would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of their duties or by reason of the reckless disregard of their
obligations and duties under this Agreement, or (ii) is the Fund to be liable
under its indemnity agreement contained in this paragraph with respect to any
claim made against the Distributor or any such controlling persons, unless the
Distributor or such controlling persons, as the case may be, shall have notified
the Fund in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon the Distributor or such controlling persons (or after the
Distributor or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund of any such
claim shall not relieve it from any liability which it may have to the person
against whom such action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Fund will be entitled to participate
at its own expense in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Fund elects to assume
the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Distributor or such controlling person or persons, defendant
or
12
<PAGE>
defendants in the suit. In the event the Fund elects to assume the defense
of any such suit and retain such counsel, the Distributor or such controlling
person or persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case the Fund does
not elect to assume the defense of any such suit, it will reimburse the
Distributor or such controlling person or persons, defendant or defendants in
the suit, for the reasonable fees and expenses of any counsel retained by them.
The Fund shall promptly notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or Directors in
connection with the issuance or sale of any of the Class A shares.
(b) The Distributor shall indemnify and hold harmless the Fund and
each of its Directors and officers and each person, if any, who controls the
Fund against any loss, liability, claim, damage or expense described in the
foregoing indemnity contained in subsection (a) of this Section, but only with
respect to statements or omissions made in reliance upon, and in conformity
with, information furnished to the Fund in writing by or on behalf of the
Distributor for use in connection with the registration statement or related
prospectus or statement of additional information, as from time to time amended,
or the annual or interim reports to Class A shareholders. In case any action
shall be brought against the Fund or any person so indemnified, in respect of
which indemnity may be sought against the Distributor, the Distributor shall
have the rights and duties given to the Fund, and the Fund and each person so
indemnified shall have the rights and duties
13
<PAGE>
given to the Distributor by the provisions of subsection (a) of this Section 9.
Section 10. MERRILL LYNCH MUTUAL FUND ADVISER PROGRAM. In connection
with the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized to
offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of expenses and indemnification
obligations of the Fund and the Distributor.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT. This
Agreement shall become effective as of the date first above written and shall
remain in force until October 20, 1996 and thereafter, but only so long as such
continuance is specifically approved at least annually by (i) the Directors, or
by the vote of a majority of the outstanding voting securities of the Fund and
(ii) by a vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Directors or by vote of a majority of the outstanding voting
securities of the Fund, or by the Distributor, on sixty days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
14
<PAGE>
The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS OF THIS AGREEMENT. This Agreement may be
amended by the parties only if such amendment is specifically approved by
(i) the Directors, or by the vote of a majority of the outstanding voting
securities of the Fund and (ii) by a vote of a majority of those Directors of
the Fund who are not parties to this Agreement or interested persons of any such
party cast in person at a meeting called for the purpose of voting on such
approval.
Section 13. GOVERNING LAW. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of October 21, 1994.
MERRILL LYNCH ASSET INCOME FUND, INC.
By:
------------------------------------
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By:
------------------------------------
15
<PAGE>
EXHIBIT A
MERRILL LYNCH ASSET INCOME FUND, INC.
CLASS A SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with Merrill Lynch Asset Income Fund, Inc., a Maryland
corporation (the "Fund"), pursuant to which it acts as the distributor for
the sale of Class A shares of common stock, par value $0.10 per share,
(herein referred to as "Class A shares"), of the Fund and as such has the
right to distribute shares of the Fund for resale. The Fund is an
open-end investment company registered under the Investment Company Act of
1940, as amended, and its Class A shares are registered under the
Securities Act of 1933, as amended. You have received a copy of the Class
A Shares Distribution Agreement (the "Distribution Agreement") between
ourself and the Fund and reference is made herein to certain provisions of
such Distribution Agreement. The terms "Prospectus" and "Statement of
Additional Information" as used herein refer to the prospectus and
statement of additional information, respectively, on file with the
Securities and Exchange Commission which is part of the most recent
effective registration statement pursuant to the Securities Act of 1933,
as amended. We offer to sell to you, as a member of the Selected Dealers
Group, Class A shares of the Fund for resale to investors identified in
the Prospectus and Statement of Additional Information as eligible to
purchase Class A shares ("eligible investors") upon the following terms
and conditions:
1. In all sales of these Class A shares to eligible investors
you shall act as dealer for your own account, and in no transaction shall
you have any authority to act as agent for the Fund, for us or for any
other member of the Selected Dealers Group, except in connection with the
Merrill Lynch Mutual Fund Adviser program and such other special programs
as we from time to time agree, in which case you shall have authority to
offer and sell shares, as agent for the Fund, to participants in such
program.
2. Orders received from you will be accepted through us only
at the public offering price applicable to each order, as set forth in the
current Prospectus and Statement of Additional Information of the Fund.
The procedure relating to the handling of orders shall be subject to
Section 5 hereof and instructions which we or the Fund shall forward from
time to time to you. All orders
<PAGE>
are subject to acceptance or rejection by the Distributor or the Fund in
the sole discretion of either. The minimum initial and subsequent
purchase requirements are as set forth in the current Prospectus and
Statement of Additional Information of the Fund.
3. The sales charges for sales to eligible investors, computed
as percentages of the public offering price and the amount invested, and
the related discount to Selected Dealers are as follows:
<TABLE>
<CAPTION>
Discount to
Sales Charge Selected
Sales Charge as Percentage(1) Dealers as
Amount as Percentage of the Net Percentage
of of the Amount of the
Purchase Offering Price Invested Offering
Price
-------- -------------- -------- ------------
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.75%
$25,000 but less 3.75 3.90 3.50
than $50,000
$50,000 but less 3.25 3.36 3.00
than $100,000
$100,000 but less 2.50 2.56 2.25
than $250,000
$250,000 but less 1.50 1.52 1.25
than $1,000,000
$1,000,000 and over(2) 0.00 0.00 0.00
<FN>
____________________
(1) Rounded to the nearest one-hundredth percent.
(2) Initial sales charges may be waived for certain classes of offerees as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. Such purchases may be subject to a
contingent deferred sales charge as set forth in the current
Prospectus and Statement of Additional Information.
</TABLE>
The term "purchase" 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 Class A shares for his
or their own account and to single purchases by a trustee or other
fiduciary purchasing Class A shares for a single trust estate or single
fiduciary account although more than one beneficiary is involved. The
term "purchase" also includes purchases by any "company" as that term is
defined in the Investment Company Act of 1940, as amended, 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 shall not include purchases by any
group of individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company, policyholders of
an insurance company,
2
<PAGE>
customers of either a bank or broker-dealer or clients of an investment
adviser.
The reduced sales charges are applicable through a right of
accumulation under which certain eligible investors are permitted to
purchase Class A shares of the Fund at the offering price applicable to
the total of (a) the public offering price of the shares then being
purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of the
Class A shares of the Fund and of any other investment company with an
initial sales charge or deferred sales charge for which the Distributor
acts as the distributor. For any such right of accumulation to be made
available, the Distributor must be provided at the time of purchase, by
the purchaser or you, with sufficient information to permit confirmation
of qualification, and acceptance of the purchase order is subject to such
confirmation.
The reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A shares or of any other investment
company with an initial sales charge for which the Distributor acts as the
distributor made through you within a thirteen-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided
in the Prospectus. A purchase not originally made pursuant to a Letter of
Intention may be included under a subsequent letter executed within 90
days of such purchase if the Distributor is informed in writing of this
intent within such 90-day period. If the intended amount of shares is not
purchased within the thirteen-month period, an appropriate price
adjustment will be made pursuant to the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts of
any sales made by you to eligible investors qualifying for reduced sales
charges. Further information as to the reduced sales charges pursuant to
the right of accumulation or a Letter of Intention is set forth in the
Prospectus and Statement of Additional Information.
