<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 1997
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. [_]
POST-EFFECTIVE AMENDMENT NO. 4 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 6 [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)
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
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:
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
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) 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.
----------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock
par value $0.10 per
share................ 86,994 Shares $10.39 $329,997 $100
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The calculation of the aggregate offering price is made as of April 21,
1997 pursuant to Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of shares of Common Stock redeemed or repurchased during
the Registrant's previous fiscal year was 466,180 shares.
(3) 410,947 shares of the shares described in (2) above have been used for
reduction pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment
Company Act of 1940 in previous filings during Registrant's current fiscal
year.
(4) 55,233 of the shares redeemed during the Registrant's previous fiscal year
are being used for the reduction of the registration fee in this post-
effective amendment to the Registration Statement.
The Registrant has registered an indefinite number of its Class A Shares,
Class B Shares, Class C Shares and Class D Shares under the Securities Act of
1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. The
notice required by such rule for the Registrant's most recent fiscal year was
filed on February 21, 1997.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH ASSET INCOME FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page.................... Cover Page
Item 2. Synopsis...................... Fee Table
Item 3 Financial Highlights.......... Not Applicable
Item 4. General Description of
Registrant................... Investment Objectives and Policies;
Additional Information
Item 5. Management of the Fund........ Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion of
Fund Performance............. Not Applicable
Item 6. Capital Stock and Other
Securities................... Cover Page; Additional Information
Item 7. Purchase of Securities Being
Offered...................... Cover Page; ML Select Pricing(SM)
System; Shareholder Services;
Purchase of Shares
Item 8. Redemption or Repurchase...... Fee Table; ML Select PricingSM
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
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
APRIL 25, 1997
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." For more information on the Fund's investment objectives and
policies, please see "Investment Objectives and Policies" on page 11.
----------------
Pursuant to the Merrill Lynch Select PricingSM 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 PricingSM 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 PricingSM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 ((609)
282-2800), or from 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, but as of May 1, 1997 $5.35) 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" on pages 27 and 36.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated April 25, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"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 CLASS D
---------- ---------- ------- -------
SHAREHOLDER TRANSACTION
EXPENSES:
<S> <C> <C> <C> <C>
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed
on Dividend
Reinvestments......... None None None None
Deferred Sales Charge
(as a percentage of
original purchase None(d) 4.0% during the first 1.0% for one year(f) None(d)
price or redemption year, decreasing 1.0%
proceeds, whichever annually thereafter to 0.0%
is lower)............. after the fourth year
Exchange Fee........... None None(e) None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS):
Investment Advisory
Fees(g)............... 0.75% 0.75% 0.75% 0.75%
12b-1 Fees(h):
Account Maintenance
Fees................ None 0.25% 0.25% 0.25%
Distribution Fees.... None 0.50% 0.55% None
(Class B shares convert to
Class D shares automatically
after approximately ten years
and cease being subject
to distribution fees)
Other Expenses:
Custodial Fees...... 0.14% 0.14% 0.14% 0.14%
Shareholder
Servicing Costs(i). 0.39% 0.40% 0.39% 0.36%
Other............... 2.20% 2.20% 2.20% 2.20%
---- ---- ---- ----
Total Other Ex-
penses............ 2.73% 2.74% 2.73% 2.70%
---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES(j) 3.48% 4.24% 4.28% 3.70%
==== ==== ==== ====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"-- page 29 and "Shareholder
Services--Fee-Based Programs"--page 40.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares"--page 31.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A or Class D purchases of
$1,000,0000 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 29.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year of purchase. Such
CDSC may be waived in connection with redemptions to fund participation in
certain fee-based programs. See "Shareholder Services--Fee Based
Programs"--page 40.
(e) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder Services--
Fee Based program"--page 40.
(f) The CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder Services--
Fee Based program"--page 40.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
25.
(h) See "Purchases of Shares--Distribution Plans"--page 34.
(i) See "Management of the Fund--Transfer Agency Services"--page 26.
(j) The expense information in the table reflects current reimbursement
arrangements. As of December 31, 1996, the Manager was waiving its entire
management fee and voluntarily reimbursing the Fund for a portion of other
expenses (excluding Rule 12b-1 fees). The Fee Table has been restated to
assume the absence of any such waiver of fees or reimbursement of expenses
because the Manager may discontinue or reduce such waiver of fees and/or
reimbursement of expenses at any time without notice. During the fiscal
year ended December 31, 1996, the Manager waived management fees and
reimbursed expenses totaling 3.23% for Class A shares, 3.24% for Class B
shares, 3.24% for Class C shares and 3.20% for Class D shares after which
the Fund's total expense ratio was 0.25% for Class A shares, 1.00% for
Class B shares, 1.04% for Class C shares and 0.50% for Class D shares.
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 fol-
lowing expenses on a $1,000 in-
vestment including the maximum
$40 initial sales charge (Class
A and Class D shares only) and
assuming (1) the Total Fund Op-
erating Expenses for each class
set forth on page 2; (2) a 5%
annual return throughout the
periods; and (3) redemption at
the end of the period:
Class A........................ $ 74$ 143$ 214 $ 401
Class B........................ $ 83$ 149$ 216 $ 440
Class C........................ $ 53$ 130$ 218 $ 444
Class D........................ $ 76$ 149$ 223 $ 419
An investor would pay the fol-
lowing expenses on the same
$1,000 investment assuming no
redemption at the end of the
period:
Class A........................ $ 74$ 143$ 214 $ 401
Class B........................ $ 43$ 129$ 216 $ 440
Class C........................ $ 43$ 130$ 218 $ 444
Class D........................ $ 76$ 149$ 223 $ 419
</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, but as of May 1st will be $5.35) 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."
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM 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 PricingSM System is used by more than 50
registered investment companies 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
3
<PAGE>
deferred sales charge arrangements. The deferred sales charges, distribution
and account maintenance fees that are imposed on Class B and Class C shares,
as well as the account maintenance fees that are imposed on 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 PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM 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
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(/2/),(/3/)
- ----------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at a rate 0.25% 0.50% B shares convert to D shares
of 4.0% during the first year, automatically after approximately
decreasing 1.0% annually to 0.0%(/4/) ten years(/5/)
- ----------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after the first year(/6/)
- ----------------------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales charge(/3/) 0.25% No No
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. 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 or more, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but, if
the initial sales charge is waived, may be subject to a 1.0% CDSC for one
year. A 0.75% sales charge for 401(k) purchases over $1,000,0000 will
apply. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are modified. Also, Class
B shares of certain other MLAM-advised mutual funds into which exchanges
may be made have a ten-year conversion period. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund,
the conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will
be tacked onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs.
4
<PAGE>
Class A: Class A shares incur an initial sales charges when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares of the Fund. Investors who currently own Class A shares
of the Fund in a shareholder account are entitled to purchase
additional Class A shares of the Fund in that account. Other eligible
investors include certain retirement plans and participants in certain
fee-based programs. In addition, Class A shares will be offered at net
asset value to Merrill Lynch & Co., Inc. ("ML & Co.") and its
subsidiaries (the term "subsidiaries," when used herein with respect
to ML & Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly owned and controlled by ML & Co.,) and their
directors and employees, and to members of the Boards of MLAM-advised
mutual funds. The maximum initial sales charge is 4.00%, which is
reduced for purchases of $25,000 and over, and waived for purchases by
certain retirement plans and participants in connection with certain
fee-based programs. Purchases of $1,000,000 or more may not be subject
to an initial sales charge, but if the initial sales charge is waived
such purchases may be subject to a 1.0% CDSC if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with redemptions to fund participation in certain fee-based
programs. A 0.75% sales charge for (401(k) purchases over $1,000,000
will apply. 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."
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% of the Fund's average net assets
attributable to Class B shares, and a CDSC if they are redeemed within
four years of purchase. Such CDSC may be modified in connection with
redemptions to fund participation in certain fee-based programs.
Approximately eight 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 ten
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
the conversion and holding periods for certain retirement plans are
modified as described under "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.55%, of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a 1.0% CDSC if
5
<PAGE>
they are redeemed within one year of purchase. Such CDSC may be waived in
connection with redemptions to fund participation in certain fee-based
programs. Although Class C shares are subject to a CDSC for only one year
(as compared to four years for Class B), Class C shares have no
conversion feature and, accordingly, an investor who purchases Class C
shares will be subject to distribution fees that will be imposed on Class
C shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchases may be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with redemptions to fund participation in certain fee-based
programs. The schedule of initial sales charges and reductions for
Class D shares is the same as the schedule for Class A shares, except
that there is no waiver for purchases in connection with certain fee-
based programs. Class D shares also will be issued upon conversion of
Class B shares as described above under "Class B."' See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM 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
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors who
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to
6
<PAGE>
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 financial information in the table below has been audited by Deloitte &
Touche LLP, independent auditors. Financial statements for the fiscal year
ended December 31, 1996, and the independent auditors' report thereon are
included in the Statement of Additional Information. Further information about
the performance of the Fund is contained in the Fund's most recent annual
report to shareholders which may be obtained, without charge, by calling or
writing the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------- ------------------------
FOR THE FOR THE
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED SEPT. 2, YEAR ENDED SEPT. 2,
DECEMBER 31, 1994+ TO DECEMBER 31, 1994+ TO
--------------- DEC. 31, -------------- DEC. 31,
1996 1995 1994 1996 1995 1994
Increase (Decrease) in Net ------- ------ -------- ------ ----- -------
Asset Value:
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $ 10.62 $ 9.68 $10.00 $10.62 $ 9.68 $10.00
------- ------ ------ ------ ------ ------
Investment income--net.. .50 .60 .18 .42 .51 .16
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... .23 1.04 (.32) .23 1.04 (.32)
------- ------ ------ ------ ------ ------
Total from investment
operations............... .73 1.64 (.14) .65 1.55 (.16)
------- ------ ------ ------ ------ ------
Less dividends and
distributions:
Investment income--net.. (.50) (.60) (.18) (.42) (.51) (.16)
In excess of investment
income--net............ (.05) -- -- (.05) -- --
Realized gain on
investments--net....... (.27) (.01) -- (.27) (.01) --
In excess of realized
gain on investments--
net.................... -- (.09) -- -- (.09) --
------- ------ ------ ------ ------ ------
Total dividends and
distributions............ (.82) (.70) (.18) (.74) (.61) (.16)
------- ------ ------ ------ ------ ------
Net asset value, end of
period................... $ 10.53 $10.62 $ 9.68 $10.53 $10.62 $ 9.68
======= ====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN**:
Based on net asset value
per share................ 7.11% 17.38% (1.37)%# 6.31% 16.51% (1.62)%#
======= ====== ====== ====== ====== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement............ .25% .00% .00%* 1.00% .75% .75%*
======= ====== ====== ====== ====== ======
Expenses.................. 3.48% 5.12% 5.20%* 4.24% 5.94% 6.04%*
======= ====== ====== ====== ====== ======
Investment income--net.... 4.73% 5.78% 5.64%* 3.99% 5.06% 4.86%*
======= ====== ====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)........... $ 3,918 $3,872 $1,147 $8,690 $9,236 $6,797
======= ====== ====== ====== ====== ======
Portfolio turnover........ 342.71% 46.75% .83% 342.71% 46.75% .83%
======= ====== ====== ====== ====== ======
Average commission rate
paid++................... $ .0265 -- -- $.0265 -- --
======= ====== ====== ====== ====== ======
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effect of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS C CLASS D
------------------------ ------------------------
FOR THE FOR THE
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED OCT. 21, YEAR ENDED OCT. 21,
DECEMBER 31, 1994+ TO DECEMBER 31, 1994+ TO
-------------- DEC. 31, -------------- DEC. 31,
1996 1995 1994 1996 1995 1994
Increase (Decrease) in ------ ------ -------- ----- ---- --------
Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $10.62 $ 9.69 $9.88 $10.62 $ 9.69 $9.88
------ ------ ----- ------ ------ -----
Investment income--
net.................. .41 .52 .10 .46 .57 .11
Realized and
unrealized gain
(loss) on investments
and foreign currency
transactions--net.... .23 1.03 (.19) .24 1.03 (.19)
------ ------ ----- ------ ------ -----
Total from investment
operations............. .64 1.55 (.09) .70 1.60 (.08)
------ ------ ----- ------ ------ -----
Less dividends and
distributions:
Investment income--
net.................. (.42) (.52) (.10) (.47) (.57) (.11)
In excess of
investment income--
net.................. (.04) -- -- (.05) -- --
Realized gain on
investments--net..... (.27) (.01) -- (.27) (.01) --
In excess of realized
gain on investments--
net.................. -- (.09) -- -- (.09) --
------ ------ ----- ------ ------ -----
Total dividends and
distributions.......... (.73) (.62) (.10) (.79) (.67) (.11)
------ ------ ----- ------ ------ -----
Net asset value, end of
period................. $10.53 $10.62 $9.69 $10.53 $10.62 $9.69
====== ====== ===== ====== ====== =====
TOTAL INVESTMENT
RETURN**:
Based on net asset value
per share.............. 6.25% 16.33% (.94)%# 6.84% 16.97% (.83)%#
====== ====== ===== ====== ====== =====
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement.......... 1.04% .80% .80%* .50% .25% .25%*
====== ====== ===== ====== ====== =====
Expenses................ 4.28% 6.02% 5.75%* 3.70% 5.44% 5.14%*
====== ====== ===== ====== ====== =====
Investment income--net.. 3.95% 4.99% 5.19%* 4.48% 5.53% 5.70%*
====== ====== ===== ====== ====== =====
SUPPLEMENTAL DATA:
Net assets, end of
period
(in thousands)......... $ 357 $ 418 $ 154 $ 633 $ 771 $ 63
====== ====== ===== ====== ====== =====
Portfolio turnover...... 342.71% 46.75% .83% 342.71% 46.75% .83%
====== ====== ===== ====== ====== =====
Average commission rate
paid++................. $.0265 -- -- $.0265 -- --
====== ====== ===== ====== ====== =====
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effect of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
9
<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.
10
<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 in response to
changing market and economic trends. This investment approach provides the Fund
11
<PAGE>
with the opportunity to benefit from anticipated shifts in the relative
performance of different types of securities and different capital markets. For
example, at times the Fund may increase its emphasis on debt securities in
anticipation of significant declines in interest rates and at other times the
Fund's investments in equity securities may be increased, 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
12
<PAGE>
development ("supranational entities") such as the International Bank for
Reconstruction and Development (the "World Bank").
U.S. Government securities include: (i) U.S. Treasury obligations (bills,
notes and bonds), which differ in their interest rates, maturities and times of
issuance, all of which are backed by the full faith and credit of the U.S.; and
(ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related securities,
some of which are backed by the full faith and credit of the U.S. Treasury
(e.g., direct pass-through certificates of the Government National Mortgage
Association), some of which are supported by the right of the issuer to borrow
from the U.S. Government (e.g., obligations of Federal Home Loan Banks) and
some of which are backed only by the credit of the issuer itself (e.g.,
obligations of the Student Loan Marketing Association).
In the case of mortgage-related securities, prepayments occur when the holder
of an individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, a mortgage-related security is often
subject to more rapid prepayment of principal than its stated maturity would
indicate. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the realized yield or average
life of a particular issue of pass-through certificates. Prepayment rates are
important because of their effect on the yield and price of the securities.
Accelerated prepayments adversely impact yields for pass-through securities
purchased at a premium (i.e., a price in excess of principal amount) and may
involve additional risk of loss of principal because the premium may not have
been fully amortized at the time the obligation is repaid. The opposite is true
for pass-through securities purchased at a discount. The Fund may purchase
mortgage-related securities at a premium or at a discount.
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing power. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund
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
13
<PAGE>
interest rates rise. Prices of longer term securities generally fluctuate more
in response to interest rate changes than do shorter term securities.
EQUITY SECURITIES
Within the portion, if any, of the Fund's portfolio allocated to equity
securities, the Manager 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
14
<PAGE>
asset-based securities which are rated, or are issued by issuers that have
outstanding debt obligations rated, A or better by S&P or Moody's or commercial
paper rated A-1 by S&P or Prime-1 by Moody's or of issuers that the Manager has
determined to be of similar creditworthiness. If the asset-based security is
backed by a bank letter of credit or other similar facility, the Manager may
take such backing into account in determining the creditworthiness of the
issuer.
Real Estate-Related Securities. The real estate-related securities which 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
15
<PAGE>
when movements in the equity, debt and currency markets occur. Reference is
made to the Statement of Additional Information for further information
concerning these strategies.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund in return for a premium gives another party
a right to buy specified securities owned by the Fund at a specified future
date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies with a securities depository
with a value equal to or greater than the exercise price of the underlying
securities. By writing a put, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise for as long as the option is outstanding. The
Fund may engage in closing transactions in order to terminate put options that
it has written.
Purchasing Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the stated exercise
price, thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be 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-
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wide stock price movements in the securities in which the Fund invests. Options
on indices are similar to options on securities except that on exercise or
assignment, the parties to the contract pay or receive an amount of cash equal
to the difference between the closing value of the index and the exercise price
of the option times a specified multiple. The Fund may invest in stock index
options based on a broad market index, e.g., the S&P 500 Index, or on a narrow
index representing an industry or market segment, e.g., the AMEX Oil & Gas
Index.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract
to sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index futures contracts
in connection with the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant advance, it
may purchase futures in order to gain rapid market exposure that may in part or
entirely offset increases in the cost of securities that the Fund intends to
purchase. As such purchases are made, an equivalent amount of futures contracts
will be terminated by offsetting sales. The Fund does not consider purchases of
futures contracts to be a speculative practice under these circumstances. It is
anticipated that, in a substantial majority of these transactions, the Fund
will purchase such securities upon termination of the long futures position,
whether the long position is the purchase of a futures contract or the purchase
of a call option or the writing of a put option on a future, but under unusual
circumstances (e.g., the Fund experiences a significant amount of redemptions),
a long futures position may be terminated without the corresponding purchase of
securities.
The Fund also has authority to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies are utilized under the same market and market
sector conditions (i.e., conditions relating to specific types of investments)
in which the Fund enters into futures transactions. The Fund may purchase put
options or write call options on futures contracts and stock indices rather
than selling the underlying futures contract in anticipation of a decrease in
the market value of its securities. Similarly, the Fund may purchase call
options, or write put options on futures contracts and stock indices, as a
substitute for the purchase of such futures to hedge against the increased cost
resulting from an increase in the market value of securities which the Fund
intends to purchase.
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
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prices and terms negotiated by the buyer and seller. See "Restrictions on OTC
Options" below for information as to restrictions on the use of OTC options.
Foreign Currency Hedging. The Fund has authority to deal in forward foreign
exchange among currencies of the different countries in which it will invest
and multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. The Fund's dealings in
forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption of shares of the Fund or the
payment of dividends and distributions by the Fund. Position hedging is the
sale of forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not speculate in
forward foreign exchange. Hedging against a decline in the value of a currency
does not eliminate fluctuations in the prices of portfolio securities or
prevent losses if the prices of such securities decline. Such transactions also
preclude the opportunity for gain if the value of the hedged currency should
rise. Moreover, it may not be possible for the Fund to hedge against a
devaluation that is so generally anticipated that the Fund is not able to
contract to sell the currency at a price above the devaluation level it
anticipates.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. dollars of an investment in a yen denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of yen for dollars at a specified price
by a future date. To the extent the hedge is successful, a loss in the value of
the yen relative to the dollar will tend to be offset by an increase in the
value of the put option. To offset, in whole or in part, the cost of acquiring
such a put option, the Fund may also sell a call option which, if exercised,
requires it to sell a specified amount of yen for dollars at a specified price
by a future date (a technique called a "straddle"). By selling such a call
option in this illustration, the Fund gives up the opportunity to profit
without limit from increases in the relative value of the yen to the dollar.
The Manager believes that "straddles" of the type which may be utilized by the
Fund constitute hedging transactions and are consistent with the policies
described above.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or sell a
currency at a fixed price on a future date. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Futures contracts and options
on futures contracts are traded on boards of trade or futures exchanges. The
Fund will not speculate in foreign currency options, futures or related
options. Accordingly, the Fund will not hedge a currency substantially in
excess of the market value of securities which it has committed or anticipates
to purchase which are denominated in such currency and, in the case of
securities which have been sold by the Fund but not yet delivered, the proceeds
thereof in its
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denominated currency. The Fund may not incur potential net liabilities of more
than 20% of its total assets from foreign currency options, futures or related
options.
Restrictions on the Use of Futures Transactions. Regulations of the Commodity
Futures Trading Commission ("CFTC") applicable to the Fund provide that the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool," as defined under such regulations if the Fund
adheres to certain restrictions. In particular, the Fund may purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts and options.
These restrictions are in addition to other restrictions on the Fund's hedging
activities mentioned herein.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures contract is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options, including
over-the-counter stock index options, over-the-counter foreign currency options
and options on foreign currency futures, only with member banks of the Federal
Reserve System and primary dealers in U.S. Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least $50
million.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets used as cover for written OTC options
are illiquid securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transaction, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the underlying securities covered by OTC call options
currently outstanding which were sold by the Fund and margin deposits on the
Fund's existing OTC options on futures contracts exceeds 15% of the total
assets of the Fund, taken at market value, together with all other assets of
the Fund which are illiquid or are not otherwise readily marketable. However,
if the OTC option is sold by the Fund to a primary U.S. Government securities
dealer recognized by the Federal Reserve Bank of New York and if the Fund has
the unconditional contractual right to repurchase such OTC option from the
dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities as is equal to the repurchase price less
the amount by which the option is "in-the-money" (i.e., current market value of
the underlying security minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money." This policy as to OTC options is not a
fundamental policy of the Fund and may be amended by the Directors of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
Securities and Exchange Commission staff of its position.
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Risk Factors in Options and Futures Transactions. Utilization of 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 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 of 1940 (the "Act"), which means that the
Fund is not limited by the 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
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Fund will limit its investments so that, at the close of each quarter of the
taxable year, (i) not more than 25% of the market value of the Fund's total
assets will be invested in the securities of a single issuer and (ii) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities of a single
issuer, and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer. A fund which elects to be classified as
"diversified" under the 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 NASD, 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.
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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 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
15% 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
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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 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
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may not invest more than 25% of its total assets, taken at market value at the
time of each investment, in the securities of issuers of any particular
industry (excluding the U.S. Government and its agencies or instrumentalities).
Other fundamental policies include policies which (i) limit investments in
securities which cannot be readily resold because of legal or contractual
restrictions or which are not otherwise readily marketable, including
repurchase agreements and purchase and sale contracts maturing in more than
seven days, if, regarding all such securities, more than 15% of its net assets,
taken at market value, would be invested in such securities, (ii) limit
investments in securities of other investment companies, except in connection
with certain specified transactions and with respect to investments of up to 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. 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.
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 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 Act. The Board of Directors elects officers of
the Fund annually.
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The Directors of the Fund and their principal employment are as follows:
Joe Grills--Member of the Committee of Investment of Employee Benefit
Assets of the Financial Executives Institute. ("CIEBA"); Member of CIEBA's
Executive Committee; and Member of the Investment Advisory Committee of the
State of New York Common Retirement Fund and the Howard Hughes Medical
Institute; Director, Duke Management Company, LaSalle Street Fund and Kimco
Realty Corporation.
Walter Mintz--Special Limited Partner of Cumberland Partners (investment
partnership).
Robert S. Salomon, Jr.--Principal of STI Management (investment adviser).
Melvin R. Seiden--Director of Silbanc Properties, Ltd. (real estate,
consulting and investments).
Stephen B. Swensrud--Chairman of Fernwood Associates (financial
consultants).
Arthur Zeikel*--President of the Manager and its affiliate, Fund Asset
Management, L.P. ("FAM"); President and Director of Princeton Services,
Inc. ("Princeton Services"); Executive Vice President of ML & Co.; and
Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor").
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* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, Merrill Lynch Asset Management, L.P., which does business as
Merrill Lynch Asset Management, is owned and controlled by Merrill Lynch & Co.,
Inc., a financial services holding company and the parent of Merrill Lynch. The
Manager provides the Fund with management and investment advisory services. The
Manager or an affiliate, FAM, acts as the manager for over 130 other registered
investment companies. The Manager also provides investment advisory services to
individual and institutional accounts. As of March 31, 1997, the Manager and
FAM had a total of approximately $247.2 billion in investment company and other
portfolio assets under management, including assets of certain affiliates.
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.
For the fiscal year ended December 31, 1996, the Manager received management
fees from the Fund in the amount of $103,776 (based on average net assets of
approximately $13.8 million), all of which was voluntarily waived.
The Manager provides the portfolio manager for the Fund who considers
analyses from various sources (including brokerage firms with which the Fund
does business), makes the necessary decisions, and places transactions
accordingly. The Manager is also obligated to perform certain administrative
and management services for the Fund and is obligated to provide all of the
office space, facilities, equipment and personnel
necessary to perform its duties under the Management Agreement. Thomas R.
Robinson, who has been a Vice President of the Manager since 1995, 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.
25
<PAGE>
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. The
Fund's ratio of total expenses to average net assets, before reimbursement of
expenses for the fiscal year ended December 31, 1996, was 3.48% for Class A
shares, 4.24% for Class B Shares, 4.28% for Class C shares and 3.70% for Class
D shares. The Manager voluntarily reimbursed the Fund for additional expenses
of $345,299. Accounting services are provided to the Fund by the Manager, and
the Fund reimburses the Manager for its costs in connection with such services
on a semi-annual basis. For the fiscal year ended December 31, 1996, the Fund
paid the Manager $35,078 in connection with accounting services.
The Manager may discontinue waiver of its management fee and any voluntary
reimbursement by the Manager of the Fund's expenses in whole or in part at any
time without notice.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect wholly-owned subsidiary of ML & Co. and
an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a fee
for providing investment advisory services to the Manager with respect to the
Fund in an amount to be determined from time to time by the Manager and MLAM
U.K., but in no event in excess of the amount that the Manager actually
receives for providing services to the Fund pursuant to the Management
Agreement.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Act which incorporates the Code of Ethics of the Manager
(together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch 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
26
<PAGE>
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. For the fiscal
year ended December 31, 1996, the Fund paid the Transfer Agent $54,273 pursuant
to the Transfer Agency Agreement for providing transfer agency services.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc., 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
PricingSM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (generally 4:00 p.m., New York time), which includes orders
received after the close of business on the previous day, the applicable
offering price will be based on the net asset value as of 15 minutes after the
close of business on the New York Stock Exchange (generally 4:00 p.m., New York
time), on the day the orders are placed with the Distributor, provided the
orders are received prior to 30 minutes after the close of business on the New
York Stock Exchange (generally 4:00 p.m., New York time), on that day. If the
purchase orders are not received by the Distributor prior to 30 minutes after
the close of business on the New York Stock Exchange (generally 4:00 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 but, as of May 1st, 1997, $5.35) 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
PricingSM 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
27
<PAGE>
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 PricingSM System is set forth under "Merrill Lynch
Select PricingSM System" on page 3.
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.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE (1) FEE FEE CONVERSION FEATURE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales charge(2),(3) No No No
- ------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at a rate of 0.25% 0.50% B shares convert to D shares
4.0% during the first year, decreasing automatically after approximately
1.0% annually to 0.0%(4) ten years(5)
- ------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
decreasing to 0.0% after the first year(6)
- ------------------------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales charge(3) 0.25% No No
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
28
<PAGE>
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge but, if
the initial sales charge is waved, may be subject to a 1.0% CDSC for one
year. A 0.75% sales charge for 401(k) purchases over $1,000,000 will
apply.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are modified. Also, Class
B shares of certain other MLAM-advised mutual funds into which exchanges
may be made have a ten-year conversion period. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund,
the conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will
be tacked onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads) as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE AS DISCOUNT TO
SALES CHARGE AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE THE OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------ ------------------ --------------- ------------------
<S> <C> <C> <C>
Less than $25,000........ 4.00% 4.17% 3.75%
$25,000 but less than
$50,000................. 3.75 3.90 3.50
$50,000 but less than
$100,000................ 3.25 3.36 3.00
$100,000 but less than
$250,000................ 2.50 2.56 2.25
$250,000 but less than
$1,000,000.............. 1.50 1.52 1.25
$1,000,000 and over**.... 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases by certain retirement plans and
participants in connection with certain fee-based programs. If the sales
charge is waived in connection with a purchase of $1,000,000 or more, such
purchases may be subject to a CDSC of 1.0% if the shares are redeemed
within one year after purchase. 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 0.75% sales charge for 401(k) purchases over $1,000,000
will apply.
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 fiscal year ended December
31, 1996, the Fund sold 148,235 Class A shares for aggregate net proceeds of
$1,558,183. The gross sales charge for the sale of Class A shares of the Fund
was $90, of which $8 and $82 were received by the Distributor and Merrill
Lynch, respectively. For the fiscal year ended December 31, 1996, the Fund
sold 19,806 Class D shares for aggregate net proceeds of $207,380. The gross
sales charge for the sale of Class D shares of the Fund was $124 of which the
Distributor received $11 and Merrill Lynch received $113.
29
<PAGE>
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 BlueprintSM
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 discretionary
trustee services, collective investment trusts for which Merrill Lynch Trust
Company serves as trustee, certain Merrill Lynch investment programs that
offer pricing alternatives for securities transactions and purchases made in
connection with certain fee-based programs. In addition, Class A shares are
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 in their initial offerings who wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund also may purchase Class A shares of the
Fund if certain conditions set forth in the Statement of Additional
Information are met for closed-end funds that commenced operations prior to
October 21, 1994. In addition, Class A shares of the Fund and certain other
MLAM-advised mutual funds are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions set
forth in the Statement of Additional Information are met, to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted
by such funds in shares of the Fund and certain other MLAM-advised mutual
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." See
"Shareholder Services--Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A and Class
D shares are offered at net asset value to Employee Access SM Accounts
available through authorized employers. Subject to certain conditions, Class A
and Class D shares are offered at net asset value to shareholders of Merrill
Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal
Bond Fund Inc., and Class A shares are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc., who wish to
reinvest in shares of the Fund the net proceeds from a sale of certain of
their shares of common stock pursuant to tender offers conducted by those
funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
30
<PAGE>
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value to participants in the Merrill Lynch
Blueprint SM Program.
Additional Information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
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.
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
31
<PAGE>
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 CDSC on Class B shares:
<TABLE>
<CAPTION>
CLASS B
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>
For the fiscal year ended December 31, 1996, the Distributor received CDSCs
of $13,295, with respect to Class B shares, all of which were paid to Merrill
Lynch.