4. You shall not place orders for any of the Class A shares
unless you have already received purchase orders for such Class A shares
at the applicable public offering prices and subject to the terms hereof
and of the Distribution Agreement. You agree that you will not offer or
sell any of the Class A shares except under circumstances that will result
in compliance with the applicable Federal and state securities laws and
that in connection with sales and offers to sell Class A shares you will
furnish to each person to whom any such sale or offer is made a copy of
the Prospectus (as then amended or supplemented) and will not furnish to
any person any information relating to the Class A shares of the Fund
which is inconsistent in any respect with the information contained in the
Prospectus or Statement of Additional Information (as then amended or
supplemented) or cause any advertisement to be
3
<PAGE>
published in any newspaper or posted in any public place without our
consent and the consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Fund for Class A shares of the Fund to be
resold by us to you subject to the applicable terms and conditions
governing the placement of orders by us set forth in Section 3 of the
Distribution Agreement and subject to the compensation provisions of
Section 3 hereof, and (ii) to tender Class A shares directly to the Fund
or its agent for redemption subject to the applicable terms and conditions
set forth in Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such withholding: E.G.,
by a change in the "net asset value" from that used in determining the
offering price to your customers.
7. If any Class A shares sold to you under the terms of this
Agreement are repurchased by the Fund or by us for the account of the Fund
or are tendered for redemption within seven business days after the date
of the confirmation of the original purchase by you, it is agreed that you
shall forfeit your right to, and refund to us, any discount received by
you on such Class A shares.
8. No person is authorized to make any representations
concerning Class A shares of the issuer except those contained in the
current Prospectus or Statement of Additional Information of the Fund and
in such printed information subsequently issued by us or the Fund as
information supplemental to such Prospectus and Statement of Additional
Information. In purchasing Class A shares through us you shall rely
solely on the representations contained in the Prospectus or Statement of
Additional Information and supplemental information above mentioned. Any
printed information which we furnish you other than the Fund's Prospectus
or Statement of Additional Information, periodic reports and proxy
solicitation material is our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no
liability or responsibility to you in these respects unless expressly
assumed in connection therewith.
9. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to the time
of offering or sale and you agree thereafter to deliver to such purchasers
copies of the annual and interim reports and proxy solicitation materials
of the Fund. You further agree to endeavor to obtain proxies from such
purchasers. Additional copies of the Prospectus and Statement of
Additional Information, annual or interim reports and proxy solicitation
materials of the Fund will be supplied to you in reasonable quantities
upon request.
10. We reserve the right in our discretion, without notice, to
suspend sales or withdraw the offering of Class A shares
4
<PAGE>
entirely or to certain persons or entities in a class or classes specified
by us. Each party hereto has the right to cancel this agreement upon
notice to the other party.
11. We shall have full authority to take such action as we may
deem advisable in respect of all matters pertaining to the continuous
offering. We shall be under no liability to you except for lack of good
faith and for obligations expressly assumed by us herein. Nothing
contained in this paragraph is intended to operate as, and the provisions
of this paragraph shall not in any way whatsoever constitute, a waiver by
you of compliance with any provision of the Securities Act of 1933, as
amended, or of the rules and regulations of the Securities and Exchange
Commission issued thereunder.
12. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any sales in
the United States, we both hereby agree to abide by the Rules of Fair
Practice of such Association.
13. Upon application to us, we will inform you as to the states
in which we believe the Class A shares have been qualified for sale under,
or are exempt from the requirements of, the respective securities laws of
such states, but we assume no responsibility or obligation as to your
right to sell shares in any jurisdiction. We will file with the
Department of State in New York a Further State Notice with respect to the
shares, if necessary.
14. All communications to us should be sent to the address set
forth below. Any notice to you shall be duly given if mailed or
telegraphed to you at the address specified by you below.
5
<PAGE>
15. Your first order placed pursuant to this Agreement for the
purchase of Class A shares of the Fund will represent your acceptance of
this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By:
----------------------------------
Authorized Signature
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, N.J. 08543-9011
Accepted:
Firm Name:
-----------------------------------------
By:
------------------------------------------------
Address:
-------------------------------------------
---------------------------------------------------
Date:
----------------------------------------------
6
<PAGE>
EXHIBIT 6(c)
<PAGE>
CLASS C SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 21st day of October 1994, between MERRILL LYNCH
ASSET INCOME FUND, INC., a Maryland corporation (the "Fund"), and MERRILL
LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), as an open-end investment company,
and it is affirmatively in the interest of the Fund to offer its shares for sale
continuously; and
WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement with
each other with respect to the continuous offering of the Fund's Class C shares
in order to promote the growth of the Fund and facilitate the distribution of
its Class C shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR. The Fund hereby appoints
the Distributor as the principal underwriter and distributor of the Fund to sell
Class C shares of common stock in the Fund (sometimes herein referred to as
"Class C shares") to
<PAGE>
the public and hereby agrees during the term of this Agreement to sell shares of
the Fund to the Distributor upon the terms and conditions herein set forth.
Section 2. EXCLUSIVE NATURE OF DUTIES. The Distributor shall be the
exclusive representative of the Fund to act as principal underwriter and
distributor of the Class C shares, except that:
(a) The Fund may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class C shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class C shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class C
shares from the Fund shall not apply to Class C shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2
<PAGE>
(c) Such exclusive right also shall not apply to Class C shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
(d) Such exclusive right also shall not apply to Class C shares issued by
the Fund pursuant to any conversion, exchange or reinstatement privilege
afforded redeeming shareholders or to any other Class C shares as shall be
agreed between the Fund and the Distributor from time to time.
Section 3. PURCHASE OF CLASS C SHARES FROM THE FUND.
(a) It is contemplated that the Fund will commence an offering of its
Class C shares, and thereafter the Distributor shall have the right to buy from
the Fund the Class C shares needed, but not more than the Class C shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Class C shares of the Fund placed with the Distributor by eligible investors or
securities dealers. Investors eligible to purchase Class C shares shall be
those persons so identified in the currently effective prospectus and statement
of additional information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act of 1933, as
amended (the "Securities Act"), relating to such Class C shares. The price which
the Distributor shall pay for the Class C shares so purchased from the Fund
shall be the net asset value, determined as set forth in Section 3(c) hereof.
3
<PAGE>
(b) The Class C shares are to be resold by the Distributor to investors
at net asset value, as set forth in Section 3(c) hereof, or to securities
dealers having agreements with the Distributor upon the terms and conditions set
forth in Section 7 hereof.
(c) The net asset value of Class C shares of the Fund shall be determined
by the Fund or any agent of the Fund in accordance with the method set forth in
the prospectus and statement of additional information and guidelines
established by the Board of Directors of the Fund.
(d) The Fund shall have the right to suspend the sale of its Class C
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend the
sale of its Class C shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by Federal or
New York authorities, or if there shall have been some other event, which, in
the judgment of the Fund, makes it impracticable or inadvisable to sell the
Class C shares.
(e) The Fund, or any agent of the Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Class C shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Class C shares. The Fund
4
<PAGE>
(or its agent) will confirm orders upon their receipt, will make appropriate
book entries and, upon receipt by the Fund (or its agent) of payment therefor,
will deliver deposit receipts or certificates for such Class C shares pursuant
to the instructions of the Distributor. Payment shall be made to the Fund in
New York Clearing House funds. The Distributor agrees to cause such payment and
such instructions to be delivered promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF CLASS C SHARES BY THE FUND.
(a) Any of the outstanding Class C shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Class C shares so
tendered in accordance with its obligations as set forth in Article VII of its
Articles of Incorporation, as amended from time to time, and in accordance with
the applicable provisions set forth in the prospectus and statement of
additional information of the Fund. The price to be paid to redeem or
repurchase the Class C shares shall be equal to the net asset value calculated
in accordance with the provisions of Section 3(c) hereof, less any contingent
deferred sales charge ("CDSC"), redemption fee or other charge(s), if any, set
forth in the prospectus and statement of additional information of the Fund.
All payments by the Fund hereunder shall be made in the manner set forth below.
5
<PAGE>
The Fund shall pay the total amount of the redemption price as defined in
the above paragraph pursuant to the instructions of the Distributor on or before
the seventh business day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of shares shall be
paid by the Fund as follows: (i) any applicable CDSC shall be paid to the
Distributor, and (ii) the balance shall be paid to or for the account of the
shareholder, in each case in accordance with the applicable provisions of the
prospectus and statement of additional information.