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.
32
<PAGE>
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 BlueprintSM 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. No Class C CDSC will be assessed in connection
with redemptions to fund participation in certain fee-based programs. See
"Shareholder Services--Fee-Based Programs."
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.
For the fiscal year ended December 31, 1996, the Distributor received CDSCs
of $292, with respect to Class C shares, all of which were paid to Merrill
Lynch.
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 will also 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.
33
<PAGE>
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 per share.
The Conversion Period also is modified for retirement plan investors which
participate in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.50% 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
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Class C shares of the Fund. The Distribution Plans relating to Class B and
Class C shares are designed to permit an investor to purchase Class B and Class
C shares through dealers without the assessment of an initial sales charge and
at the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended December 31, 1996, the Fund paid the Distributor
$66,442 pursuant to the Class B Distribution Plan (based on average net assets
subject to such Class B Distribution Plan of approximately $8.9 million), all
of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended December 31, 1996, the Fund paid the Distributor
$3,097 pursuant to the Class C Distribution Plan (based on average net assets
subject to such Class C Distribution Plan of $387,006), all of which was paid
to Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class C shares. For the fiscal year
ended December 31, 1996, the Fund paid the Distributor $2,007 pursuant to the
Class D Distribution Plan (based on average net assets subject to such Class D
Distribution Plan of $802,872 ) all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class D 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.
For the year ended December 31, 1996, direct cash expenses exceeded direct
cash revenues of Class B shares by approximately $496. For the year ended
December 31, 1996, direct cash revenues exceeded direct cash expenses of Class
C shares by $784. For the year ended December 31, 1996, fully allocated
expenses exceeded fully allocated accrual revenues of Class B shares by
approximately $254,000. Class "C" fully allocated expenses exceeded fully
allocated accrual revenues by approximately $61.00.
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
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sales charges, the account maintenance fee, the distribution fee and/or the
CDSCs received with respect to one class will not be used to subsidize the sale
of shares of another class. Payments of the distribution fee on Class B shares
will terminate upon conversion of those Class B shares 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, Merrill Lynch Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with
the Transfer Agent may be accomplished by a written
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<PAGE>
letter requesting redemption. Proper notice of redemption in the case of shares
for which certificates have been issued may be accomplished by a written letter
as noted above accompanied by certificates for the shares to be redeemed. The
notice in either event requires the signatures of all persons in whose names
the shares are registered, signed exactly as their names appear on the Transfer
Agent's register or on the certificate, as the case may be. The signature(s) on
the notice must be guaranteed by an "eligible guarantor institution"
(including, for example, Merrill Lynch branch offices and certain other
financial institutions) as such term is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Notarized signatures are not sufficient. In certain instances,
the Transfer Agent may require additional documents, such as, but not limited
to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payment will be mailed within seven
days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a U.S. bank) has been collected for the purchase of
such shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the close of business on the
New York Stock Exchange on the day received and that such request is received
by the Fund from such dealer not later than 30 minutes after the close of
business on the New York Stock Exchange (generally 4:00 p.m., New York time),
on the same day. Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 30 minutes after the close of business on
the New York Stock Exchange (generally 4:00 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, but as of May 1, 1997, $5.35) 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
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
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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. Alternately, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in its shares.
Certain of such services are not available to investors who place purchase
orders for the Fund's shares through the Merrill Lynch BlueprintSM Program.
Full details as to each of such services, copies of the various plans described
below and instructions as to how to participate in the various plans and
services, or to change options with respect thereto, can be obtained from the
Fund by calling 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.
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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 PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class D
shares also may be exchanged for Class A shares of a second MLAM-advised mutual
fund at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund.
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 for 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 of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
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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 $100 or more
through the CMA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND (637-3863).
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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.
For the fiscal year ended December 31, 1996 the Fund's portfolio turnover rate
was 342.71%. The portfolio turnover rate for the 1996 fiscal year was
significantly higher than prior fiscal years primarily due to volatility in the
U.S. and foreign bond markets.
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.
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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.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security held during the
period by (b) the average daily numbers of shares outstanding during the period
that were entitled to receive dividends multiplied by the maximum offering
price per share on the last day of the period. The yield for the 30-day period
ending December 31, 1996 was 4.63% for Class A shares, 4.06% for Class B
shares, 3.98% for Class C shares, and 4.37% for Class D shares.
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 indicative 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
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order to permit the Fund to maintain a more stable level of distributions. As a
result, the distribution paid by the Fund for any particular period may be more
or less than the amount of net investment income earned by the Fund during such
period. However, it is the Fund's intention to distribute during any fiscal
year all its net investment income. Shares will accrue dividends as long as
they are issued and outstanding. Shares are issued and outstanding as of the
settlement date of a purchase order to the settlement date of a redemption
order. All net realized long- or short-term capital gains, if any, are
distributed to the Fund's shareholders at least annually.
The per share dividends and distributions on 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
The net asset value of the shares of all classes is determined once daily by
the Manager immediately after the declaration of dividends as of 15 minutes
after the closing time (generally 4:00 p.m. New York City time) on each day
during which the New York Stock Exchange is open for trading and on any other
day on which there is sufficient trading in the Fund's portfolio securities
that net asset value might be materially affected but only if on any such day
the Fund is required to sell or redeem shares.
43
<PAGE>
Any assets or liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market rates as
quoted by one or more banks or dealers on the day of valuation. The net asset
value per share is computed by dividing the market value of the securities held
by the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time. Expenses,
including the fees payable to the Manager and 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 daily
expense accruals of the account maintenance fees applicable with respect to
Class D shares. Moreover, the per share net asset value of Class D shares
generally will be higher than the per share net asset value of Class B and
Class C shares, reflecting the daily expense accruals of the distribution and
higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions which will differ by approximately
the amount of the expense accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter ("OTC") market
are valued at the last available bid price in the OTC market prior to the time
of valuation. Portfolio securities that are traded both in the OTC market and
on a stock exchange are valued according to the broadest and most
representative market. When the Fund writes an option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last asked price. Options purchased by the Fund
are valued at their last sale price in the case of exchange-traded options or
in the case of options traded in the OTC market, the last bid price. Other
investments, including futures contracts and related options, are stated at
market value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund. Such valuations and procedures
will be reviewed periodically by the Board of Directors.
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.
44
<PAGE>
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.
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.
45
<PAGE>
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.
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 advisors 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.
46
<PAGE>
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.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, 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 Merrill Lynch 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.
47
<PAGE>
[This Page Intentionally Left Blank]
48
<PAGE>
MERRILL LYNCH ASSET INCOME FUND--AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
<TABLE>
<S> <C> <C> <C>
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
</TABLE>
of Merrill Lynch 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 Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................... 4. ................................
2. .................................... 5. ................................
3. .................................... 6. ................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address................................ Name and Address of Employer ......
....................................... ...................................
(Zip Code) ...................................
Occupation............................. ...................................
....................................... Signature of Co-Owner (if any)
Signature of Owner
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
Select [_] Reinvest Select [_] Reinvest
One: [_] Cash One: [_] Cash
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 MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor ........................................................
Signature of Depositor .................................. Date.................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
49
<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 UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
Signature of Owner................... Signature of Co-Owner (if any).......
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
..................., 19......
Date of Initial Purchase
Dear Sir/Madam:
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.
By .................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number.......................
Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
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 or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
- - - Withdrawal Plan. We guarantee the
Shareholder's signature.
This form, when completed, should .....................................
be mailed to: Dealer Name and Address
Merrill Lynch Asset Income Fund By ..................................
c/o Merrill Lynch Financial Authorized Signature of Dealer
Data Services, Inc.
P.O. Box 45289 [][][] [][][][]
Jacksonville, FL 32232-5289 Branch- F/C No. ...............
Code F/C Last Name
[][][] [][][][][]
Dealer's Customer A/C No.
50
<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 ---------------------------------
Name of Owner...................... ---------------------------------
Social Security Number or
Name of Co-Owner (if any).......... Taxpayer Identification
Number
Address............................ Account Number ....................
(if existing account)
...............................
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND CLASS 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 or as soon as possible thereafter.
(month)
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 MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
...............................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
51
<PAGE>
MERRILL LYNCH ASSET INCOME FUND--AUTHORIZATION FORM (PART 2) -- (CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
<TABLE>
<S> <C> <C> <C>
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
</TABLE>
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.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA DRAWN BY MERRILL LYNCH FINANCIAL
SERVICES, INC. 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:
To...............................Bank
(Investor's Bank)
Bank Address.........................
City...... State...... Zip Code......
Amount of each ACH debit $........
As a convenience to me, I hereby
Account Number ................... request and authorize you to pay and
charge to my account ACH debits
drawn on my account by and payable
to Merrill Lynch Financial Data
Services, Inc. I agree that your
rights in respect to each such debit
shall be the same as if it were a
check drawn on you and signed
personally by me. This authority is
to remain in effect until revoked
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.
Please date and invest ACH debits on
the 20th of each month beginning
......(month) or as soon thereafter as
possible.
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 credit my bank
account. I further agree that if a
check or debit is not honored upon
presentation, Merrill Lynch Financial
Data Services, Inc. is authorized to
discontinue immediately the Automatic
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
dishonored debit.
............ .....................
Date Signature of
Depositor
............ .....................
Bank Signature of Depositor
Account (If joint account,
Number both must sign)
............ .....................
Date Signature of
Depositor
......................
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.
52
<PAGE>
[This Page Intentionally Left Blank]
53
<PAGE>
[This Page Intentionally Left Blank]
54
<PAGE>
MANAGER
Merrill Lynch Asset Management, LP
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 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
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 REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION 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 PricingSM System...................................... 3
Financial Highlights....................................................... 8
Risk Factors and Special Considerations.................................... 10
Investment Objectives and Policies......................................... 11
Debt Securities........................................................... 12
Equity Securities......................................................... 14
Money Market Securities................................................... 15
Portfolio Strategies Involving Options and Futures........................ 15
Other Investment Policies and Practices................................... 20
Management of the Fund..................................................... 24
Board of Directors........................................................ 24
Management and Advisory Arrangements...................................... 25
Code of Ethics............................................................ 26
Transfer Agency Services.................................................. 26
Purchase of Shares......................................................... 27
Initial Sales Charge Alternatives--Class A and Class D Shares............. 29
Deferred Sales Charge Alternatives--Class B and Class C Shares............ 31
Distribution Plans........................................................ 34
Limitations on the Payment of Deferred Sales Charges...................... 36
Redemption of Shares....................................................... 36
Redemption................................................................ 36
Repurchase................................................................ 37
Reinstatement Privilege--Class A and Class D Shares....................... 37
Shareholder Services....................................................... 38
Fee Based Programs......................................................... 40
Portfolio Transactions and Brokerage....................................... 41
Performance Data........................................................... 41
Additional Information..................................................... 42
Dividends and Distributions............................................... 42
Determination of Net Asset Value.......................................... 43
Taxes..................................................................... 44
Organization of the Fund.................................................. 46
Shareholder Reports....................................................... 47
Shareholder Inquiries..................................................... 47
Authorization Form......................................................... 49
</TABLE>
Code #18235--0497
[LOGO] MERRILL LYNCH
MERRILL LYNCH
ASSET INCOME FUND, INC.
[ART]
PROSPECTUS
April 25, 1997
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 PricingSM 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 PricingSM 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 April 25,
1997 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
or by writing the Fund at the above telephone number or address. 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 April 25, 1997.
<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" or "MLAM"), 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. 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.
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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
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generally pay above average dividends and may offer the potential for capital
appreciation. Such securities will be subject to the risks customarily
associated with the real estate industry, including declines in the value of
the real estate investments of the trusts. Real estate values are affected by
numerous factors including (i) governmental regulations (such as zoning and
environmental laws) and changes in tax laws, (ii) operating costs, (iii) the
location and the attractiveness of the properties, (iv) changes in economic
conditions (such as fluctuations in interest and inflation rates and business
conditions) and (v) supply and demand for improved real estate. Such trusts
also are dependent on management skill and may not be diversified in their
investments.
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,
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<PAGE>
of course, may be offset by a decline in the market value of the underlying
security during the option period. If a call option is exercised, the writer
would realize a gain or loss from the sale of the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so
long as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt or equity securities
denominated in U.S. dollars or non-U.S. currencies with a securities depository
with a value equal to or greater than the 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
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<PAGE>
expiration, a put option may be sold in a closing sale transaction; profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the put option plus the related transaction cost. A
closing sale transaction cancels out the Fund's position as the purchaser of an
option by means of an offsetting sale of an identical option prior to the
expiration of the option it has purchased. In certain circumstances, the Fund
may purchase call options on securities held in its portfolio on which it has
written call options or on securities which it intends to purchase. The Fund
may purchase either exchange traded options or OTC options. The Fund will not
purchase options on securities (including stock index options discussed below)
if as a result of such purchase the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the
Fund's total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin," are required to be made on a daily
basis as the price of the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable, a process known
as "mark to the market." At any time prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite position
which will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the 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
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generally less than one tenth of one percent due to the costs of converting
from one currency to another. However, the Fund has authority to deal in
forward foreign exchange among currencies of the different countries in which
it will invest as a hedge against possible variations in the foreign exchange
rates among these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption of shares of the Fund or the
payment of dividends and distributions by the Fund. Position hedging is the
sale of forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not speculate in
forward foreign exchange. The Fund may not position hedge with respect to the
currency of a particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in its portfolio
denominated or quoted in that particular foreign currency. If the Fund enters
into a position hedging transaction, its custodian will place cash or liquid
equity or debt securities in a separate account of the Fund in an amount equal
to the value of the Fund's total assets committed to the consummation of such
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
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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 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
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may invest in securities of a single issuer. However, the Fund's investments
will be limited so as to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code of 1986, as amended. See "Dividends,
Distributions and Taxes--Taxes." To qualify, among other requirements, the Fund
will limit its investments so that, at the close of each quarter of the taxable
year, (i) not more than 25% of the market value of the Fund's total assets will
be invested in the securities of a single issuer, and (ii) with respect to 50%
of the market value of its total assets, not more than 5% of the market value
of its total assets will be invested in the securities of a single issuer, and
the Fund will not own more than 10% of the outstanding voting securities of a
single issuer. A fund which elects to be classified as "diversified" under the
Investment Company Act must satisfy the foregoing 5% and 10% requirements with
respect to 75% of its total assets. To the extent that the Fund assumes large
positions in the securities of a small number of issuers, the Fund's net asset
value may fluctuate to a greater extent than that of a diversified company as a
result of changes in the financial condition or in the market's assessment of
the issuers.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt or equity securities denominated 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
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of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the 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.
10
<PAGE>
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
non-diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
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.
11
<PAGE>
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
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. As of the
date hereof, 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).
(iv) 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 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 15% of the total assets of the Fund, taken at market
value, together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the Fund to
a primary U.S. Government securities dealer recognized by the Federal Reserve
Bank of New York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer
12
<PAGE>
at a predetermined price, then the Fund will treat as illiquid such amount of
the underlying securities as is equal to the repurchase price less the amount
by which the option is "in-the-money" (i.e., current market value of the
underlying securities minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money." This policy as to OTC options is not a
fundamental policy of the Fund and may be amended by the Directors of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
Commission staff of its position.
Portfolio securities of the Fund generally may not be purchased from, sold or
loaned to the Manager or its affiliates or any of their directors, general
partners, officers or employees, acting as principal, unless pursuant to a rule
or exemptive order under the Investment Company Act.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving the Manager's
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"), or its affiliates except for brokerage transactions permitted under
the Investment Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions and Brokerage." Without such an exemptive order,
the Fund would be prohibited from engaging in portfolio transactions with
Merrill Lynch or its affiliates acting as principal and from purchasing
securities in public offerings which are not registered under the Securities
Act of 1933, as amended, in which such firm or any of its affiliates
participate as an underwriter or dealer.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their ages and 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 (64)--President and Director(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of Fund Asset Management, L.P. ("FAM") (which term as used herein
includes its corporate predecessors) since 1977; President and Director of
Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML&Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor").
Joe Grills (62)--Director--183 Soundview Lane, New Canaan, Connecticut 06840.
Member of the Committee on Investment of Employee Benefit 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 Incorporated ("IBM") and Chief
Investment Officer of IBM Retirement Fund from 1986 until 1993; Member of the
Investment Advisory Committee of the State of New York Common Retirement Fund;
Director of Duke Management Company and LaSalle Street Fund; Member of
Investment Advisory Committee to the Howard Hughes Medical Institute; Director
of Duke Management Company since 1993; Director, LaSalle Street Fund since
1995; Director Kimco Realty Corporation since January 1997.
13
<PAGE>
Walter Mintz (68)--Director--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Partners (investment partnership)
since 1982.
Robert S. Salomon, JR. (60)--Director--106 Dolphin Cove Quay, Stamford,
Connecticut 06902. Principal of STI Management (investment adviser); Director,
Common Fund and the Norwalk Community Technical College Foundation; Chairman
and CEO of Salomon Brothers Asset Management from 1992 until 1995; Chairman of
Salomon Brothers equity mutual funds from 1992 until 1995; Director of Stock
Research and U.S. Equity Strategist at Salomon Brothers from 1975 until 1991.
Melvin R. Seiden (66)--Director--780 Third Avenue, New York, New York 10017.
Director of Silbanc Properties, Ltd. (real estate, consulting and investments)
and President thereof since 1987; Chairman and President of Seiden & de
Cuevas, Inc. (private investment firm) from 1964 to 1987.
Stephen B. Swensrud (63)--Director--24 Federal Street, Suite 400, Boston,
Massachusetts 02110. Chairman of Fernwood Associates (financial consultants)
since 1996 and Principal thereof since 1975.
Terry K. Glenn (56)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.
Norman R. Harvey (63)--Senior Vice President(1)(2)--Senior Vice President of
the Manager and FAM since 1982.
Donald C. Burke (36)--Vice President(1)(2)--Vice President of the Manager
since 1990.
Thomas R. Robinson (53)--Vice President(1)(2)--Senior Portfolio Manager of
the Manager since November 1995; Manager of International Equity Strategy of
ML & Co.'s Global Securities Research and Economics Group from 1989 to 1995.
Gerald M. Richard (47)--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.
- --------
(1) Interested person, as defined in the Investment Company Act of 1940, of
the Company.
(2) The officers of the Fund are officers of certain other investment
companies for which the Manager or FAM acts as investment adviser.
Pursuant to the terms of the management agreement with the Fund, the Manager
pays all compensation of officers of the Fund as well as the fees of all
Directors who are affiliated persons of the Manager. The Fund pays each
Director not affiliated with the Manager (each a "non-interested Director") a
fee of $2,000 per year plus $400 per meeting attended, together with such
Director's actual out-of-pocket expenses relating to attendance at meetings.
The Fund also compensates members of its Audit and Nominating Committee (the
"Committee"), which consists of all of the non-interested Directors, with a
fee of $1,000 per year; the Chairman of the Committee receives an additional
annual fee of $1,000 per year. For the fiscal year ended December 31, 1996,
fees and expenses paid to the non-interested Directors which were allocated to
the Fund aggregated $12,360.
14
<PAGE>
The following table sets forth for the fiscal year ended December 31, 1996
compensation paid by the Fund to the non-interested Directors and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
investment companies (including the Fund) advised by MLAM and its affiliate,
FAM ("MLAM/FAM Advised Funds") to the non-interested Directors:
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION FROM
RETIREMENT BENEFITS FUND AND MLAM/FAM
AGGREGATE COMPENSATION ACCRUED AS PART ADVISED FUNDS
NAME OF DIRECTOR FROM FUND OF FUND EXPENSE PAID TO DIRECTORS(1)
- ---------------- ---------------------- ------------------- -----------------------
<S> <C> <C> <C>
Walter Mintz(1)......... $2,500 None $164,000
Melvin R. Seiden(1)..... $2,500 None $164,000
Stephen B. Swensrud(1).. $2,250 None $154,250
Joe Grills(1)........... $2,500 None $164,000
Robert S. Salomon,
Jr.*(1)................ $2,375 None $187,167
</TABLE>
- --------
* Mr. Salomon was elected as a Director of the Fund on January 17, 1996.
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows:
Mr. Grills (18 registered investment companies consisting of 37
portfolios); Mr. Mintz (18 registered investment companies consisting of
37 portfolios); Mr. Salomon (18 registered investment companies consisting
of 37 portfolios); Mr. Seiden (18 registered investment companies
consisting of 37 portfolios); Mr. Swensrud (20 registered investment
companies consisting of 48 portfolios).
At March 31, 1997, the officers and Directors of the Fund as a group (11
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.
As of March 31, 1997, ML Trust Company of California and ML Trust Company of
America owned 6.9% and 19.7% of the outstanding Class A shares of the Fund,
respectively.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives
or other factors, a particular security may be bought for one or more clients
when one or more clients are selling the same security. If purchases or sales
of securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its other advisory clients arise for consideration
at or about the same time, transactions in such securities will be made,
insofar as feasible, for the respective funds and clients in a manner deemed
equitable to all. To the extent that transactions on behalf of more than one
client of the Manager or its affiliates during the same period may increase
the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price.
The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). As discussed in the Prospectus, the Management
Agreement provides that the Fund will pay the Manager a monthly fee at the
annual rate of 0.75% of the average daily net assets of the Fund. This fee is
higher than that of most mutual funds, but management of the Fund believes
this fee, which is typical for a global fund, is justified by the global
nature of the Fund. For the fiscal year ended December 31, 1996, the
management
15
<PAGE>
fees paid by the Fund to the Manager totaled $103,776, all of which was waived.
For the fiscal year ended December 31, 1995, the management fee paid by the
Fund to the Manager totaled $80,601, all of which was waived. For the period
from September 2, 1994 (commencement of operations) to December 31, 1994, the
management fee paid by the Fund to the Manager totaled $16,460, all of which
was waived. For the fiscal year ended December 31, 1996, the Manager
voluntarily reimbursed the Fund for additional expenses of $345,299. For the
fiscal year ended December 31, 1995, the Manager voluntarily reimbursed the
Fund for additional expenses of $476,619. For the period from September 2, 1994
(commencement of operations) to December 31, 1994, the Manager voluntarily
reimbursed the Fund for additional expenses of $99,325.
The Manager may discontinue waiver of its management fee and any voluntary
reimbursement by the Manager of the Fund's expenses in whole or in part at any
time without notice.
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. For the fiscal year ended
December 31, 1996, the amount of such reimbursement was $35,078. For the fiscal
year ended December 31, 1995, the amount of such reimbursement was $74,125. For
the period from September 2, 1994 (commencement of operations) to December 31,
1994, the amount of such reimbursement was $10,120. 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.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect wholly-owned subsidiary of ML & Co. and
an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a fee
for providing investment advisory services to the Manager with respect to the
Fund in an amount to be determined from time to time by the Manager and MLAM
U.K., but in no event in excess of the amount that the Manager actually
receives for providing services to the Fund pursuant to the Management
Agreement.
Duration and Termination. Renewal of the Management Agreement for one year
was approved by the Board of Directors, including a majority of the
disinterested directors, on March 26, 1997. Unless earlier
16
<PAGE>
terminated as described below, the Management Agreement will remain in effect
from year to year if approved annually (a) by the Board of Directors or by a
majority of the outstanding shares of the Fund and (b) by a majority of the
Directors who are not parties to such contracts or interested persons (as
defined in the Investment Company Act) of any such party. Such contracts are
not assignable and may be terminated without penalty on 60 days' written notice
at the option of either party thereto or by the vote of the shareholders of the
Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM 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 PricingSM System is used by more than 50 registered
investment companies advised by MLAM or its affiliate, FAM. Funds advised by
MLAM or FAM which utilize the Merrill Lynch Select Pricing SM System are
referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with 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,
17
<PAGE>
by an individual, his spouse and their children under the age of 21 years
purchasing shares for his or their own account and to single purchases by a
trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account (including a pension, profit-sharing or other employee
benefit trust created pursuant to a plan qualified under Section 401 of the
Code) although more than one beneficiary is involved. The term "purchase" also
includes purchases by any "company," as that term is defined in the Investment
Company Act, but does not include purchases by any such company which has not
been in existence for at least six months or which has no purpose other than
the purchase of shares of the Fund or shares of other registered investment
companies at a discount; provided, however, that it does not include purchases
by any group of individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser. For the fiscal year ended December 31, 1996, the
Distributor received $8 and $11 as sales charges on Class A and Class D shares,
respectively, and Merrill Lynch, the only selected dealer for the Fund for such
period received $82 and $113 as sales charges on Class A and Class D shares,
respectively. For the fiscal year end December 31, 1995, the Distributor
received $14 and $246 as sales charges on the Class A and Class D shares,
respectively, and Merrill Lynch, the only selected dealer for the Fund for such
period, received $112 and $3,035 as sales charges on the Class A and Class D
shares, respectively. For the period September 2, 1994 (commencement of
operations) to December 31, 1994, the Distributor received $271 and $0 as sales
charges on Class A and Class D shares, respectively, and Merrill Lynch, the
only selected dealer for the Fund for such period, received $3,551 and $0 as
sales charges on the Class A and Class D shares, respectively.
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
18
<PAGE>
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 5% 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 5% 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.
Employee Access SM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee Access SM Accounts available through authorized employers that
provide employer-sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
Merrill Lynch BlueprintSM Program. Class D shares of the Fund are offered to
participants in the Merrill Lynch BlueprintSM 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.
19
<PAGE>
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 BlueprintSM Program, P.O. Box
30441, New Brunswick, New Jersey 08989-0441.
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 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 the investor
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 a
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; Second,
such purchase of Class D shares must be made within 90 days after such notice
of termination.
Closed-End Fund Investment Option. 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 (the
20
<PAGE>
date Merrill Lynch Select Pricing SM System commenced operations) and wish to
reinvest the net proceeds of a sale of their closed-end fund shares of common
stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to buy Class A shares) or Class D shares of the Fund and other MLAM-advised
mutual funds ("Eligible Class D shares") if the following conditions are met.
First, the sale of closed-end fund shares must be made through Merrill Lynch,
and the net proceeds therefrom must be immediately reinvested in Eligible
Class A or Class D shares. Second, the closed-end fund shares must either have
been acquired in the initial public offering or be shares representing
dividends from shares of common stock acquired in such offering. Third, the
closed-end fund shares must have been continuously maintained in a Merrill
Lynch securities account. Fourth, there must be a minimum purchase of $250 to
be eligible for the reinvestment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and the
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, a shareholder of one of the above-
referenced continuously offered closed-end funds (an "eligible fund") must
sell his or her shares of common stock of the eligible fund (the "eligible
shares") back to the fund in connection with a tender offer conducted by the
eligible fund and reinvest the proceeds immediately in the designated class of
shares of the Fund. This investment option is available only with respect to
eligible shares as to which no Early Withdrawal Charge or CDSC (each as
defined in the eligible fund's prospectus) is applicable. Purchase orders from
eligible fund shareholders wishing to exercise this investment option will be
accepted only on the day that the related tender offer terminates and will be
effected at the net asset value of the designated class of the Fund on such
day.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
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
21
<PAGE>
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
Objectives 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.
FEE-BASED PROGRAMS.
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares, which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified. Termination of participation in a Program may result in the
redemption of such shares or the automatic exchange thereof to another class at
net asset value. In addition, upon termination of participation in a Program,
shares that have been held for less than specified periods within such Program
may be subject to a fee based upon the current value of such shares. These
Programs also generally prohibit such shares from being transferred to another
account at Merrill Lynch, to another broker-dealer or to the Transfer Agent.
Except in limited circumstances (which may also involve an exchange as
described above), such shares must be redeemed and another class of shares
purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding
a specific Program (including charges and limitations on transferability
applicable to shares that may be held in such Program) is available in the
Program's client agreement and from Merrill Lynch Investor Services at (800)
MER-FUND (637-3863).
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or numbers of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain others plans
may purchase Class B shares with a waiver of CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the share of any MLAM-advised
mutual fund. Minimum purchase requirements may be waived or varied for such
plans. Additional information regarding purchases by employer-sponsored
retirement or savings and certain other arrangements is available toll-free
from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each, a "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Fund to the
Distributor with respect to such classes.
Payments of the account maintenance fees and/or distribution fees are subject
to the provisions of Rule 12b-1 under the Investment Company Act. See "General
Information--Description of Shares." Among other
22
<PAGE>
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 Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
The following tables set forth comparative information as of December 31,
1996 with respect to Class B shares and Class C shares of the Fund indicating
the maximum allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to the Class B shares, the Distributor's
voluntary maximum for the year ended December 31, 1996.
23
<PAGE>
DATA CALCULATED AS OF DECEMBER 31, 1996
CLASS B
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE AMOUNT DISTRIBUTION
ALLOWABLE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
ELIGIBLE AGGREGATE ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
GROSS SALES(1) SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------------- ------------- ---------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $10,906 $682 $114 $796 $123 $673 $43
Under Distributor's
Voluntary Waiver....... $10,906 $682 $ 55 $737 $123 $614 $43
</TABLE>
CLASS C
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE AMOUNT DISTRIBUTION
ALLOWABLE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
ELIGIBLE AGGREGATE ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
GROSS SALES(5) SALES CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------------- ------------- ---------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $647 $40 $7 $47 $4 $43 $2
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since September 2, 1994
(commencement of Class B operations) other than shares acquired through
dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly average prime rate basis based upon the
prime rate, as reported in The Wall Street Journal, plus 1.0%, as
permitted under the NASD Rule.
(3) Consists of CDSC payments, distribution fee payment and accruals.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
(5) Purchase price of all eligible Class C shares sold since October 21, 1994
(commencement of Class C operations) other than shares acquired through
dividend reinvestment and the exchange privilege.
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 CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain
24
<PAGE>
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.
For the fiscal year ended December 31, 1996, Merrill Lynch received CDSCs of
$13,295 and $292 relating to transactions in Class B and Class C Shares,
respectively. For the fiscal year ended December 31, 1995, Merrill Lynch
received CDSCs of $13,537 and $36, relating to transactions in Class B and
Class C shares of the Fund, respectively. For the period September 2, 1994
(commencement of operations) to December 31, 1994, Merrill Lynch received CDSCs
of $968 and $0 relating to transactions in Class B and Class C shares of the
Fund, respectively.
Merrill Lynch BlueprintSM Program. Class B shares are offered to certain
participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). Blueprint
is directed to small investors, group IRAs and participants in certain affinity
groups such as trade associations and credit unions. Class B shares of the Fund
are offered through Blueprint only to members of certain affinity groups. The
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 BlueprintSM Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Retirement Plans. Any Retirement Plan which does not meet the qualifications
to purchase Class A 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.