(b) Redemption of Class C shares or payment may be suspended at times
when the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. DUTIES OF THE FUND.
(a) The Fund shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class C shares of the
Fund, and this shall include, upon request by the Distributor, one certified
copy of all
6
<PAGE>
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
prospectus and statement of additional information as the Distributor shall
reasonably request.
(b) The Fund shall take, from time to time, but subject to any necessary
approval of the shareholders, all necessary action to fix the number of
authorized shares and such steps as may be necessary to register the same under
the Securities Act to the end that there will be available for sale such number
of Class C shares as the Distributor reasonably may be expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class C shares for sale under the
securities laws of such states as the Distributor and the Fund may approve. Any
such qualification may be withheld, terminated or withdrawn by the Fund at any
time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualification.
(d) The Fund will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.
7
<PAGE>
Section 6. DUTIES OF THE DISTRIBUTOR.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class C shares of the Fund but shall not be obligated to sell any
specific number of shares. The services of the Distributor to the Fund
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class C shares of the Fund, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Fund to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Fund, for the confirmation of sales to investors and selected
dealers, the collection of amounts payable by investors and selected dealers on
such sales, and the cancellation of unsettled transactions, as may be necessary
to comply with the requirements of the National Association
8
<PAGE>
of Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.
Section 7. SELECTED DEALER AGREEMENTS.
(a) The Distributor shall have the right to enter into selected dealer
agreements with securities dealers of its choice ("selected dealers") for the
sale of Class C shares; provided, that the Fund shall approve the forms of
agreements with dealers. Class C shares sold to selected dealers shall be for
resale by such dealers only at net asset value determined as set forth in
Section 3(c) hereof. The form of agreement with selected dealers to be used
during the continuous offering of the shares is attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer and sell Class
C shares only to such selected dealers that are members in good standing of the
NASD.
Section 8. PAYMENT OF EXPENSES.
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class C
shareholders (including but not limited to the expense of setting in type any
such registration statements,
9
<PAGE>
prospectuses, statements of additional information, annual or interim reports or
proxy materials).
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments of
sales commissions to financial consultants. In addition, after the
prospectuses, statements of additional information and annual and interim
reports have been prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof which are to be
used in connection with the offering of Class C shares to selected dealers or
investors pursuant to this Agreement. The Distributor shall bear the costs and
expenses of preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in connection
with the offering of the Class C shares for sale to the public and any expenses
of advertising incurred by the Distributor in connection with such offering. It
is understood and agreed that so long as the Fund's Class C Shares Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act remains in effect,
any expenses incurred by the Distributor hereunder may be paid from amounts
recovered by it from the Fund under such Plan.
(c) The Fund shall bear the cost and expenses of qualification of the
Class C shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of quali-
10
<PAGE>
fying the Fund as a broker or dealer in such states of the United States or
other jurisdictions as shall be selected by the Fund and the Distributor
pursuant to Section 5(c) hereof and the cost and expenses payable to each such
state for continuing qualification therein until the Fund decides to
discontinue such qualification pursuant to Section 5(c) hereof.
Section 9. INDEMNIFICATION.
(a) The Fund shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor against any loss, liability, claim,
damage or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by reason of any
person acquiring any Class C shares, which may be based upon the Securities Act,
or on any other statute or at common law, on the ground that the registration
statement or related prospectus and statement of additional information, as from
time to time amended and supplemented, or an annual or interim report to Class C
shareholders of the Fund, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with, information
furnished to the Fund in connection therewith by or on behalf of the
Distributor; provided, however, that in no case (i)
11
<PAGE>
is the indemnity of the Fund in favor of the Distributor and any such
controlling persons to be deemed to protect such Distributor or any such
controlling persons thereof against any liability to the Fund or its security
holders to which the Distributor or any such controlling persons would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of their duties or by reason of the reckless disregard of their
obligations and duties under this Agreement; or (ii) is the Fund to be liable
under its indemnity agreement contained in this paragraph with respect to any
claim made against the Distributor or any such controlling persons, unless the
Distributor or such controlling persons, as the case may be, shall have notified
the Fund in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon the Distributor or such controlling persons (or after the
Distributor or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund of any such
claim shall not relieve it from any liability which it may have to the person
against whom such action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Fund will be entitled to participate
at its own expense in the defense or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Fund elects to assume
the defense, such defense shall be
12
<PAGE>
conducted by counsel chosen by it and satisfactory to the Distributor or such
controlling person or persons, defendant or defendants in the suit. In the
event the Fund elects to assume the defense of any such suit and retain such
counsel, the Distributor or such controlling person or persons, defendant or
defendants in the suit shall bear the fees and expenses, as incurred, of any
additional counsel retained by them, but in case the Fund does not elect to
assume the defense of any such suit, it will reimburse the Distributor or such
controlling person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses, as incurred, of any counsel retained by them. The
Fund shall promptly notify the Distributor of the commencement of any litigation
or proceedings against it or any of its officers or Directors in connection with
the issuance or sale of any of the Class C shares.
(b) The Distributor shall indemnify and hold harmless the Fund and each
of its Directors and officers and each person, if any, who controls the Fund
against any loss, liability, claim, damage or expense, as incurred, described in
the foregoing indemnity contained in subsection (a) of this Section, but only
with respect to statements or omissions made in reliance upon, and in conformity
with, information furnished to the Fund in writing by or on behalf of the
Distributor for use in connection with the registration statement or related
prospectus and statement of additional information, as from time to time
amended, or the
13
<PAGE>
annual or interim reports to shareholders. In case any action shall be brought
against the Fund or any person so indemnified, in respect of which indemnity may
be sought against the Distributor, the Distributor shall have the rights and
duties given to the Fund, and the Fund and each person so indemnified shall have
the rights and duties given to the Distributor by the provisions of subsection
(a) of this Section 9.
Section 10. DURATION AND TERMINATION OF THIS AGREEMENT. This Agreement
shall become effective as of the date first above written and shall remain in
force until October __, 1995 and thereafter, but only for so long as such
continuance is specifically approved at least annually by (i) the Board of
Directors of the Fund or by the vote of a majority of the outstanding voting
securities of the Fund and (ii) by the vote of a majority of those Directors who
are not parties to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Directors or by vote of a majority of the outstanding voting
securities of the Fund, or by the Distributor, on sixty days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested
14
<PAGE>
person", when used in this Agreement, shall have the respective meanings
specified in the Investment Company Act.
Section 11. AMENDMENTS OF THIS AGREEMENT. This Agreement may be
amended by the parties only if such amendment is specifically approved by (i)
the Board of Directors of the Fund or by the vote of a majority of outstanding
voting securities of the Fund and (ii) by the vote of a majority of those
Directors of the Fund who are not parties to this Agreement or interested
persons of any such party cast in person at a meeting called for the purpose of
voting on such approval.
Section 12. GOVERNING LAW. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
MERRILL LYNCH ASSET INCOME FUND, INC.
By _______________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By _______________________________________
Title:
15
<PAGE>
EXHIBIT A
MERRILL LYNCH ASSET INCOME FUND, INC.
CLASS C SHARES OF COMMON STOCK
SELECTED DEALER AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with Merrill Lynch Asset Income Fund, Inc., a Maryland corporation (the "Fund"),
pursuant to which it acts as the distributor for the sale of Class C shares of
common stock, par value $0.10 per share (herein referred to as the "Class C
shares"), of the Fund and as such has the right to distribute Class C shares of
the Fund for resale. The Fund is an open-end investment company registered
under the Investment Company Act of 1940, as amended, and its Class C shares
being offered to the public are registered under the Securities Act of 1933, as
amended. You have received a copy of the Class C Shares Distribution Agreement
(the "Distribution Agreement") between ourself and the Fund and reference is
made herein to certain provisions of such Distribution Agreement. The terms
"Prospectus" and "Statement of Additional Information" as used herein refer to
the prospectus and statement of additional information, respectively, on file
with the Securities and Exchange Commission which is part of the most recent
effective registration statement pursuant to the Securities Act of 1933, as
amended. We offer to sell to you, as a member of the Selected Dealers Group,
Class C shares of the Fund upon the following terms and conditions:
1. In all sales of these Class C shares to the public, you shall act as
dealer for your own account and in no transaction shall you have any authority
to act as agent for the Fund, for us or for any other member of the Selected
Dealers Group.