25
<PAGE>
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. For the fiscal years
ended December 31, 1996 and 1995, the Fund's portfolio turnover rates were
342.71% and 46.75%, respectively. The portfolio turnover rate for the 1996
fiscal year was significantly higher than prior fiscal years primarily due to
volatility in the U.S. and foreign bond markets.
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States will be conducted
primarily on the principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock exchange transactions
are generally higher than in the United States, although the Fund will endeavor
to achieve the best net results in effecting its portfolio transactions. There
is generally less governmental supervision and regulation of foreign stock
exchanges and brokers than in the United States.
The Fund invests in certain securities traded in the over-the-counter market
and, where possible, deals directly with the dealers who make a market in the
securities involved except in those circumstances in which better prices and
execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund and persons who are affiliated with such affiliated
persons are prohibited from dealing with the 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
26
<PAGE>
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.
For the fiscal year ended December 31, 1996, the Fund paid total brokerage
commissions of $14,580, of which $1,286, or 8.8%, was paid to Merrill Lynch for
effecting 13.4% of the aggregate dollar amount of transactions on which the
Fund paid brokerage commissions. For the fiscal year ended December 31, 1995,
the Fund paid total brokerage commissions of $5,112, of which $611, or 12.0%,
was paid to Merrill Lynch for effecting 11.6% of the aggregate dollar amount of
transactions on which the Fund paid brokerage commissions. For the period
September 2, 1994 (commencement of operations) to December 31, 1994, the Fund
paid total brokerage commissions of $4,985, of which $342, or 6.9%, was paid to
Merrill Lynch for effecting 10.4% of the aggregate dollar amount of
transactions on which the Fund paid brokerage commissions.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" on page 42 of the Prospectus. The net asset value of the shares of the
Fund is determined once daily by the Manager immediately after the declaration
of dividends as of 15 minutes after the closing time (generally 4:00 p.m. New
York City time) on each day during which the New York Stock Exchange is open
for trading and on
27
<PAGE>
any other day on which there is sufficient trading in the Fund's portfolio
securities that net asset value might be materially affected but only if on any
such day the Fund is required to sell or redeem shares. 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 (although not necessarily
meet) immediately after the payment of dividends or distributions, which will
differ by approximately the amount of the expense accrual differential between
the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter ("OTC") market
are valued at the last available bid price in the OTC market prior to the time
of valuation. Portfolio securities that are traded both in the OTC market and
on a stock exchange are valued according to the broadest and most
representative market. When the Fund writes an option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last asked price. Options purchased by the Fund
are valued at their last sale price in the case of exchange-traded options or
in the case of options traded in the OTC market, the last bid price. Other
investments, including futures contracts and related options, are stated at
market value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund. Such valuations and procedures
will be reviewed periodically by the Board of Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services and copies of the various plans described below can be obtained
from the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
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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 $100 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.
29
<PAGE>
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
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
U.S. 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 PricingSM System, Class A shareholders may exchange Class
A shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
30
<PAGE>
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of the
second fund. Class B, Class C and Class D shares will be exchangeable with
shares of the same class of other MLAM-advised mutual funds. For purposes of
computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other fund as more fully described below. Class A, Class B, Class C and Class D
shares also will be exchangeable for shares of certain MLAM-advised money
market funds specifically designated below as available for exchange by holders
of Class A, Class B, Class C or Class D shares. Shares with 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 certain 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
31
<PAGE>
shares for two and a half years. The 2% sales charge that generally would apply
to a redemption would not apply to the exchange. Three years later the investor
may decide to redeem the Class B shares of Merrill Lynch Global Resources Trust
and receive cash. There will be no contingent deferred sales charge due on this
redemption, since by "tacking" the two and a half year holding period of the
Fund's Class B shares to the three year holding period for the Merrill Lynch
Global Resources Trust Class B shares, the investor will be deemed to have held
the new Class B shares for more than 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.
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
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<PAGE>
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."
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
33
<PAGE>
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.
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
34
<PAGE>
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.
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.
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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 own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield 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.
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<PAGE>
Set forth below is total return and yield information for Class A, Class B,
Class C and Class D shares for the Fund.
<TABLE>
<CAPTION>
EXPRESSED AS A REDEEMABLE VALUE OF A
PERCENTAGE BASED HYPOTHETICAL $1,000
ON A HYPOTHETICAL INVESTMENT AT THE
PERIOD $1,000 INVESTMENT END OF THE PERIOD
------ ----------------------- ------------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C>
One Year Ending December
31, 1996
Class A............... 2.82 % $ 1,028.20
Class B............... 2.34 % $ 1,023.40
Inception (September 2,
1994) to December 31,
1996
Class A............... 7.77 % $ 1,190.40
Class B............... 8.09 % $1,198.60
One Year Ending December
31, 1996
Class C............... 5.26 % $ 1,052.60
Class D............... 2.57 % $ 1,025.70
Inception (October 21,
1994) to December 31,
1996
Class C............... 9.67 % $ 1,224.50
Class D............... 8.24 % $ 1,189.70
<CAPTION>
EXPRESSED AS A REDEEMABLE VALUE OF A
PERCENTAGE BASED HYPOTHETICAL $1,000
ON A HYPOTHETICAL INVESTMENT AT THE
PERIOD $1,000 INVESTMENT END OF THE PERIOD
------ ----------------------- ------------------------
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C>
One Year Ending December
31, 1996
Class A............... 7.11 % $ 1,071.10
Class B............... 6.31 % $ 1,063.10
One Year Ending December
31, 1995
Class A............... 17.38 % $ 1,173.80
Class B............... 16.51 % $ 1,165.10
Inception (September 2,
1994) to December 31,
1994
Class A............... (1.37)% $ 986.30
Class B............... (1.62)% $ 983.80
One Year Ending December
31, 1996
Class C............... 6.25 % $ 1,062.50
Class D............... 6.84 % $ 1,068.40
One Year Ending December
31, 1995
Class C............... 16.33 % $ 1,163.30
Class D............... 16.97 % $ 1,169.70
Inception (October 21,
1994) to December 31,
1994
Class C............... (0.94)% $ 990.60
Class D............... (0.83)% $ 991.70
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C>
Inception (September 2,
1994) to December 31,
1996
Class A............... 19.04 % $ 1,190.40
Class B............... 19.86 % $ 1,198.60
Inception (October 21,
1994) to December 31,
1996
Class C............... 15.24 % $ 1,152.40
Class D............... 18.97 % $ 1,189.70
30 Days Ended December
31, 1996 YIELD
-----
Class A............... 4.63 %
Class B............... 4.06 %
Class C............... 3.98 %
Class D............... 4.37 %
</TABLE>
37
<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.
38
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A, Class B, Class C and Class D shares of the
Fund, based on the value of the Fund's net assets and number of shares
outstanding as of December 31, 1996, is calculated as set forth below. 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 CLASS C CLASS D
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Net Assets............................. $3,918,053 $8,690,463 $357,373 $632,559
========== ========== ======== ========
Number of Shares Outstanding........... 372,079 825,099 33,935 60,067
========== ========== ======== ========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding).......................... $ 10.53 $ 10.53 $ 10.53 $ 10.53
Sales Charge (for Class A and Class D
shares: 4.00% of offering price (4.17%
of net asset value per share))*....... .44 ** ** .44
---------- ---------- -------- --------
Offering Price......................... $ 10.97 $ 10.53 $ 10.53 $ 10.97
========== ========== ======== ========
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares and Class C 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 and "Redemption of Shares--Deferred Sales Charge--Class B and
Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche llp, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The 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
Merrill Lynch Financial Data Services, Inc., 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.
LEGAL COUNSEL
Rogers & Wells, 200 Park Avenue, New York, New York 10166, is counsel for the
Fund.
39
<PAGE>
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.
40
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
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.
41
<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.
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
42
<PAGE>
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:
"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.
43
<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.
AAA Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only
in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. BB indicates the
least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures
to adverse conditions.
44
<PAGE>
BB Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating
category is also used for debt subordinated to senior debt that
is assigned an actual or implied BBB- rating.
B Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category is also used
for debt subordinated to senior debt that is assigned an actual
or implied BB or BB- rating.
CCC Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial,
and economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating
category is 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.
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
45
<PAGE>
obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A-1" for
the highest quality obligations to "D" for the lowest. The four categories are
as follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2, and 3 to indicate the relative degree of safety.
A-1
This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
A-2
Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3
Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period.
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.
46
<PAGE>
II.
Nature of, and provisions of, the issue.
III.
Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for
issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to make payments for a preferred stock in this category
than for issues in the "A" category.
CCC Preferred stock rated "BB," "B," and "CCC" are regarded, on balance,
as predominately speculative with respect to the issuer's capacity
to pay preferred stock obligations. "BB" indicates the lowest degree
of speculation and "CCC" the highest degree of speculation. While
such issues will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears
on dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
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.
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Shareholders, Merrill Lynch Asset Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Asset Income Fund, Inc. as of
December 31, 1996, the related statements of operations for the year then ended
and changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the two-year
period then ended and the period September 2, 1994 (commencement of operations)
to December 31, 1994. These financial statements and the financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
December 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Asset
Income Fund, Inc. as of December 31, 1996, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 14, 1997
48
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Argentina Banking 794 Banco Frances del Rio de la Plata
S.A. (ADR)* $ 18,594 $ 21,821 0.2%
Oil & Gas Producers 1,200 Yacimientos Petroliferos Fiscales
S.A. (Class D)(ADR)* 25,283 30,300 0.2
Total Common Stocks in Argentina 43,877 52,121 0.4
Brazil Beverages 45,000 Companhia Cervejaria Brahma S.A.
PN (Preferred) 25,807 24,603 0.2
Oil & Related 230,000 Petroleo Brasileiro S.A.--Petrobras
(Preferred) 27,101 36,640 0.3
Telecommunications 400 Telecomunicacoes Brasileiras S.A.--
Telebras (ADR)* 21,165 30,600 0.2
Total Common Stocks in Brazil 74,073 91,843 0.7
Canada Automobile Parts 500 Magna International Inc. (Class A) 22,929 27,875 0.2
Mining 280 Potash Corp. of Saskatchewan, Inc. 17,625 23,800 0.2
Multi-Industry 1,000 Canadian Pacific, Ltd. 17,418 26,500 0.2
Total Common Stocks in Canada 57,972 78,175 0.6
Finland Telecommunications 500 Nokia Corp. (ADR)* 17,218 28,813 0.2
Equipment
Total Common Stocks in Finland 17,218 28,813 0.2
France Iron & Steel 1,900 Usinor-Sacilor S.A. 29,039 27,650 0.2
Reinsurance 700 Scor S.A. 26,665 24,624 0.2
Semiconductor Capital 400 ++SGS-Thompson Microelectronics N.V.
Equipment (NY Registered Shares) 15,040 28,000 0.2
Tires & Rubber 600 Michelin (C.G.D.E.)(Class B) 26,463 32,394 0.2
Total Common Stocks in France 97,207 112,668 0.8
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Germany Chemicals 75 ++Henkel KGaA $ 3,334 $ 3,598 0.0%
675 ++Henkel KGaA (Preferred) 28,688 33,915 0.3
----------- ----------- ------
32,022 37,513 0.3
Electronics 500 Siemens AG 22,176 23,562 0.2
Footwear 100 ++Puma AG 3,247 3,393 0.0
Machinery & 70 Mannesmann AG 19,573 30,348 0.2
Equipment
Total Common Stocks in Germany 77,018 94,816 0.7
Hong Kong Banking 1,200 HSBC Holdings PLC 18,562 25,679 0.2
Telecommunications 1,200 Hong Kong Telecommunications,
Ltd. (ADR)* 21,418 19,500 0.1
Total Common Stocks in Hong Kong 39,980 45,179 0.3
Indonesia Telecommunications 720 P.T. Indonesian Satellite Corp.
(ADR)* 26,205 19,710 0.1
Total Common Stocks in Indonesia 26,205 19,710 0.1
Italy Telecommunications 8,500 Societa Finanziara Telefonica
S.p.A. (STET) 24,838 38,630 0.3
Total Common Stocks in Italy 24,838 38,630 0.3
Japan Building & 3,000 Maeda Corp. 31,463 22,202 0.2
Construction 4,000 Okumura Corp. 35,729 24,318 0.2
----------- ----------- ------
67,192 46,520 0.4
Capital Goods 3,000 Mitsubishi Heavy Industries, Inc. 24,018 23,834 0.2
Electrical Equipment 3,000 Mitsubishi Electric Co. 21,636 17,876 0.1
Electronics 1,000 Canon, Inc. 19,005 22,107 0.2
1,000 Matsushita Electric Industrial
Co., Ltd. 16,152 16,321 0.1
----------- ----------- ------
35,157 38,428 0.3
Financial Services 1,000 Nomura Securities Co., Ltd. 22,237 15,026 0.1
Insurance 2,000 Tokio Marine & Fire Insurance
Co., Ltd. 24,908 18,826 0.1
Pharmaceuticals 1,000 Eisai Co., Ltd. 17,650 19,689 0.1
Textiles 3,000 Toray Industries Ltd. 19,082 18,523 0.1
Tires & Rubber 2,000 Bridgestone Corporation 34,483 37,997 0.3
Warehouse & Storage 3,000 Mitsui-Soko Co., Ltd. 25,215 19,611 0.2
Total Common Stocks in Japan 291,578 256,330 1.9
Mexico Beverages 700 Panamerican Beverages, Inc.