2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling of orders shall be subject to Section 4 hereof and
instructions which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor or the Fund in
the sole discretion of either. The minimum initial and subsequent purchase
requirements are as set forth in the current Prospectus and Statement of
Additional Information of the Fund.
1
<PAGE>
3. You shall not place orders for any of the Class C shares unless you
have already received purchase orders for such Class C shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class C shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class C shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class C shares of the Fund which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund.
4. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for Class C shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and (ii) to tender
Class C shares directly to the Fund or its agent for redemption subject to the
applicable terms and conditions set forth in Section 4 of the Distribution
Agreement.
5. You shall not withhold placing orders received from your customers so
as to profit yourself as a result of such withholding: E.G., by a change in
the "net asset value" from that used in determining the offering price to your
customers.
6. No person is authorized to make any representations concerning Class C
shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class C
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no liability
or responsibility to you in these respects unless expressly assumed in
connection therewith.
7. You agree to deliver to each of the purchasers making purchases from
you a copy of the then current Prospectus and, if
2
<PAGE>
requested, the Statement of Additional Information at or prior to the time of
offering or sale and you agree thereafter to deliver to such purchasers copies
of the annual and interim reports and proxy solicitation materials of the Fund.
You further agree to endeavor to obtain proxies from such purchasers.
Additional copies of the Prospectus and Statement of Additional Information,
annual or interim reports and proxy solicitation materials of the Fund will be
supplied to you in reasonable quantities upon request.
8. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class C shares entirely or to certain persons
or entities in a class or classes specified by us. Each party hereto has the
right to cancel this Agreement upon notice to the other party.
9. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by you of compliance with any provision of
the Securities Act of 1933, as amended, or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.
10. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.
11. Upon application to us, we will inform you as to the states in which
we believe the Class C shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell Class C shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class C shares, if necessary.
12. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
3
<PAGE>
13. Your first order placed pursuant to this Agreement for the purchase of
Class C shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By __________________________________________
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:_____________________________________________________
By:____________________________________________________________
Address:_______________________________________________________
_______________________________________________________________
Date:__________________________________________________________
4
<PAGE>
EXHIBIT 6(d)
<PAGE>
CLASS D SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 21st day of October 1994 between MERRILL LYNCH
ASSET INCOME FUND, INC., a Maryland corporation (the "Fund"), and MERRILL LYNCH
FUNDS DISTRIBUTOR, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the "Investment Company Act"), as an open-end investment company,
and it is affirmatively in the interest of the Fund to offer its shares for sale
continuously; and
WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an agreement with
each other with respect to the continuous offering of the Class D shares of
common stock in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR. The Fund hereby appoints
the Distributor as the principal underwriter and distributor of the Fund to sell
Class D shares of common stock in the Fund (sometimes herein referred to as
"Class D shares") to the
<PAGE>
public and hereby agrees during the term of this Agreement to sell Class D
shares of the Fund to the Distributor upon the terms and conditions herein set
forth.
Section 2. EXCLUSIVE NATURE OF DUTIES. The Distributor shall be the
exclusive representative of the Fund to act as principal underwriter and
distributor, except that:
(a) The Fund may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class D shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class D shares in the areas so designated shall terminate, but
this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive right granted to the Distributor to purchase Class D
shares from the Fund shall not apply to Class D shares issued in connection with
the merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
(c) Such exclusive right also shall not apply to Class D shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2
<PAGE>
(d) Such exclusive right also shall not apply to Class D shares issued by
the Fund pursuant to any conversion, exchange or reinstatement privilege
afforded redeeming shareholders or to any other Class D shares as shall be
agreed between the Fund and the Distributor from time to time.
Section 3. PURCHASE OF CLASS D SHARES FROM THE FUND.
(a) It is contemplated that the Fund will commence an offering of its
Class D shares, and thereafter the Distributor shall have the right to buy from
the Fund the Class D shares needed, but not more than the Class D shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Class D shares of the Fund placed with the Distributor by eligible investors or
securities dealers. Investors eligible to purchase Class D shares shall be
those persons so identified in the currently effective prospectus and statement
of additional information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act of 1933, as
amended (the "Securities Act"), relating to such Class D shares. The price which
the Distributor shall pay for the Class D shares so purchased from the Fund
shall be the net asset value, determined as set forth in Section 3(d) hereof,
used in determining the public offering price on which such orders were based.
(b) The Class D shares are to be resold by the Distributor to investors
at the public offering price, as set forth in Section 3(c) hereof, or to
securities dealers having agreements
3
<PAGE>
with the Distributor upon the terms and conditions set forth in Section 7
hereof.
(c) The public offering price(s) of the Class D shares, I.E., the
price per share at which the Distributor or selected dealers may sell Class D
shares to the public, shall be the public offering price as set forth in the
prospectus and statement of additional information relating to such Class D
shares, but not to exceed the net asset value at which the Distributor is to
purchase the Class D shares, plus a sales charge not to exceed 4.00% of the
public offering price (4.17% of the net amount invested), subject to reductions
for volume purchases. Class D shares may be sold to certain Directors, officers
and employees of the Fund, directors and employees of Merrill Lynch & Co., Inc.
and its subsidiaries, and to certain other persons described in the prospectus
and statement of additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the prospectus and
statement of additional information. If the public offering price does not
equal an even cent, the public offering price may be adjusted to the nearest
cent. All payments to the Fund hereunder shall be made in the manner set forth
in Section 3(f).
(d) The net asset value of Class D shares shall be determined by the Fund
or any agent of the Fund in accordance with the method set forth in the
prospectus and statement of additional
4
<PAGE>
information of the Fund and guidelines established by the Board of Directors of
the Fund.
(e) The Fund shall have the right to suspend the sale of its Class D
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend the
sale of its Class D shares if trading on the New York Stock Exchange shall have
been suspended, if a banking moratorium shall have been declared by Federal or
New York authorities, or if there shall have been some other event, which, in
the judgment of the Fund, makes it impracticable or inadvisable to sell the
Class D shares.
(f) The Fund, or any agent of the Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Class D shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Class D shares. The Fund (or its agent) will
confirm orders upon their receipt, will make appropriate book entries and, upon
receipt by the Fund (or its agent) of payment therefor, will deliver deposit
receipts or certificates for such Class D shares pursuant to the instructions of
the Distributor. Payment shall be made to the Fund in New York Clearing House
funds. The Distributor agrees to cause such payment and such instructions to be
delivered promptly to the Fund (or its agent).
5
<PAGE>
Section 4. REPURCHASE OR REDEMPTION OF CLASS D SHARES BY THE FUND.
(a) Any of the outstanding Class D shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Class D shares so
tendered in accordance with its obligations as set forth in Article VII of its
Articles of Incorporation, as amended from time to time, and in accordance with
the applicable provisions set forth in the prospectus and statement of
additional information. The price to be paid to redeem or repurchase the Class
D shares shall be equal to the net asset value calculated in accordance with the
provisions of Section 3(d) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in the prospectus
and statement of additional information of the Fund. All payments by the Fund
hereunder shall be made in the manner set forth below. The redemption or
repurchase by the Fund of any of the Class D shares purchased by or through the
Distributor will not affect the sales charge secured by the Distributor or any
selected dealer in the course of the original sale, except that if any Class D
shares are tendered for redemption or repurchase within seven business days
after the date of the confirmation of the original purchase, the right to the
sales charge shall be forfeited by the Distributor and the selected dealer which
sold such Class D shares.
The Fund shall pay the total amount of the redemption price as defined in
the above paragraph pursuant to the instructions of
6
<PAGE>
the Distributor in New York Clearing House funds on or before the seventh
business day subsequent to its having received the notice of redemption in
proper form. The proceeds of any redemption of shares shall be paid by the Fund
as follows: (i) any applicable CDSC shall be paid to the Distributor, and (ii)
the balance shall be paid to or for the account of the shareholder, in each case
in accordance with the applicable provisions of the prospectus and statement of
additional information.