(Class A) 28,172 32,813 0.2
Financial Services 29 Grupo Financiero Inbursa, S.A. de
C.V. (ADR)* 588 493 0.0
Multi-Industry 2,100 Grupo Carso, S.A. de C.V. (ADR)* 33,457 21,788 0.2
Paper Products 700 Kimberly-Clark de Mexico, S.A. de
C.V. (ADR)* 26,338 26,775 0.2
Telecommunications 2,100 ++Carso Global Telecom, S.A. de
C.V. (ADR)* 9,975 9,450 0.1
Total Common Stocks in Mexico 98,530 91,319 0.7
Netherlands Banking 300 ABN AMRO Holding N.V. 16,900 19,537 0.1
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
<S> <S> <C> <S> <C> <C> <C>
Total Common Stocks in the
Netherlands 16,900 19,537 0.1
Norway Cruise Lines 3,000 Color Line ASA 11,280 13,966 0.1
Total Common Stocks in Norway 11,280 13,966 0.1
Philippines Beverages 6,250 San Miguel Corp. (Class B) 20,578 27,609 0.2
Total Common Stocks in the
Philippines 20,578 27,609 0.2
South Korea Engineering & 700 ++Hyundai Engineering & Construction
Construction Co., Ltd. (GDR)**++++++ 9,121 4,375 0.0
Total Common Stocks in South Korea 9,121 4,375 0.0
Spain Energy & Petroleum 900 Repsol S.A. (ADR)* 31,784 34,313 0.2
Total Common Stocks in Spain 31,784 34,313 0.2
Sweden Banking 1,200 Sparbanken Sverige AB (Class A) 15,094 20,602 0.2
Investment 2,300 Bure Investment AB 19,273 27,337 0.2
Management
Total Common Stocks in Sweden 34,367 47,939 0.4
Switzerland Electrical Equipment 25 BBC Brown Boveri & Cie (Bearer) 22,679 31,091 0.2
Pharmaceuticals 500 ++Novartis AG (ADR)* 21,705 27,938 0.2
Total Common Stocks in Switzerland 44,384 59,029 0.4
United Banking 2,600 National Westminster Bank PLC 27,449 30,514 0.2
Kingdom
Beverages 3,900 Grand Metropolitan PLC 26,591 30,692 0.2
Chemicals 1,200 Imperial Chemical Industries PLC 15,490 15,777 0.1
400 Imperial Chemical Industries PLC
(ADR)* 22,878 20,800 0.2
----------- ----------- ------
38,368 36,577 0.3
Electrical Equipment 5,000 General Electric Co. PLC (Ordinary) 22,639 32,762 0.3
Merchandising 2,800 Boots Company PLC 26,311 28,861 0.2
Pharmaceuticals 2,000 Glaxo Wellcome PLC 27,207 32,437 0.2
Steel 10,000 British Steel PLC 26,271 27,544 0.2
Telecommunications 8,000 Vodafone Group PLC 27,839 33,805 0.3
Total Common Stocks in the
United Kingdom 222,675 253,192 1.9
United Aerospace 400 Allied Signal, Inc. 29,436 26,800 0.2
States 1,100 ++Gulfstream Aerospace Corp. 27,119 26,675 0.2
500 Northrop Grumman Corp. 34,652 41,375 0.3
600 United Technologies Corp. 18,809 39,600 0.3
----------- ----------- ------
110,016 134,450 1.0
Automobile 600 General Motors Corp. 31,232 33,450 0.2
Automobile Parts 1,700 ++Lear Corporation 57,537 58,013 0.4
Banking 1,600 Bank of New York Co., Inc. 42,717 54,000 0.4
200 BankAmerica Corp. 20,429 19,950 0.1
500 Citicorp 41,897 51,500 0.4
----------- ----------- ------
105,043 125,450 0.9
Broadcasting-- 1,362 ++Viacom, Inc. (Class B) 49,846 47,500 0.4
Media
Building Products 900 Oakwood Homes Corporation 20,515 20,588 0.2
1,600 Spieker Properties, Inc. 43,279 57,600 0.4
----------- ----------- ------
63,794 78,188 0.6
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Chemicals 1,000 ++FMC Corporation $ 71,038 $ 70,125 0.5%
States 900 PPG Industries, Inc. 44,154 50,512 0.4
(concluded) ----------- ----------- ------
115,192 120,637 0.9
Computer Services 570 ++cisco Systems, Inc. 26,449 36,266 0.3
& Software 1,230 First Data Corp. 47,688 44,895 0.3
300 International Business Machines
Corp. 31,106 45,300 0.4
1,052 ++Oracle Corp.(b) 37,454 43,789 0.3
----------- ----------- ------
142,697 170,250 1.3
Computers 400 ++Compaq Computer Corp. 29,673 29,700 0.2
Electronics 1,300 Corning, Inc. 42,362 60,125 0.4
400 General Electric Company 32,801 39,550 0.3
200 Linear Technology Corporation 8,075 8,750 0.1
----------- ----------- ------
83,238 108,425 0.8
Engineering & 1,100 Foster Wheeler Corp. 46,941 40,837 0.3
Construction
Fertilizers 500 IMC Global, Inc. 19,377 19,562 0.1
Financial Services 1,075 American Express Company 49,310 60,737 0.4
Foods 1,300 H.J. Heinz Company 41,766 46,475 0.3
Insurance 400 Aetna Inc. (a) 28,876 32,000 0.2
900 Allstate Corp. 37,195 52,087 0.4
700 UNUM Corporation 44,604 50,575 0.4
----------- ----------- ------
110,675 134,662 1.0
Leisure/Tourism 1,800 Brunswick Corporation 44,654 43,200 0.3
480 TCI Pacific Communications
(Convertible Preferred) 44,276 43,560 0.3
----------- ----------- ------
88,930 86,760 0.6
Machine Tools 1,400 ++American Standard Companies, Inc. 45,663 53,550 0.4
& Machinery 1,300 Deere & Co. 51,589 52,812 0.4
----------- ----------- ------
97,252 106,362 0.8
Manufacturing 700 Fisher Scientific International,
Inc. 21,337 32,987 0.2
Medical Services 1,700 ++Health Management Associates,
Inc. (Class A) 38,381 38,250 0.3
Natural Gas 400 El Paso Natural Gas Co. 19,863 20,200 0.1
1,200 Enron Corp. 47,249 51,750 0.4
----------- ----------- ------
67,112 71,950 0.5
Oil Service 1,600 Dresser Industries, Inc. 36,951 49,600 0.4
600 Schlumberger Ltd. 41,477 59,925 0.4
----------- ----------- ------
78,428 109,525 0.8
Paper 500 Kimberly-Clark Corp. 38,794 47,625 0.4
Petroleum 700 Pennzoil Co. 29,082 39,550 0.3
1,300 Unocal Corp. 43,754 52,812 0.4
----------- ----------- ------
72,836 92,362 0.7
Pharmaceuticals 700 Abbott Laboratories 29,869 35,525 0.3
700 Merck & Co., Inc. 24,045 55,475 0.4
----------- ----------- ------
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
<S> <S> <C> <S> <C> <C> <C>
53,914 91,000 0.7
Railroads 600 Burlington Northern Santa Fe Inc. 48,542 51,825 0.4
Real Estate 950 Prentiss Properties Trust 19,286 23,750 0.2
Investment Trust
Retail Stores 910 Rite Aid Corporation 27,064 36,172 0.3
1,060 Sears, Roebuck & Co. 47,686 48,892 0.3
1,800 ++Toys 'R' Us, Inc. 56,192 54,000 0.4
----------- ----------- ------
130,942 139,064 1.0
Software--Computer 1,200 ++BMC Software, Inc. 44,805 49,650 0.4
Steel 1,300 AK Steel Holding Corp. 52,133 51,512 0.4
Telecommunications 2,200 ++Airtouch Communications, Inc. 62,972 55,550 0.4
800 Bell Atlantic Corporation 44,677 51,800 0.4
----------- ----------- ------
107,649 107,350 0.8
Tobacco 300 Philip Morris Companies, Inc. 27,058 33,787 0.2
Travel & Lodging 1,650 Carnival Corp. (Class A) 47,536 54,450 0.4
Utilities 2,400 Edison International 44,885 47,700 0.4
Total Common Stocks in the
United States 2,136,157 2,444,245 18.0
Total Investments in Common
Stocks 3,375,742 3,813,809 28.0
Face
Amount Fixed-Income Securities
Denmark Dkr 3,900,000 Denmark Government Bonds, 8% due
3/15/2006 716,715 728,539 5.3
Total Fixed-Income Securities in
Denmark 716,715 728,539 5.3
Germany DM 550,000 Bundesrepublik Deutschland, 7.125%
due 12/20/2002 387,865 392,525 2.9
Total Fixed-Income Securities in
Germany 387,865 392,525 2.9
Italy Lit 490,000,000 Buoni Poliennali del Tesoro
(Italian Government Bonds), 8.50%
due 1/01/2004 347,145 345,703 2.5
Total Fixed-Income Securities in
Italy 347,145 345,703 2.5
Sweden Government of Sweden:
Skr 1,000,000 10.25% due 5/05/2000 171,007 169,285 1.3
1,800,000 8% due 8/15/2007 282,566 288,301 2.1
Total Fixed-Income Securities in
Sweden 453,573 457,586 3.4
United United Kingdom Treasury Gilt:
Kingdom Pound 30,000 7% due 11/06/2001 49,443 50,763 0.4
Sterling 55,000 7.50% due 12/07/2006 91,834 93,976 0.7
Total Fixed-Income Securities in
the United Kingdom 141,277 144,739 1.1
United Federal National Mortgage
States Association:
US$ 379,171 6% due 11/01/2000 375,379 370,283 2.7
855,032 6% due 6/06/2001 846,348 843,409 6.2
535,511 6% due 11/01/2006 529,152 527,311 3.9
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
Face Value Percent of
COUNTRY Amount Fixed-Income Securities Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United States US Treasury Notes:
(concluded) US$ 600,000 5% due 1/31/1998 $ 594,703 $ 595,782 4.4%
1,340,000 6.25% due 4/30/2001 1,357,435 1,342,935 9.9
1,000,000 7.25% due 5/15/2004 1,057,578 1,052,190 7.7
2,115,000 7% due 7/15/2006 2,204,532 2,197,295 16.2
Total Fixed-Income Securities in
the United States 6,965,127 6,929,205 51.0
Total Investments in Fixed-Income
Securities 9,011,702 8,998,297 66.2
Short-Term Securities
United Commercial US $ 108,000 General Motors Acceptance Corp.,
States Paper*** 7.50% due 1/02/1997 108,000 108,000 0.8
US Government 1,290,000 Federal National Mortgage
& Agency Association, 5.40% due 1/17/1997 1,287,098 1,287,098 9.5
Obligations***
Total Investments in Short-Term
Securities 1,395,098 1,395,098 10.3
Total Investments $13,782,542 14,207,204 104.5
===========
Unrealized Depreciation on Forward Foreign Exchange Contracts++++ (18,196) (0.1)
Liabilities in Excess of Other Assets (590,560) (4.4)
----------- ------
Net Assets $13,598,448 100.0%
=========== ======
</TABLE>
++ Non-income producing security.
++++ Forward foreign exchange contracts sold as of December 31, 1996
were as follows:
Unrealized
Appreciation
Expiration (Depreciation)
Foreign Currency Sold Date (Note 1c)
Chf 40,000 January 1997 $ 616
DM 904,000 January 1997 (5,683)
DM 1,021,781 February 1997 4,463
Frf 425,000 January 1997 (502)
Pound 210,000 January 1997 (16,654)
Sterling
YEN 29,500,000 February 1997 (436)
Total Unrealized Depreciation on Forward Foreign
Exchange Contracts (US$ Commitment--$1,962,708) $(18,196)
========
++++++ Restricted security as to resale. The value of the Fund's
investments in restricted securities was approximately $4,000,
representing 0.0% of net assets.
Acquisition Value
Issue Date Cost (Note 1a)
Hyundai Engineering &
Construction Co., Ltd. (GDR) 3/19/1996 $9,121 $ 4,375
Total $9,121 $ 4,375
====== ========
(a) Formerly Aetna Life & Casualty Company.
(b) Formerly Oracle Systems Corp.
* American Depositary Receipts (ADR).
** Global Depositary Receipts (GDR).
*** Commercial Paper and certain US Government & Agency Obligations are traded
on a discount basis; the interest rates shown are discount rates paid at
the time of purchase by the Fund.
See Notes to Financial Statements.
54
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of December 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$13,782,542) (Note 1a) $14,207,204
Cash 5,382
Foreign cash (Note 1d) 35,283
Receivables:
Interest $ 190,858
Capital shares sold 64,938
Forward foreign exchange contracts (Note 1c) 18,279
Dividends 7,454 281,529
-----------
Deferred organization expenses (Note 1g). 59,185
Prepaid registration fees and other assets (Note 1g) 146,240
-----------
Total assets 14,734,823
-----------
Liabilities: Unrealized depreciation on forward foreign exchange contracts
(Note 1c) 18,196
Payables:
Securities purchased 823,453
Distributions to shareholders (Note 1h) 159,017
Dividends to shareholders (Note 1h) 64,412
Capital shares redeemed 9,265
Distributor (Note 2) 5,950
Forward foreign exchange contracts (Note 1c) 443 1,062,540
-----------
Accrued expenses and other liabilities 55,639
-----------
Total liabilities $ 1,136,375
-----------
Net Assets: Net assets $13,598,448
===========
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 37,208
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 82,510
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 3,394
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 6,007
Paid-in capital in excess of par 12,813,977
Undistributed realized capital gains on investments and foreign
currency transactions--net 252,105
Unrealized appreciation on investments and foreign currency
transactions--net 403,247
-----------
Net assets $13,598,448
===========
Net Asset Value: Class A--Based on net assets of $3,918,053 and 372,079 shares
outstanding $ 10.53
===========
Class B--Based on net assets of $8,690,463 and 825,099 shares
outstanding $ 10.53
===========
Class C--Based on net assets of $357,373 and 33,935 shares
outstanding $ 10.53
===========
Class D--Based on net assets of $632,559 and 60,067 shares
outstanding. $ 10.53
===========
See Notes to Financial Statements.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
<S> <S> <C> <C>
Investment Interest and discount earned (net of $4,276 foreign witholding tax) $ 624,129
Income Dividends (net of $2,988 foreign witholding tax) 67,925
(Notes 1e & 1f): -----------
Total income 692,054
-----------
Expenses: Investment advisory fees (Note 2) $ 103,776
Registration fees (Note 1g) 84,991
Printing and shareholder reports 74,606
Account maintenance and distribution fees--Class B (Note 2) 66,442
Professional fees 58,846
Transfer agent fees--Class B (Note 2) 35,249
Accounting services (Note 2) 35,078
Amortization of organization expenses (Note 1g) 22,195
Custodian fees 19,103
Transfer agent fees--Class A (Note 2) 14,439
Directors' fees and expenses 12,360
Account maintenance and distribution fees--Class C (Note 2) 3,097
Transfer agent fees--Class D (Note 2) 3,029
Pricing fees 2,810
Account maintenance fees--Class D (Note 2) 2,007
Transfer agent fees--Class C (Note 2) 1,556
Other 15,619
-----------
Total expenses before reimbursements 555,203
Reimbursement of expenses (Note 2) (449,075)
-----------
Total expenses after reimbursement 106,128
-----------
Investment income--net 585,926
-----------
Realized & Realized gain from:
Unrealized Gain Investments--net 703,561
(Loss) on Foreign currency transactions--net 79,041 782,602
Investments & -----------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (414,303)
(Notes 1c, 1d, Foreign currency transactions--net (59,670) (473,973)
1f & 3): ----------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions 308,629
-----------
Net Increase in Net Assets Resulting from Operations $ 894,555
===========
See Notes to Financial Statements.
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended
December 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 585,926 $ 556,494
Realized gain on investments and foreign currency transactions
--net 782,602 16,659
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net (473,973) 1,087,284
----------- -----------
Net increase in net assets resulting from operations 894,555 1,660,437
----------- -----------
Dividends & Investment income--net:
Distributions to Class A (178,761) (83,814)
Shareholders Class B (356,040) (424,788)
(Note 1h): Class C (15,319) (16,003)
Class D (35,806) (31,889)
In excess of investment income--net:
Class A (19,148) --
Class B (38,138) --
Class C (1,641) --
Class D (3,835) --
Realized gain on investments--net:
Class A (99,948) (4,541)
Class B (217,791) (10,847)
Class C (8,964) (494)
Class D (19,583) (899)
In excess of realized gain on investments--net:
Class A -- (32,862)
Class B -- (78,505)
Class C -- (3,574)
Class D -- (6,508)
----------- -----------
Net decrease in net assets resulting from dividends and
distributions to shareholders (994,974) (694,724)
----------- -----------
Capital Share Net increase (decrease) in net assets derived from capital
Transactions share transactions (598,413) 5,170,953
(Note 4): ----------- -----------
Net Assets: Total increase (decrease) in net assets (698,832) 6,136,666
Beginning of year 14,297,280 8,160,614
----------- -----------
End of year $13,598,448 $14,297,280
=========== ===========
See Notes to Financial Statements.