(b) Redemption of Class D shares or payment may be suspended at times
when the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. DUTIES OF THE FUND.
(a) The Fund shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class D shares of the
Fund, and this shall include, upon request by the Distributor, one certified
copy of all financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor
7
<PAGE>
such number of copies of the prospectus and statement of additional information
as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to any necessary
approval of the Class D shareholders, all necessary action to fix the number of
authorized Class D shares and such steps as may be necessary to register the
same under the Securities Act, to the end that there will be available for sale
such number of Class D shares as the Distributor may reasonably be expected to
sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class
D shares for sale under the securities laws of such states as the Distributor
and the Fund may approve. Any such qualification may be withheld, terminated or
withdrawn by the Fund at any time in its discretion. As provided in Section
8(c) hereof, the expense of qualification and maintenance of qualification shall
be borne by the Fund. The Distributor shall furnish such information and other
material relating to its affairs and activities as may be required by the Fund
in connection with such qualification.
(d) The Fund will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports of the Fund.
Section 6. DUTIES OF THE DISTRIBUTOR.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class D shares of the Fund but shall not be obligated to sell any
specific number of Class D shares. The
8
<PAGE>
services of the Distributor to the Fund hereunder are not to be deemed exclusive
and nothing herein contained shall prevent the Distributor from entering into
like arrangements with other investment companies so long as the performance of
its obligations hereunder is not impaired thereby.
(b) In selling the Class D shares of the Fund, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Fund to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Fund, for the confirmation of sales to investors and selected
dealers, the collection of amounts payable by investors and selected dealers on
such sales, and the cancellation of unsettled transactions, as may be necessary
to comply with the requirements of the National Association of Securities
Dealers, Inc. (the "NASD"), as such requirements may from time to time exist.
Section 7. SELECTED DEALERS AGREEMENTS.
(a) The Distributor shall have the right to enter into selected dealers
agreements with securities dealers of its choice
9
<PAGE>
("selected dealers") for the sale of Class D shares and fix therein the portion
of the sales charge which may be allocated to the selected dealers; provided
that the Fund shall approve the forms of agreements with dealers and the dealer
compensation set forth therein. Class D shares sold to selected dealers shall
be for resale by such dealers only at the public offering price(s) set forth in
the prospectus and statement of additional information. The form of agreement
with selected dealers to be used during the continuous offering of the Class D
shares is attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer and sell
Class D shares only to such selected dealers as are members in good standing of
the NASD.
Section 8. PAYMENT OF EXPENSES.
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class D
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).
10
<PAGE>
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments of
sales commissions to financial consultants. In addition, after the
prospectuses, statements of additional information and annual and interim
reports have been prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof which are to be
used in connection with the offering of Class D shares to selected dealers or
investors pursuant to this Agreement. The Distributor shall bear the costs and
expenses of preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in connection
with the offering of the Class D shares for sale to the public and any expenses
of advertising incurred by the Distributor in connection with such offering. It
is understood and agreed that so long as the Fund's Class D Shares Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act remains in effect,
any expenses incurred by the Distributor hereunder in connection with account
maintenance activities may be paid from amounts recovered by it from the Fund
under such plan.
(c) The Fund shall bear the cost and expenses of qualification of the
Class D shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Fund
11
<PAGE>
and the Distributor pursuant to Section 5(c) hereof and the cost and expenses
payable to each such state for continuing qualification therein until the Fund
decides to discontinue such qualification pursuant to Section 5(c) hereof.
Section 9. INDEMNIFICATION.
(a) The Fund shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor against any loss, liability, claim,
damage or expense (including the reasonable cost of investigating or defending
any alleged loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by reason of any
person acquiring any Class D shares, which may be based upon the Securities Act,
or on any other statute or at common law, on the ground that the registration
statement or related prospectus and statement of additional information, as from
time to time amended and supplemented, or an annual or interim report to
shareholders of the Fund, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with, information
furnished to the Fund in connection therewith by or on behalf of the
Distributor; provided, however, that in no case (i) is the indemnity of the Fund
in favor of the Distributor and any such controlling persons to be deemed to
protect such Distributor or any such controlling persons thereof against any
liability to the
12
<PAGE>
Fund or its security holders to which the Distributor or any such controlling
persons would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of their duties or by reason of the
reckless disregard of their obligations and duties under this Agreement; or (ii)
is the Fund to be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against the Distributor or any such
controlling persons, unless the Distributor or such controlling persons, as the
case may be, shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon the Distributor or such controlling
persons (or after the Distributor or such controlling persons shall have
received notice of such service on any designated agent), but failure to notify
the Fund of any such claim shall not relieve it from any liability which it may
have to the person against whom such action is brought otherwise than on account
of its indemnity agreement contained in this paragraph. The Fund will be
entitled to participate at its own expense in the defense or, if it so elects,
to assume the defense of any suit brought to enforce any such liability, but if
the Fund elects to assume the defense, such defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or such controlling
person or persons, defendant or defendants in the suit. In the event the Fund
elects to assume the defense of any such suit and retain such counsel, the
13
<PAGE>
Distributor or such controlling person or persons, defendant or defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them, but in case the Fund does not elect to assume the defense of any such
suit, it will reimburse the Distributor or such controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Fund shall promptly notify the Distributor of the
commencement of any litigation or proceedings against it or any of its officers
or Directors in connection with the issuance or sale of any of the Class D
shares.
(b) The Distributor shall indemnify and hold harmless the Fund and each
of its Directors and officers and each person, if any, who controls the Fund
against any loss, liability, claim, damage or expense described in the foregoing
indemnity contained in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity with,
information furnished to the Fund in writing by or on behalf of the Distributor
for use in connection with the registration statement or related prospectus and
statement of additional information, as from time to time amended, or the annual
or interim reports to Class D shareholders. In case any action shall be brought
against the Fund or any person so indemnified, in respect of which indemnity may
be sought against the Distributor, the Distributor shall have the rights and
duties given to the Fund, and the Fund and each person so indemnified
14
<PAGE>
shall have the rights and duties given to the Distributor by the provisions of
subsection (a) of this Section 9.
Section 10. MERRILL LYNCH MUTUAL FUND ADVISER PROGRAM. In connection
with the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized to
offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of expenses and indemnification
obligations of the Fund and the Distributor.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT. This Agreement
shall become effective as of the date first above written and shall remain in
force until October 20, 1996 and thereafter, but only for so long as such
continuance is specifically approved at least annually by (i) the Directors or
by the vote of a majority of the outstanding voting securities of the Fund and
(ii) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such party cast in person at a meeting
called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Directors or by vote of a majority of the outstanding voting
securities of the Fund, or by the Distributor, on sixty days' written notice to
the other party. This
15
<PAGE>
Agreement shall automatically terminate in the event of its assignment.
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS OF THIS AGREEMENT. This Agreement may be
amended by the parties only if such amendment is specifically approved by (i)
the Directors or by the vote of a majority of outstanding voting securities of
the Fund and (ii) by the vote of a majority of those Directors of the Fund who
are not parties to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such approval.
Section 13. GOVERNING LAW. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MERRILL LYNCH ASSET INCOME FUND, INC.
By___________________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By___________________________________________
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH ASSET INCOME FUND, INC.
CLASS D SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with Merrill Lynch Asset Income Fund, Inc., a Maryland corporation (the "Fund"),
pursuant to which it acts as the distributor for the sale of Class D shares of
common stock, par value $0.10 per share (herein referred to as "Class D
shares"), of the Fund and as such has the right to distribute Class D shares of
the Fund for resale. The Fund is an open-end investment company registered
under the Investment Company Act of 1940, as amended, and its Class D shares
being offered to the public are registered under the Securities Act of 1933, as
amended. You have received a copy of the Class D Shares Distribution Agreement
(the "Distribution Agreement") between ourself and the Fund and reference is
made herein to certain provisions of such Distribution Agreement. The terms
"Prospectus" and "Statement of Additional Information" used herein refer to the
prospectus and statement of additional information, respectively, on file with
the Securities and Exchange Commission which is part of the most recent
effective registration statement pursuant to the Securities Act of 1933, as
amended. We offer to sell to you, as a member of the Selected Dealers Group,
Class D shares of the Fund upon the following terms and conditions:
1. In all sales of these Class D shares to the public, you shall act as
dealer for your own account and in no transaction shall you have any authority
to act as agent for the Fund, for us or for any other member of the Selected
Dealers Group, except in connection with the Merrill Lynch Mutual Fund Adviser
program and such other special programs as we from time to time agree, in which
case you shall have authority to offer and sell shares, as agent for the Fund,
to participants in such program.