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (concluded)
Class A Class B
The following per share data and
ratios have been derived from For the For the
information provided in the financial Period Period
statements. For the Sept. 2, For the Sept. 2,
Year Ended 1994++ to Year Ended 1994++ to
Increase (Decrease) in Net Asset December 31, Dec. 31, December 31, Dec. 31,
Value: 1996 1995 1994 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.62 $ 9.68 $ 10.00 $ 10.62 $ 9.68 $ 10.00
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .50 .60 .18 .42 .51 .16
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net .23 1.04 (.32) .23 1.04 (.32)
------- ------- ------- ------- ------- -------
Total from investment operations .73 1.64 (.14) .65 1.55 (.16)
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.50) (.60) (.18) (.42) (.51) (.16)
In excess of investment income
--net (.05) -- -- (.05) -- --
Realized gain on investments--net (.27) (.01) -- (.27) (.01) --
In excess of realized gain on
investments--net -- (.09) -- -- (.09) --
------- ------- ------- ------- ------- -------
Total dividends and distributions (.82) (.70) (.18) (.74) (.61) (.16)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.53 $ 10.62 $ 9.68 $ 10.53 $ 10.62 $ 9.68
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 7.11% 17.38% (1.37%)+++ 6.31% 16.51% (1.62%)+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Expenses, net of reimbursement .25% .00% .00%* 1.00% .75% .75%*
Average Net ======= ======= ======= ======= ======= =======
Assets: Expenses 3.48% 5.12% 5.20%* 4.24% 5.94% 6.04%*
======= ======= ======= ======= ======= =======
Investment income--net 4.73% 5.78% 5.64%* 3.99% 5.06% 4.86%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 3,918 $ 3,872 $ 1,147 $ 8,690 $ 9,236 $ 6,797
======= ======= ======= ======= ======= =======
Portfolio turnover 342.71% 46.75% .83% 342.71% 46.75% .83%
======= ======= ======= ======= ======= =======
Average commission rate paid++++ $ .0265 -- -- $ .0265 -- --
======= ======= ======= ======= ======= =======
<CAPTION>
Class C Class D
The following per share data and
ratios have been derived from For the For the
information provided in the financial Period Period
statements. For the Oct. 21, For the Oct. 21,
Year Ended 1994++ to Year Ended 1994++ to
Increase (Decrease) in Net Asset December 31, Dec. 31, December 31, Dec. 31,
Value: 1996 1995 1994 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.62 $ 9.69 $ 9.88 $ 10.62 $ 9.69 $ 9.88
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income--net .41 .52 .10 .46 .57 .11
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net .23 1.03 (.19) .24 1.03 (.19)
------- ------- ------- ------- ------- -------
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
<S> <S> <C> <C> <C> <C> <C> <C>
Total from investment operations .64 1.55 (.09) .70 1.60 (.08)
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.42) (.52) (.10) (.47) (.57) (.11)
In excess of investment income--net (.04) -- -- (.05) -- --
Realized gain on investments--net (.27) (.01) -- (.27) (.01) --
In excess of realized gain on
investments--net -- (.09) -- -- (.09) --
------- ------- ------- ------- ------- -------
Total dividends and distributions (.73) (.62) (.10) (.79) (.67) (.11)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 10.53 $ 10.62 $ 9.69 $ 10.53 $ 10.62 $ 9.69
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 6.25% 16.33% (.94%)+++ 6.84% 16.97% (.83%)+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Expenses, net of reimbursement 1.04% .80% .80%* .50% .25% .25%*
Average Net ======= ======= ======= ======= ======= =======
Assets: Expenses 4.28% 6.02% 5.75%* 3.70% 5.44% 5.14%*
======= ======= ======= ======= ======= =======
Investment income--net 3.95% 4.99% 5.19%* 4.48% 5.53% 5.70%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $ 357 $ 418 $ 154 $ 633 $ 771 $ 63
======= ======= ======= ======= ======= =======
Portfolio turnover 342.71% 46.75% .83% 342.71% 46.75% .83%
======= ======= ======= ======= ======= =======
Average commission rate paid++++ $ .0265 -- -- $ .0265 -- --
======= ======= ======= ======= ======= =======
</TABLE>
* Annualized.
** Total investment returns exclude the effect of sales loads.
+++ Aggregate total investment return.
++ Commencement of Operations.
++++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been converted
into US dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
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. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of
59
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
exchange-traded options or, in the case of options traded in the over-the-
counter market, the last bid price. Short-term securities are valued at
amortized cost, which approximates market value. Other investments, including
futures contracts and related options, are stated at market value. Securities
and assets for which market quotations are not available are valued at fair
value as determined in good faith by or under the direction of the Fund's Board
of Directors.
(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) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. 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.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
* Foreign currency options and futures--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.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is
added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security sold. When
an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(d) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(e) 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.
(f) 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. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined 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.
(g) 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.
(h) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
60
<PAGE>
gains are recorded on the ex-dividend dates. Distributions in excess
of realized capital gains are due primarily to differing tax
treatments for post-October losses.
(i) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$62,762 have been reclassified between undistributed net realized
capital gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset values
per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidi-
ary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the 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.
For the year ended December 31, 1996, MLAM earned fees of $103,776,
all of which were waived. MLAM also reimbursed the Fund for
additional expenses of $345,299.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("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, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended December 31, 1996, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ 8 $ 82
Class D $ 11 $ 113
For the year ended December 31, 1996, MLPF&S received contingent
deferred sales charges of $13,295 and $292 relating to transactions
in Class B and Class C Shares, respectively
In addition, MLPF&S received $1,286 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
December 31, 1996.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
During the year ended December 31, 1996, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $90 for security
price quotations to compute the net asset value of the Fund.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1996 were $43,630,522 and
$42,242,017, respectively.
Net realized and unrealized gains (losses) as of December 31, 1996
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $703,917 $ 424,662
Short-term investments (356) --
Forward foreign exchange contracts 73,936 (18,196)
Foreign currency transactions 5,105 (3,219)
-------- ---------
Total $782,602 $ 403,247
======== =========
As of December 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $423,000, of which $569,312 related
to appreciated securities and $146,312 related to depreciated
securities. At December 31, 1996, the aggregate cost of investments
for Federal income tax purposes was $13,784,204.
61
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Capital Share Transactions:
Net increase(decrease) in net assets derived from capital share
transactions were $(598,413) and $5,170,953 for the years ended
December 31, 1996 and December 31, 1995, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 148,235 $1,558,183
Shares issued to shareholders in
reinvestment of dividends and
distributions 6,575 68,638
---------- ----------
Total issued 154,810 1,626,821
Shares redeemed (147,468) (1,548,311)
---------- ----------
Net increase 7,342 $ 78,510
========== ==========
Class A Shares for the Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 472,669 $4,997,372
Shares issued to shareholders in
reinvestment of dividends and
distributions 7,443 79,751
---------- ----------
Total issued 480,112 5,077,123
Shares redeemed (233,839) (2,476,825)
---------- ----------
Net increase 246,273 $2,600,298
========== ==========
Class B Shares for the Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 188,856 $1,980,405
Shares issued to shareholders in
reinvestment of dividends and
distributions 32,429 340,779
---------- ----------
Total issued 221,285 2,321,184
Shares redeemed (262,466) (2,771,235)
Automatic conversion of shares (3,441) (35,577)
---------- ----------
Net decrease (44,622) $ (485,628)
========== ==========
Class B Shares for the Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 395,975 $4,018,024
Shares issued to shareholders in
reinvestment of dividends and
distributions 29,811 307,641
---------- ----------
Total issued 425,786 4,325,665
Shares redeemed (257,918) (2,648,106)
---------- ----------
Net increase 167,868 $1,677,559
========== ==========
Class C Shares for the Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 7,915 $ 84,054
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,406 14,763
---------- ----------
Total issued 9,321 98,817
Shares redeemed (14,748) (155,613)
---------- ----------
Net decrease (5,427) $ (56,796)
========== ==========
Class C Shares for the Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 44,492 $ 445,570
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,385 13,383
---------- ----------
Total issued 45,877 458,953
Shares redeemed (22,425) (224,003)
---------- ----------
Net increase 23,452 $ 234,950
========== ==========
Class D Shares for the Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 19,806 $ 207,380
Automatic conversion of shares 3,441 35,577
Shares issued to shareholders in
reinvestment of dividends and
distributions 5,725 60,261
---------- ----------
Total issued 28,972 303,218
Shares redeemed (41,498) (437,717)
---------- ----------
Net decrease (12,526) $ (134,499)
========== ==========
Class D Shares for the Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 73,881 $ 726,037
Shares issued to shareholders in
reinvestment of dividends and
distributions 2,407 35,301
---------- ----------
Total issued 76,288 761,338
Shares redeemed (10,134) (103,192)
---------- ----------
Net increase 66,154 $ 658,146
========== ==========
5. Commitments:
At December 31, 1996, the Fund entered into foreign exchange
contracts, in addition to the contracts listed on the Schedule of
Investments, under which it had agreed to purchase various foreign
currencies with a value of approximately $826,000.
62
<PAGE>
[This Page Intentionally Left Blank]
63
<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.................................................. 11
Management of the Fund.................................................... 13
Directors and Officers................................................... 13
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
Fee Based Programs....................................................... 22
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 22
Distribution Plans....................................................... 22
Limitations on the Payment of Deferred Sales Charges..................... 23
Redemption of Shares...................................................... 24
Deferred Sales Charges--Class B and Class C Shares....................... 24
Portfolio Transactions and Brokerage...................................... 26
Determination of Net Asset Value.......................................... 27
Shareholder Services...................................................... 28
Investment Account....................................................... 29
Automatic Investment Plans............................................... 29
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 29
Systematic Withdrawal Plans--
Class A and Class D Shares.............................................. 29
Exchange Privilege....................................................... 30
Dividends, Distributions and Taxes........................................ 32
Dividends and Distributions.............................................. 32
Taxes.................................................................... 33
Performance Data.......................................................... 36
General Information....................................................... 38
Description of Shares.................................................... 38
Computation of Offering Price Per Share.................................. 39
Independent Auditors...................................................... 39
Custodian................................................................. 39
Transfer Agent............................................................ 39
Legal Counsel............................................................. 39
Reports to Shareholders................................................... 40
Additional Information.................................................... 40
Appendix.................................................................. 41
Independent Auditors' Report.............................................. 48
Financial Statements...................................................... 49
</TABLE>
Code #18238-0497
[LOGO] MERRILL LYNCH
MERRILL LYNCH
ASSET INCOME FUND, INC.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
April 25, 1996
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 each of the years in the two-year period ended
December 31, 1996 and the period September 2, 1994 (commencement of
operations) to December 31, 1994.
Contained in Part B:
Schedule of Investments as of December 31, 1996.
Statement of Assets and Liabilities as of December 31, 1996.
Statement of Operations for the year ended December 31, 1996.
Statements of Changes in Net Assets for each of the years in the two-
year period ended December 31, 1996.
Financial Highlights for each of the years in the two year period
December 31, 1996 and the period September 2, 1994 (commencement of
operations) to December 31, 1994.
(b) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) --Articles of Incorporation of Registrant, as amended.*
(b) --Articles Supplementary to Articles of Incorporation.**
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(a) --Form of Management Agreement between Registrant and Merrill
Lynch Asset Management, L.P.*
5(b) --Form of Sub-Advisory Agreement between Merrill Lynch Asset
Management L.P. and Merrill Lynch Asset Management U.K. Limited.#
6(a) --Form of Amended 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.*
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
9(a) --Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between Registrant and
Financial Data Services, Inc.*
(b) --Form of Agreement between Merrill Lynch & Co., Inc. and the
Registrant relating to use by Registrant of Merrill Lynch name.*
10(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.**
16 --Schedule for computation of each performance in the quotation
provided in the Registration Statement in response to Item 22
(for Class A, Class B, Class C and Class D shares).***
24 --Power of Attorney for Robert S. Salomon, Jr.****
27(a) --Financial Data Schedule--Class A Shares.#
(b) --Financial Data Schedule--Class B Shares.#
(c) --Financial Data Schedule--Class C Shares.#
(d) --Financial Data Schedule--Class D Shares.#
</TABLE>
- --------
(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 AmendmentNo. 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.
** Previously filed with Post-Effective Amendment No. 1 to the Registration
Statement.
*** Previously filed with Post-Effective Amendment No. 2 to the Registration
Statement.
**** Previously filed with Post-Effective Amendment No. 3 to the Registration
Statement.
#Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
C-2
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS MARCH 31, 1997
-------------- --------------
<S> <C>
Shares of Class A Common Stock, par value $0.10 per share..... 1,919
Shares of Class B Common Stock, par value $0.10 per share..... 444
Shares of Class C Common Stock, par value $0.10 per share..... 23
Shares of Class D Common Stock, par value $0.10 per share..... 26
</TABLE>
Note: The number of holders shown in the table above includes holders of record
plus beneficial owners whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
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.
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
C-3
<PAGE>
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 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. (the "Manager" or "MLAM"), acts as
investment adviser for the following open-end investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Capital
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap
Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value
Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement
Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global
Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc. and Merrill
Lynch Variable Series Funds, Inc.; and the following closed-end investment
companies: Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond
Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. Fund Asset
Management, L.P. ("FAM"), an affiliate of MLAM, acts as the investment adviser
for the following open-end investment companies: CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program,
Inc., Financial Institutions Series Trust, Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate
Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
C-4
<PAGE>
Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc.,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and the following closed-end investment companies: Apex
Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield
New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNewYork 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. The address of Merrill Lynch Funds for Institutions Series
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 Funds Distributor, Inc. ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML&Co.") is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281. The address of Merrill Lynch Financial Data Services,
Inc. ("MLFDS") is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
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
January 1, 1993, 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.
Giordano, Harvey, Kirstein and Monagle are directors, trustees or officers of
one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION WITH BUSINESS, PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
---- ------------- ----------------------
<S> <C> <C>
ML & Co................. Limited Partner Financial Services Holding Company
Merrill Lynch
Management, Inc........ Limited Partner Investment Advisory Services; Limited
Partner of FAM
Princeton Services, Inc.
("Princeton Services"). General Partner General Partner of FAM
Arthur Zeikel........... President President and Director 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
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION WITH BUSINESS, PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
---- ------------- ----------------------
<S> <C> <C>
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM;
President President and Director of MLFD;
Executive Vice President and Director
of Princeton Services; President of
Princeton Administrators, L.P.;
Director of MLFDS
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
Norman R. Harvey........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel.. Senior Vice President Senior Vice President of FAM; Senior
Vice President Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President, General Counsel
President, General and Secretary of FAM; Senior Vice
Counsel, Director President, General Counsel, Director
and and Secretary of Princeton Services;
Secretary Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller
and Controller of FAM; Senior Vice President and
Controller of Princeton Services
Richard L. Reller....... Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President
of Princeton Services
Stephen M.M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael L. Quinn........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch, Pierce,
Fenner & Smith Incorporated from 1989
to 1995
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of Princeton
Services
</TABLE>
C-6
<PAGE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
advisor for the following registered investment companies; Merrill Lynch
EuroFund, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch International Equity Fund and Merrill Lynch
Short-Term Global Income Fund, Inc. The address of each of these investment
companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
MLAM U.K. is Milton Gate, 1 Motor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business profession, vocation or employment of a substantial
nature in which each such person has been engaged since July 1, 1994, for his
or her own account or in the capacity of director, officer, partner or trustee.
In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Richard and Yardley are
officers of one or more of the registered investment companies listed in the
first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION WITH PROFESSION, VOCATION
NAME MLAM U.K. OR EMPLOYMENT
---- ------------- ---------------------------
<S> <C> <C>
Arthur Zeikel........... Director and Chairman President of the Manager and FAM;
President and Director of Princeton
Services, Director of MLFD; Executive
Vice President of ML & Co.
Alan J. Albert.......... Senior Managing Vice President of the Manager
Director
Terry K. Glenn.......... Director Executive Vice President of the
Manager and FAM; Executive Vice
President and Director of Princeton
Services; President and Director of
MLFD; Director of MLFDS; President of
Princeton Administrators, L.P.
Adrian Holmes........... Managing Director Director of Merrill Lynch Global Asset
Management
Andrew John Bascand..... Director Director of Merrill Lynch Global Asset
Management
Edward Gobora........... Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride........ Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan.......... Director Vice President, Institutional
Marketing Debt and Equity Group,
Merrill Lynch Capital Markets from
1989 to 1994
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
the Manager and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and
Treasurer of MLFD
Stephen J. Yardley...... Director Director of Merrill Lynch Global Asset
Management
Carol Ann Langham....... Company Secretary None
Debra Anne Scarle....... Assistant Company None
Secretary
</TABLE>
C-7
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the investment companies referred to in the first paragraph of Item 28 except
Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation
Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., MuniAssets Fund, Inc., The Municipal Fund Accumulation Program, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Fund, MuniYield Arizona
Fund, MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York 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, 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
Michael G. Clark........ Vice President None
Mark A. DeSario......... Vice President None
James T. Fatseas........ Vice President None
Michelle T. Lau......... Vice President None
Debra W. Landsman-Yaros. Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary None
</TABLE>
(c) Not applicable.
C-8
<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 Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) 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-9
<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 25TH
DAY OF APRIL, 1997.
Merrill Lynch Asset Income Fund, Inc.
By: /s/ Terry K. Glenn
--------------------------------
(TERRY K. GLENN, EXECUTIVE VICE
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.
SIGNATURE TITLE DATE
* President and
- ---------------------------------- Director (Principal April 25, 1997
ARTHUR ZEIKEL Executive Officer)
* Director
- ----------------------------------
JOE GRILLS
* Director
- ----------------------------------
WALTER MINTZ
* Director
- ----------------------------------
MELVIN R. SEIDEN
* Director
- ----------------------------------
ROBERT S. SALOMON, JR.
* Director
- ----------------------------------
STEPHEN B. SWENSRUD
* Treasurer (Principal
- ---------------------------------- Financial and
GERALD M. RICHARD Accounting Officer)
*By /s/ Terry K. Glenn April 25, 1997
-------------------------------
(TERRY K. GLENN, ATTORNEY-IN-
FACT)
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NUMBERED
NUMBER PAGE
------- ----------
<C> <S> <C>
5(b) Form of Sub-Advisory Agreement between Merrill Lynch
Asset Management L.P. and Merrill Lynch Asset Management
U.K. Limited.#*
11 --Consent of Deloitte & Touche LLP, independent auditors
for the Registrant*.....................................
27(a) --Financial Data Schedule--Class A Shares*...............
(b) --Financial Data Schedule--Class B Shares*...............
(c) --Financial Data Schedule--Class C Shares*...............
(d) --Financial Data Schedule--Class D Shares*...............
</TABLE>
- --------
* Filed herewith
<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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH ASSET INCOME FUND, INC. - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 13782542
<INVESTMENTS-AT-VALUE> 14207204
<RECEIVABLES> 281529
<ASSETS-OTHER> 246090
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14734823
<PAYABLE-FOR-SECURITIES> 823453
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 312922
<TOTAL-LIABILITIES> 1136375
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12943096
<SHARES-COMMON-STOCK> 372079
<SHARES-COMMON-PRIOR> 364737
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 252105
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 403247
<NET-ASSETS> 3918053
<DIVIDEND-INCOME> 67925
<INTEREST-INCOME> 624129
<OTHER-INCOME> 0
<EXPENSES-NET> (106128)
<NET-INVESTMENT-INCOME> 585926
<REALIZED-GAINS-CURRENT> 782602
<APPREC-INCREASE-CURRENT> (473973)
<NET-CHANGE-FROM-OPS> 894555
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (197909)
<DISTRIBUTIONS-OF-GAINS> (99948)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 148235
<NUMBER-OF-SHARES-REDEEMED> (147468)
<SHARES-REINVESTED> 6575
<NET-CHANGE-IN-ASSETS> (698832)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (121449)
<GROSS-ADVISORY-FEES> 103776
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 555203
<AVERAGE-NET-ASSETS> 3787935
<PER-SHARE-NAV-BEGIN> 10.62
<PER-SHARE-NII> .50
<PER-SHARE-GAIN-APPREC> .23
<PER-SHARE-DIVIDEND> (.55)
<PER-SHARE-DISTRIBUTIONS> (.27)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.53
<EXPENSE-RATIO> 3.48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH ASSET INCOME FUND, INC. - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 13782542
<INVESTMENTS-AT-VALUE> 14207204
<RECEIVABLES> 281529
<ASSETS-OTHER> 246090
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14734823
<PAYABLE-FOR-SECURITIES> 823453
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 312922
<TOTAL-LIABILITIES> 1136375
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12943096
<SHARES-COMMON-STOCK> 825099
<SHARES-COMMON-PRIOR> 869721
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 252105
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 403247
<NET-ASSETS> 8690463
<DIVIDEND-INCOME> 67925
<INTEREST-INCOME> 624129
<OTHER-INCOME> 0
<EXPENSES-NET> (106128)
<NET-INVESTMENT-INCOME> 585926
<REALIZED-GAINS-CURRENT> 782602
<APPREC-INCREASE-CURRENT> (473973)
<NET-CHANGE-FROM-OPS> 894555
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (394178)
<DISTRIBUTIONS-OF-GAINS> (217791)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 188856
<NUMBER-OF-SHARES-REDEEMED> (265907)
<SHARES-REINVESTED> 32429
<NET-CHANGE-IN-ASSETS> (698832)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (121449)
<GROSS-ADVISORY-FEES> 103776
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 555203
<AVERAGE-NET-ASSETS> 8858928
<PER-SHARE-NAV-BEGIN> 10.62
<PER-SHARE-NII> .42
<PER-SHARE-GAIN-APPREC> .23
<PER-SHARE-DIVIDEND> (.47)
<PER-SHARE-DISTRIBUTIONS> (.27)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.53
<EXPENSE-RATIO> 4.24
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH ASSET INCOME FUND, INC. - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 13782542
<INVESTMENTS-AT-VALUE> 14207204
<RECEIVABLES> 281529
<ASSETS-OTHER> 246090
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14734823
<PAYABLE-FOR-SECURITIES> 823453
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 312922
<TOTAL-LIABILITIES> 1136375
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12943096
<SHARES-COMMON-STOCK> 33935
<SHARES-COMMON-PRIOR> 39362
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 252105
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 403247
<NET-ASSETS> 357373
<DIVIDEND-INCOME> 67925
<INTEREST-INCOME> 624129
<OTHER-INCOME> 0
<EXPENSES-NET> (106128)
<NET-INVESTMENT-INCOME> 585926
<REALIZED-GAINS-CURRENT> 782602
<APPREC-INCREASE-CURRENT> (473973)
<NET-CHANGE-FROM-OPS> 894555
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (16960)
<DISTRIBUTIONS-OF-GAINS> (8964)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7915
<NUMBER-OF-SHARES-REDEEMED> (14748)
<SHARES-REINVESTED> 1406
<NET-CHANGE-IN-ASSETS> (698832)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (121449)
<GROSS-ADVISORY-FEES> 103776
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 555203
<AVERAGE-NET-ASSETS> 387006
<PER-SHARE-NAV-BEGIN> 10.62
<PER-SHARE-NII> .41
<PER-SHARE-GAIN-APPREC> .23
<PER-SHARE-DIVIDEND> (.46)
<PER-SHARE-DISTRIBUTIONS> (.27)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.53
<EXPENSE-RATIO> 4.28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH ASSET INCOME FUND, INC. - CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 13782542
<INVESTMENTS-AT-VALUE> 14207204
<RECEIVABLES> 281529
<ASSETS-OTHER> 246090
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14734823
<PAYABLE-FOR-SECURITIES> 823453
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 312922
<TOTAL-LIABILITIES> 1136375
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12943096
<SHARES-COMMON-STOCK> 60067
<SHARES-COMMON-PRIOR> 72593
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 252105
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 403247
<NET-ASSETS> 632559
<DIVIDEND-INCOME> 67925
<INTEREST-INCOME> 624129
<OTHER-INCOME> 0
<EXPENSES-NET> (106128)
<NET-INVESTMENT-INCOME> 585926
<REALIZED-GAINS-CURRENT> 782602
<APPREC-INCREASE-CURRENT> (473973)
<NET-CHANGE-FROM-OPS> 894555
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (39641)
<DISTRIBUTIONS-OF-GAINS> (19583)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23247
<NUMBER-OF-SHARES-REDEEMED> (41498)
<SHARES-REINVESTED> 5725
<NET-CHANGE-IN-ASSETS> (698832)
<ACCUMULATED-NII-PRIOR> 0
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<PAGE>
EXHIBIT 99.5(b)
FORM OF SUB-ADVISORY AGREEMENT
AGREEMENT made as of the ____ day of ___________, 1997, by and between
MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership
(hereinafter referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K.
LIMITED, a corporation organized under the laws of England and Wales
(hereinafter referred to as "MLAM U.K.").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, MERRILL LYNCH ASSET INCOME FUND, INC. (the "Fund") is a
Maryland corporation engaged in business as an open-end management investment
company and is registered under the Investment Company Act of 1940, as amended
(hereinafter referred to as the "Investment Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering
investment advisory services and are registered as investment advisers under the
Investment Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is a member of the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
WHEREAS, MLAM has entered into an investment advisory agreement (the
"Advisory Agreement") dated ____________, 1994, pursuant to which MLAM provides
management and investment and advisory services to the Fund; and
<PAGE>
WHEREAS, MLAM U.K. is willing to provide investment advisory services
to MLAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
---------
Duties of MLAM U.K.
-------------------
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and
to furnish, or arrange for affiliates to furnish, the investment advisory
services described below, subject to the broad supervision of MLAM and the Fund,
for the period and on the terms and conditions set forth in this Agreement.
MLAM U.K. hereby accepts such employment and agrees during such period, at its
own expense, to render, or arrange for the rendering of, such services and to
assume the obligations herein set forth for the compensation provided for
herein. MLAM and its affiliates shall for all purposes herein be deemed a
Professional Investor as defined under the rules promulgated by IMRO
(hereinafter referred to as the "IMRO Rules"). MLAM U.K. and its affiliates
shall for all purposes herein be deemed to be an independent contractor and
shall, unless otherwise expressly provided or authorized, have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
MLAM U.K. shall have the right to make unsolicited calls on MLAM and
shall provide MLAM with such investment research, advice and supervision as the
latter may from time to time consider necessary for the proper supervision of
the assets of the Fund; shall furnish continuously an investment program for the
Fund and shall make recommendations from time to time as to which securities
shall be purchased, sold or exchanged and what portion of the
2
<PAGE>
assets of the Fund shall be held in the various securities in which the Fund
invests, options, futures, options on futures or cash; all of the foregoing
subject always to the restrictions of the Articles of Incorporation and By-Laws
of the Fund, as they may be amended and/or restated from time to time, the
provisions of the Investment Company Act and the statements relating to the
Fund's investment objectives, investment policies and investment restrictions as
the same are set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under the Securities
Act of 1933, as amended (the "Prospectus" and "Statement of Additional
Information", respectively). MLAM U.K. shall make recommendations and effect
transactions with respect to foreign currency matters, including foreign
exchange contracts, foreign currency options, foreign currency futures and
related options on foreign currency futures and forward foreign currency
transactions. MLAM U.K. shall also make recommendations or take action as to
the manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the portfolio securities of the Fund shall be
exercised.
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will
MLAM U.K. be the registered holder of the registered investments of MLAM or the
Fund or be the custodian of documents or other evidence of title.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
MLAM U.K. assumes and shall pay for maintaining the staff and
personnel necessary to perform its obligations under this Agreement and shall at
its own expense provide the office space, equipment and facilities which it is
obligated to provide under Article I hereof
3
<PAGE>
and shall pay all compensation of officers of the Fund and all Directors of the
Fund who are affiliated persons of MLAM U.K.
ARTICLE III
-----------
Compensation of MLAM U.K.
-------------------------
For the services rendered, the facilities furnished and expenses
assumed by MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be
determined from time to time by MLAM and MLAM U.K. but in no event in excess of
the amount that MLAM actually receives for providing services to the Fund
pursuant to the Advisory Agreement.
ARTICLE IV
----------
Limitation of Liability of MLAM U.K.
------------------------------------
MLAM U.K. shall not be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or omission in
the performance of sub-advisory services rendered with respect to the Fund,
except for willful misfeasance, bad faith or gross negligence in the performance
of its duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates
of MLAM U.K. performing services for MLAM contemplated hereby and directors,
officers and employees of MLAM U.K. and such affiliates.
ARTICLE V
---------
Activities of MLAM U.K.
-----------------------
The services of MLAM U.K. to the Fund are not to be deemed to be
exclusive, MLAM U.K. and any person controlled by or under common control with
MLAM U.K. (for purposes of this Article V referred to as "affiliates") being
free to render services to others. It
4
<PAGE>
is understood that Directors, officers, employees and shareholders of the Fund
are or may become interested in MLAM U.K. and its affiliates, as directors,
officers, employees and shareholders or otherwise and that directors, officers,
employees and shareholders of MLAM U.K. and its affiliates are or may become
similarly interested in the Fund, and that MLAM U.K. and directors, officers,
employees, partners and shareholders of its affiliates may become interested in
the Fund as shareholders or otherwise.
ARTICLE VI
----------
MLAM U.K. Statements Pursuant to IMRO Rules
-------------------------------------------
Any complaints concerning MLAM U.K. should be in writing addressed to
the attention of the Managing Director of MLAM U.K. MLAM has the right to
obtain from MLAM U.K. a copy of the IMRO complaints procedure and to approach
IMRO directly.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding Investments Not Readily
Realisable (as that term is used in the IMRO Rules) or investments denominated
in a currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding options, futures or
contracts for differences. Markets can be highly volatile and such investments
carry a high degree of risk of loss exceeding the original investment and any
margin on deposit.
5
<PAGE>
ARTICLE VII
-----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above
written and shall remain in force until the date of termination of the Advisory
Agreement (but not later than two years after the date hereof) and thereafter,
but only so long as such continuance is specifically approved at least annually
by (i) the Directors of the Fund or by the vote of a majority of the outstanding
voting securities of the Fund and (ii) a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by MLAM or by vote of a majority of the outstanding voting
securities of the Fund, or by MLAM U.K., on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Advisory Agreement. Any
termination shall be without prejudice to the completion of transactions already
initiated.
ARTICLE VIII
------------
Amendments of this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
6
<PAGE>
ARTICLE IX
----------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE X
---------
Governing Law
-------------
This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By: Princeton Services, Inc.,
its General Partner
By: ________________________________________
Name:
Title:
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By: ________________________________________
Name:
Title:
8
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Asset Income Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 4 to Registration
Statement No. 33-53997 of our report dated February 14, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
April 25, 1997