2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling of orders shall be subject to Section 5 hereof and
instructions
<PAGE>
which we or the Fund shall forward from time to time to you. All orders are
subject to acceptance or rejection by the Distributor or the Fund in the sole
discretion of either. The minimum initial and subsequent purchase requirements
are as set forth in the current Prospectus and Statement of Additional
Information of the Fund.
3. The sales charges for sales to the public, computed as percentages
of the public offering price and the amount invested, and the related discount
to Selected Dealers are as follows:
<TABLE>
<CAPTION>
Discount to
Selected
Sales Charge Dealers as
Sales Charge as Percentage* Percentage
as Percentage of the Net of the
of the Amount Offering
Amount of Purchase Offering Price Invested Price
- ------------------------- -------------- -------------- ----------
<S> <C> <C> <C>
Less than $25,000........ 4.00% 4.17% 3.75%
$25,000 but less
than $50,000............ 3.75% 3.90% 3.50%
$50,000 but less
than $100,000........... 3.25% 3.36% 3.00%
$100,000 but less
than $250,000........... 2.50% 2.56% 2.25%
$250,000 but less
than $1,000,000......... 1.50% 1.52% 1.25%
$1,000,000 and over**....
0.00% 0.00% 0.00%
___________________
<FN>
* Rounded to the nearest one-hundredth percent.
** Initial sales charges may be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchases may be subject to a contingent deferred sales charge as
set forth in the current Prospectus and Statement of Additional Information.
</TABLE>
2
<PAGE>
The term "purchase" 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 Class D shares for his or their own account and to
single purchases by a trustee or other fiduciary purchasing Class D shares for a
single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company" as that term is defined in the Investment Company Act of 1940, as
amended, 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 Class D shares of the Fund or Class D shares of other registered
investment companies at a discount; provided, however, that it shall not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser.
The reduced sales charges are applicable through a right of accumulation
under which eligible investors are permitted to purchase Class D shares of the
Fund at the offering price applicable to the total of (a) the public offering
price of the shares then being purchased plus (b) an amount equal to the then
current net asset value or cost, whichever is higher, of the purchaser's
combined holdings of Class A, Class B, Class C and Class D shares of the Fund
and of any other investment company with an initial 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 you, with sufficient information to permit confirmation of
qualification, and acceptance of the purchase order is subject to such
confirmation.
The reduced sales charges are applicable to purchases aggregating $10,000
or more of Class A shares or of Class D shares of any other investment company
with an initial sales charge for which the Distributor acts as the distributor
made through you within a thirteen-month period starting with the first purchase
pursuant to a Letter of Intention in the form provided in the Prospectus. A
purchase not originally made pursuant to a Letter of Intention may be included
under a subsequent letter executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. If
the intended amount of shares is not purchased within the thirteen-month period,
an appropriate price adjustment will be made pursuant to the terms of the Letter
of Intention.
You agree to advise us promptly at our request as to amounts of any sales
made by you to the public qualifying for reduced sales charges. Further
information as to the reduced sales charges pursuant to the
3
<PAGE>
right of accumulation or a Letter of Intention is set forth in the Prospectus
and Statement of Additional Information.
4. You shall not place orders for any of the Class D shares unless you
have already received purchase orders for such Class D shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class D shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class D shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class D shares of the Fund which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for Class D shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of orders
by us set forth in Section 3 of the Distribution Agreement and subject to the
compensation provisions of Section 3 hereof and (ii) to tender Class D shares
directly to the Fund or its agent for redemption subject to the applicable terms
and conditions set forth in Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from your customers
so as to profit yourself as a result of such withholding: E.G., by a change
in the "net asset value" from that used in determining the offering price to
your customers.
7. If any Class D shares sold to you under the terms of this Agreement
are repurchased by the Fund or by us for the account of the Fund or are tendered
for redemption within seven business days after the date of the confirmation of
the original purchase by you, it is agreed that you shall forfeit your right to,
and refund to us, any discount received by you on such Class D shares.
8. No person is authorized to make any representations concerning
Class D shares of the Fund except those contained in the current Prospectus
and Statement of Additional Information of the Fund and in such printed
information subsequently issued by us or the Fund as information supplemental
to such Prospectus and Statement of Additional Information. In purchasing
Class D shares through us you shall rely solely on the representations contained
in the Prospectus and Statement of Additional Information and supplemental
information above mentioned.
4
<PAGE>
Any printed information which we furnish you other than the Fund's Prospectus,
Statement of Additional Information, periodic reports and proxy solicitation
material is our sole responsibility and not the responsibility of the Fund, and
you agree that the Fund shall have no liability or responsibility to you in
these respects unless expressly assumed in connection therewith.
9. You agree to deliver to each of the purchasers making purchases from
you a copy of the then current Prospectus and, if requested, the Statement of
Additional Information at or prior to the time of offering or sale and you agree
thereafter to deliver to such purchasers copies of the annual and interim
reports and proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim reports
and proxy solicitation materials of the Fund will be supplied to you in
reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class D shares entirely or to certain persons
or entities in a class or classes specified by us. Each party hereto has the
right to cancel this agreement upon notice to the other party.
11. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by you of compliance with any provision of
the Securities Act of 1933, as amended, or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.
12. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States, we
both hereby agree to abide by the Rules of Fair Practice of such Association.
13. Upon application to us, we will inform you as to the states in which
we believe the Class D shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell Class D shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class D shares, if necessary.
5
<PAGE>
14. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
15. Your first order placed pursuant to this Agreement for the purchase
of Class D shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:__________________________________________
By:_________________________________________________
Address:____________________________________________
____________________________________________________
Date:_______________________________________________
6
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Asset Income Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 1 to Registration
Statement No. 33-53997 of our report dated July 26, 1994 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 14, 1994
<PAGE>
EXHIBIT 13
<PAGE>
[MLAM Letterhead]
October __, 1994
Merrill Lynch Asset Income
Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
Merrill Lynch Asset Management, L.P. ("MLAM") agrees to purchase
one share of Class C Common Stock, par value $.10 per share, and one share of
Class D Common Stock, par value $.10 per share (the "Shares"), of Merrill Lynch
Asset Income Fund, Inc. (the "Fund") at a price of $_____ per share. MLAM
shall tender to the Fund the amount of $______ in full payment for the
Shares.
MLAM represents and warrants to the Fund that the Shares are being
acquired for investment and not with a view to distribution thereof, and that
MLAM has no present intention to redeem or dispose of any of the Shares.
Very truly yours,
MERRILL LYNCH ASSET
MANAGEMENT, L.P.
By: PRINCETON SERVICES, INC.
Its General Partner
------------------------------
By:
Title:
<PAGE>
EXHIBIT 15(a)
<PAGE>
CLASS B SHARES DISTRIBUTION PLAN
OF
MERRILL LYNCH ASSET INCOME FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION plan made as of the 25th day of August, 1994, by and between
Merrill Lynch Asset Income Fund, Inc., a Maryland corporation (the "Fund"), and
Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H:
WHEREAS, the Fund intends to engage in business as an open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act");
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers;
WHEREAS, the Fund proposes to enter into a Class B Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act the exclusive distributor
and representative of the Fund in the offer and sale of the shares of Class B
Common Stock, per value $0.10 per share (the "Class B shares") of the Fund to
the public;
WHEREAS, the Fund desires to adopt this Class B Shares Distribution Plan
pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the
Fund will pay an account maintenance fee and a distribution fee to MLFD with
respect to the Fund's Class B shares;
WHEREAS, the Board of Directors of the Fund has determined that there is a
reasonable likelihood that adoption of this Class B Shares Distribution Plan
will benefit the Fund and its shareholders.
NOW, THEREFORE, the Fund hereby adopts, and the Distributor hereby agrees
to the terms of, this Class B Shares Distribution Plan (the "Plan") in
accordance with Rule 12b-1, under the Investment Company Act on the following
terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class B shares to compensate MLFD and securities firms with
which MLFD enters into related agreements ("Sub-Agreements") pursuant to
Paragraph 3 hereof for account maintenance activities with respect to Class B
shareholders of the Fund.
2. The Fund shall pay MLFD a distribution fee under the Plan at the end
of each month at the annual rate of .50% of the average daily net assets of the
Fund relating to Class B shares to
<PAGE>
compensate MLFD and securities firms with which MLFD enters into related
agreements ("Sub-Agreements") pursuant to Paragraph 3 hereof for providing sales
and promotional activities and services. Such activities and services will
relate to the sale, promotion and marketing of the Class B shares of the Fund.
Such expenditures may consist of sales commissions to financial consultants for
selling Class B shares of the Fund, compensation, sales incentives and payments
to sales and marketing personnel, and the payment of expenses incurred in its
sales and promotional activities including advertising expenditures related to
the Fund and the costs of preparing and distributing promotional materials.
3. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distribution fee to such Securities Firms as compensation for the
above-mentioned activities and services. Such Sub-Agreement shall provide that
the Securities Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting requirements set forth in
Paragraph 4 hereof.
4. MLFD shall provide the Fund for review by the Board of Directors,
and the Directors shall review, at least quarterly, a written report complying
with the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period.
5. This Plan shall not take effect until it has been approved by a vote
of at least a majority, as defined in the Investment Company Act, of the
outstanding Class B voting securities of the Fund.
6. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Directors of
the Fund and (b) those Directors of the Fund who are not "interested persons" of
the Fund, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on this Plan and such related
agreements.
7. This Plan shall continue in effect for so long as such continuance
is specifically approved at least annually in the manner provided for approval
of this Plan in Paragraph 6.
8. This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding Class B voting
securities of the Fund.
2
<PAGE>
9. This Plan may not be amended to increase materially the rate of
payments provided for herein unless such amendment is approved by at least a
majority, as defined in the Investment Company Act, of the outstanding Class B
voting securities of the Fund, and by the Directors of the Fund in the manner
provided for in Paragraph 6 hereof, and no material amendment to the Plan shall
be made unless approved in the manner provided for approval and annual renewal
in Paragraph 6 hereof.
10. While this Plan is in effect, the selection and nomination of
Directors who are not interested persons, as defined in the Investment Company
Act, of the Fund shall be committed to the discretion of Directors who are not
interested persons.
11. The Fund shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Paragraph 3 hereof, for a period of
not less than six years from the date of this Plan, or the agreements or such
report, as the case may be, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of the date first above written.
MERRILL LYNCH ASSET INCOME FUND INC.
By
-----------------------------------------------------
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-----------------------------------------------------
3
<PAGE>
CLASS B DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 25th day of August, 1994 by and between
Merrill Lynch Funds Distributor, Inc., a Delaware corporation (the
"Distributor"), and Merrill Lynch, Pierce, Fenner & Smith Incorporated, a
Delaware corporation ("Securities Firm")
W I T N E S S E T H:
WHEREAS, the Distributor has entered into an agreement with Merrill
Lynch Asset Income Fund, Inc., a Maryland corporation (the "Fund"), pursuant to
which it acts as the exclusive distributor for the sale of Class B shares of
Common Stock, par value $0.10 per share (the "Class B shares") of the Fund; and
WHEREAS, the Distributor and the Fund have entered into a Class B
Shares Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "Act") pursuant to which the Distributor
receives an account maintenance fee from the Fund at the annual rate of 0.25% of
average daily net assets of the Fund relating to Class B shares for account
maintenance services related to the Class B shares of the Fund and a
distribution fee from the Fund at the annual rate of 0.50% of average daily net
asset value relating to Class B shares for providing sales and promotional
activities and services related to the distribution of Class B shares; and
WHEREAS, the Distributor desires the Securities Firm to perform
certain account maintenance activities and sales and promotional activities and
services for the Fund's Class B shareholders, and the Securities Firm is willing
to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance
activities with respect to the Class B shares of the Fund of the types referred
to in Paragraph 1 of the Plan.
2. The Securities Firm shall provide sales and promotional
activities and services with respect to the sale of the Class B shares of the
Fund, and incur distribution expenditures of the types referred to in
Paragraph 2 of the Plan.
3. As compensation for its activities and services performed
under this Sub-Agreement, the Distributor shall pay the
<PAGE>
Securities Firm an account maintenance fee and a distribution fee at the end of
each calendar month in an amount agreed upon by the parties hereto.
4. The Securities Firm shall provide the Distributor, at least
quarterly, such information as reasonably requested by the Distributor to enable
the Distributor to comply with the reporting requirements of Rule 12b-1
regarding the disbursement of the fee during such period referred to in
Paragraph 4 of the Plan.
5. This Sub-Agreement shall not take effect until it has been
approved by votes of a majority of both (a) the Directors of the Fund and (b)
those Directors of the Fund who are not "interested persons" of the Fund, as
defined in the Act, and have no direct or indirect financial interest in the
operation of this Plan or any agreements related to it, cast in person at a
meeting or meetings called for the purpose of voting on this Agreement.
6. This Sub-Agreement shall continue in effect for as long as
such continuance is specifically approved at least annually in the manner
provided for approval of the Plan in Paragraph 6.
7. This Sub-Agreement shall automatically terminate in the event
of its assignment or in the event of the termination of the Plan or any
amendment to the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
----------------------------------------
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
----------------------------------------
2
<PAGE>
EXHIBIT 15(b)
<PAGE>
CLASS C DISTRIBUTION PLAN
OF
MERRILL LYNCH ASSET INCOME FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 21st day of October 1994, by and between
Merrill Lynch Asset Income Fund, Inc., a Maryland corporation (the "Fund"), and
Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H:
WHEREAS, the Fund is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund proposes to enter into a Class C Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Fund in the offer and sale of Class C
shares of common stock, par value $0.10 per share (the "Class C shares"), of the
Fund to the public; and
WHEREAS, the Fund desires to adopt this Class C Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Fund will pay an account maintenance fee and a distribution fee to
MLFD with respect to the Fund's Class C shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1 under the Investment Company
Act on the following terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class C shares to compensate MLFD and securities firms with
which MLFD enters into related agreements pursuant to Paragraph 3 hereof
("Sub-Agreements") for providing account maintenance activities with
<PAGE>
respect to Class C shareholders of the Fund. Expenditures under the Plan may
consist of payments to financial consultants for maintaining accounts in
connection with Class C shares of the Fund and payment of expenses incurred in
connection with such account maintenance activities including the costs of
making services available to shareholders including assistance in connection
with inquiries related to shareholder accounts.
2. The Fund shall pay MLFD a distribution fee under the Plan at the end
of each month at the annual rate of 0.55% of average daily net assets of the
Fund relating to Class C shares to compensate MLFD and securities firms with
which MLFD enters into related Sub-Agreements for providing sales and
promotional activities and services. Such activities and services will relate
to the sale, promotion and marketing of the Class C shares of the Fund. Such
expenditures may consist of sales commissions to financial consultants for
selling Class C shares of the Fund, compensation, sales incentives and payments
to sales and marketing personnel, and the payment of expenses incurred in its
sales and promotional activities, including advertising expenditures related to
the Fund and the costs of preparing and distributing promotional materials. The
distribution fee may also be used to pay the financing costs of carrying the
unreimbursed expenditures described in this Paragraph 2. Payment of the
distribution fee described in this Paragraph 2 shall be subject to any
limitations set forth in any applicable regulation of the National Association
of Securities Dealers, Inc.
3. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distribution fee to such Securities Firms as compensation for the
above-mentioned activities and services. Such Sub-Agreement shall provide that
the Securities Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting requirements set forth in
Paragraph 4 hereof.
4. MLFD shall provide the Fund for review by the Board of Directors, and
the Directors shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period.
5. This Plan shall not take effect until it has been approved by a vote
of at least a majority, as defined in the
2
<PAGE>
Investment Company Act, of the outstanding Class C voting securities of the
Fund.
6. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Board of
Directors of the Fund and (b) those Directors of the Fund who are not
"interested persons" of the Fund, as defined in the Investment Company Act, and
have no direct or indirect financial interest in the operation of this Plan or
any agreements related to it (the "Rule 12b-1 Directors"), cast in person at a
meeting or meetings called for the purpose of voting on the Plan and such
related agreements.
7. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding Class C voting
securities of the Fund.
9. The Plan may not be amended to increase materially the rate of
payments provided for herein unless such amendment is approved by at least a
majority, as defined in the Investment Company Act, of the outstanding Class C
voting securities of the Fund, and by the Board of Directors of the Fund in the
manner provided for in Paragraph 6 hereof, and no material amendment to the Plan
shall be made unless approved in the manner provided for approval and annual
renewal in Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomination of
Directors who are not interested persons, as defined in the Investment Company
Act, of the Fund shall be committed to the discretion of the Directors who are
not interested persons.
11. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 4 hereof, for a period of not less
than six years from the date of the Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of the date first above written.
MERRILL LYNCH ASSET INCOME FUND, INC.
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
4
<PAGE>
CLASS C SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 21st day of October 1994, by and between Merrill
Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD"), and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation ("Securities
Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill Lynch Asset
Income Fund, Inc., a Maryland corporation (the "Fund"), pursuant to which it
acts as the exclusive distributor for the sale of Class C shares of common
stock, par value $0.10 per share (the "Class C shares"), of the Fund; and
WHEREAS, MLFD and the Fund have entered into a Class C Shares Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Act"), pursuant to which MLFD receives an account
maintenance fee from the Fund at the annual rate of 0.25% of average daily net
assets of the Fund relating to Class C shares for account maintenance activities
related to Class C shares of the Fund and a distribution fee from the Fund at
the annual rate of 0.55% of average daily net assets of the Fund relating to
Class C shares for providing sales and promotional activities and services
related to the distribution of Class C shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and sales and promotional activities and services for the
Fund's Class C shareholders and the Securities Firm is willing to perform such
activities and services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities and
services with respect to the Class C shares of the Fund and incur expenditures
in connection with such activities and services of the types referred to in
Paragraph 1 of the Plan.
2. The Securities Firm shall provide sales and promotional activities and
services with respect to the sale of the Class C shares of the Fund, and incur
distribution expenditures, of the types referred to in Paragraph 2 of the Plan.
3. As compensation for its activities and services performed under this
Agreement, MLFD shall pay the Securities Firm an account maintenance fee and a
distribution fee at the end
<PAGE>
of each calendar month in an amount agreed upon by the parties hereto.
4. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Board of Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Act, and have no direct or indirect financial interest in the operation
of the Plan, this Agreement or any agreements related to the Plan or this
Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings
called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
Title:
2
<PAGE>
EXHIBIT 15(c)
<PAGE>
CLASS D DISTRIBUTION PLAN
OF
MERRILL LYNCH ASSET INCOME FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 21st day of October 1994, by and between
Merrill Lynch Asset Income Fund, Inc., a Maryland corporation (the "Fund"), and
Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H :
WHEREAS, the Fund is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund proposes to enter into a Class D Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Fund in the offer and sale of Class D
shares of common stock, par value $0.10 per share (the "Class D shares"), of the
Fund to the public; and
WHEREAS, the Fund desires to adopt this Class D Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Fund will pay an account maintenance fee to MLFD with respect to the
Fund's Class D shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1 under the Investment Company
Act on the following terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class D shares to compensate MLFD and securities firms with
which MLFD enters into related agreements ("Sub-Agreements") pursuant to
Paragraph 2 hereof for providing account maintenance activities with
<PAGE>
respect to Class D shareholders of the Fund. Expenditures under the Plan may
consist of payments to financial consultants for maintaining accounts in
connection with Class D shares of the Fund and payment of expenses incurred in
connection with such account maintenance activities including the costs of
making services available to shareholders including assistance in connection
with inquiries related to shareholder accounts.
2. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities of the type referred to in Paragraph 1. MLFD may reallocate all
or a portion of its account maintenance fee to such Securities Firms as
compensation for the above-mentioned activities. Such Sub-Agreement shall
provide that the Securities Firms shall provide MLFD with such information as is
reasonably necessary to permit MLFD to comply with the reporting requirements
set forth in Paragraph 3 hereof.
3. MLFD shall provide the Fund for review by the Board of Directors, and
the Directors shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee during such period.
4. This Plan shall not take effect until it has been approved by a vote
of at least a majority, as defined in the Investment Company Act, of the
outstanding Class D voting securities of the Fund.
5. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Directors of
the Fund and (b) those Directors of the Fund who are not "interested persons" of
the Fund, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or
meetings called for the purpose of voting on the Plan and such related
agreements.
6. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 5.
7. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding Class D voting
securities of the Fund.
8. The Plan may not be amended to increase materially the rate of
payments provided for in Paragraph 1 hereof unless such
2
<PAGE>
amendment is approved by at least a majority, as defined in the Investment
Company Act, of the outstanding Class D voting securities of the Fund, and by
the Directors of the Fund in the manner provided for in Paragraph 5 hereof, and
no material amendment to the Plan shall be made unless approved in the manner
provided for approval and annual renewal in Paragraph 5 hereof.
9. While the Plan is in effect, the selection and nomination of Directors
who are not interested persons, as defined in the Investment Company Act, of the
Fund shall be committed to the discretion of the Directors who are not
interested persons.
10. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 3 hereof, for a period of not less
than six years from the date of the Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of the date first above written.
MERRILL LYNCH ASSET INCOME FUND, INC.
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
3
<PAGE>
CLASS D SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 21st day of October 1994, by and between Merrill
Lynch Funds Distributor, Inc. a Delaware corporation ("MLFD"), and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation ("Securities
Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill Lynch Asset
Income Fund, Inc., a Maryland corporation (the "Fund"), pursuant to which it
acts as the exclusive distributor for the sale of Class D shares of common
stock, par value $0.10 per share (the "Class D shares"), of the Fund; and
WHEREAS, MLFD and the Fund have entered into a Class D Shares Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Act"), pursuant to which MLFD receives an account
maintenance fee from the Fund at the annual rate of 0.25% of average daily net
assets of the Fund relating to Class D shares for providing account maintenance
activities and services with respect to Class D shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and services, including assistance in connection with
inquiries related to shareholder accounts, for the Fund's Class D shareholders
and the Securities Firm is willing to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities and
services with respect to the Class D shares of the Fund and incur expenditures
in connection with such activities and services, of the types referred to in
Paragraph 1 of the Plan.
2. As compensation for its services performed under this Agreement, MLFD
shall pay the Securities Firm a fee at the end of each calendar month in an
amount agreed upon by the parties hereto.
3. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the fee
during such period referred to in Paragraph 3 of the Plan.
<PAGE>
4. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Board of Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Act, and have no direct or indirect financial interest in the operation
of the Plan, this Agreement or any agreements related to the Plan or this
Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings
called for the purpose of voting on this Agreement.
5. This Agreement shall continue in effect for as long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 5.
6. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
2
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 1-MO
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> SEP-02-1994
<PERIOD-END> SEP-30-1994
<INVESTMENTS-AT-COST> 5857155
<INVESTMENTS-AT-VALUE> 5810280
<RECEIVABLES> 421577
<ASSETS-OTHER> 168075
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6399932
<PAYABLE-FOR-SECURITIES> 241748
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 263899
<TOTAL-LIABILITIES> 505647
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5941689
<SHARES-COMMON-STOCK> 80224
<SHARES-COMMON-PRIOR> 50000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (554)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (46850)
<NET-ASSETS> 795179
<DIVIDEND-INCOME> 1463
<INTEREST-INCOME> 19873
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